Creating a budget can be overwhelming. I get it. But a secret to really building the perfect budget is understanding what should be included and what should be considered when creating a spending plan.
There are so many budgeting categories that can be captured in a budget. Which may lead you to think, but which one's should I include?
When you decide to create a budget, your goal is to keep tracking of the money coming in and going out.
Budget categories are vital. Knowing your budgeting categories are one of the best money management tips I have ever learned.
Every expense from large ones like house mortgage and car payment to small ones like dues and subscriptions are included in the budget.
If there are aspects of your budget that are not clearly stated, it may become difficult to stick to the budget in the long run.
So want to learn more about the right budgeting categories to include your budget. Keep reading.
Budgeting categories you should include in your spending plan
What are budget categories? And why should be we are.
What are the 3 main budget categories? Keeping it simple.
What are budget categories? And why should be we are.
At this point, you may be wondering why a budget categories list is even important. Simply put it helps to keep your expenses and money organized. There are so many budget categories to choose from. The ones you end up using are largely determined by spending habits and general lifestyle.
For example, the budget categories of someone with kids may differ from someone that is single. Or someone that finds themselves traveling a lot may have to budget their money a bit differently.
One of the secrets to a working budget is to align your budgeting categories to your habits and lifestyle. Here is the thing. Creating a budget is not one size fits all.
So if you're trying to use a cookie-cutter template and finding that it is not working chances are you need to sit down and identify budgeting categories that work for you and your lifestyle.
What are the 3 main budget categories? Keeping it simple.
The less complicated your budget is, the more likely it becomes to stick to it. Sometimes, all you need are the basics and a budget with few categories can give the minimalist feel. So let's talk about the 3 main budget categories you need to create a simple budget.
#1. Necessities or Essentials
Essentials make up to 50 percent of the budget of an average person. The things that are contained in this category are those items that are necessary for daily living. Essentials include child care expenses, housing, insurance, groceries, and clothing.
Within each category, you may have subcategories. So for example when thinking of housing it's not just mortgage or rent.
Housing also covers areas such as home maintenance, utilities, insurance, repairs, and other payments made in relation to where you live.
The easiest way you can track these expenses is to group them since they are most likely to occur every month. Having these items under a category will give you an overview of possible areas you may be able to cut back on.
#2. Saving
Most experts advise that your saving should be 20 percent of your income. Items captured in your savings is emergency funds, funds for investment, and savings for retirement. As a rule of thumb, always pay yourself first. What this means is that the amount to be saved should be removed before any expenses are made.
20 percent may look like a large amount to save from your paycheck considering other demands on your paycheck. In reality, this is true.
But then, who says you have to build your cash reserve by consistently removing 20 percent only from your paycheck? This is only a recommended number and something you can work up to. Don't get too caught up in the actual amount. But make sure you keep in mind a bucket for savings that you can contribute to regularly.
Poor In A Private Plane Tip: There are funds that you may not normally account for in your budget. An example includes cash gifts from either family or friends, cash bonuses, and payment for overtime. When this unbudgeted cash comes, the natural response may be to go on that shopping spree or have a time out with the girls. But this could be an opportunity to top off your savings or invest.
#3. Spending
This category is all about all your lifestyle spending. Things you don't NEED to live but the things that you need to live happily.
If you are using the 3 budget category, 30 percent of your total income may be allocated to this spending category. If 30 percent seems like a large amount to you then figure out a number that makes more sense. But even if these expenses are not necessary make sure to allocate a certain amount to having fun. This is the best way to stick to a budget without feeling the burnout.
If have a debt to repay, this is the category you may want to use for repaying that debt. Because many of the items are not in the needs category you can be a bit flexible here. If you find yourself having to make credit card payments, or planning to pay for that student loan, this is the category you may consider analyzing and trimming.
Make sure you are making a distinction between this category and the necessities/ essentials category so as not to mix things up.
How do you achieve this? Try maintaining a separate account for the essential budget category, different from that of spending. This will help to ensure that you don't use the funds mapped out for standing bills for lifestyle spending.
8 commonly used budget categories
If you are looking to get more granular with your budgeting, here are 8 commonly use budgeting categories you should consider.
Transportation
Whether you are a stay-at-home mom, work from home, or commute to an office, transportation can be a big expense. Going to the office every day, errands, and outings with friends require a way for you to actually get there.
Make sure you are setting a budget for this category to capture items such as car maintenance, parking, gas, toll, and public transit.
This is another common category seen in budgets. This includes items such as electricity, water, heating, sewage bills, and even air conditioning.
In addition to the monthly bill you get, some of these items need services that will keep them running.
Other utilities to consider could be cable bills, phone bills as well as internet expenses. It is advised that this expense should not exceed 10% of the amount you allocated for essentials.
Housing
We talked about this before but housing costs are a major budget category that appears in almost if not all budgets and takes up 25-35 percent of the funds allocated for essentials. (Sometimes higher depending on where you live).
You also want to make sure to include any expense you make to maintain the continual usage of your living space. These may include house maintenance expenses, mortgage interest payments as well as property tax.
Food
Groceries are a necessity and are commonly seen in most budgets.
Some people also include expenses incurred from eating out in this category which is completely up to you. Most people tend to categorize eating out as entertainment. But regardless of how you categorize be sure to keep an eye on these line items. If you looking for tips on how to save money in thin this category be sure to check out this post on how to save money on groceries.
Healthcare
No one plans to fall sick but medical emergencies can occur at any time.
Taking care of those medical bills becomes easier if you have set aside a sum of money for it. Items seen in this category include medical devices, urgent care, specialty care (visits to the dentist, oculist, and dermatologist), and prescriptions.
Entertainment and recreation
This is what I like to call “fun money”. It is spent on leisure. And it is important to have a little bit set aside for fun stuff. It's all about conscious spending. (Something I learned from this book).
Unwinding especially after a long week of work is so important. And to maintain a good balance between work and life, you need to create time and set aside money for leisure.
It is in this category you might include money spent on things like tickets for a movie, game nights, Netflix streaming subscriptions, and any other thing you consider a fun activity.
Investment and saving
When money is tight this is usually one of the first categories to go. However, it is one of the most important budget categories.
At a glance, saving and investment may seem not to have an immediate impact on your everyday living. On a closer look, you will discover that it plays a great role in determining and shaping the health of your finances. In the long run, one of the things that will guarantee financial peace for you is how much you have saved and invested.
No one wishes for emergencies to come up but they are bound to happen at some point. When you have a good cash reserve, it will help you manage the financial pressure that comes with unexpected expenses.
Financial experts will advise you to set aside 10-20 percent of your income to save and invest. However, any amount that you can afford is worthwhile to set aside.
Personal spending: This includes all manner of spending channeled towards personal care lifestyle. Common items you can include in this budget category are clothing accessories, gym or golf club membership, beauty care products, home decor, toiletries, and other products for personal grooming.
Simple Budget Categories
A simple budget category makes budgeting very simple and gives you that minimalist feeling. I even created a simple budget planner for this exact reason.
With simple budgeting categories, no need to overcomplicate things. Most expenses should fit into one of the five categories below.
Fixed Expenses
These are expenses that are fixed in nature. For the most part, they cannot be done away with but a necessity and must be budgeted for every month.
Some of the items that can be included in set expenses are electric bills, rent, internet, taxes, and insurance. These expenses are not impulsive. They can be estimated and provisions made for them on the budget.
Net Worth
This simply comprises anything that can positively affect your net worth when payment is made into it. Some of the components of this category include savings account, car loans, retirement, credit cards, investments, and mortgage payment.
Food
This is one area where people tend to overspend. Items that appear on this column include eating out, home deliveries, groceries. If you are having trouble knowing which item will go into this category or which one stays out, just know that whatever goes into your mouth should be included here.
Personal Items
This includes all the essentials needed for the proper running of the home. Items in this category range from toilet papers, down to air filters and deodorants.
Sometimes, it may be difficult getting an accurate monthly estimate for these expenses. However, if you have succeeded in automating this and can estimate how much you spend on these monthly, you can move the items to your set expenses and eliminate this category. But starting out having a personal item or household budget it key.
Discretionary
In this category, you can add any other thing that wasn't captured in the others. Things like date nights, outings with your friends, clothing accessories, vacation, hair appointments, gifts to people, and any other form of personal spending that was not planned.
When using these simple budget categories, there are two areas where overspending usually occurs.
These two categories are discretionary and food. if you are looking at cutting down expenses and saving money, these are two good areas to start.
Forgotten Budget Categories
Just when you feel like you got it all under control, there is always that pesky bill that pops up out of nowhere and throws you off.
But that won't be happening to you anymore. Let's talk about budgeting categories that people seem to always miss.
There are several budget categories that people easily forget when preparing their budget. This omission makes it possible to overspend when these expenses come up unexpectedly. So here are some of the common items you may be forgetting to include in your budget.
Yearly family celebrations
So many celebrations happen in the family yearly. Ranging from wedding anniversaries and birthday celebrations. These items most times are omitted from personal budget categories. Yet, money is spent on these occasions.
Make-up and hair cut.
I am not talking about the regular shampoo and conditioner you use for maintaining your hair weekly. I am talking about those moments when you want to give your hair a special touch in that classy salon with premium charges. Don't forget to include these hair appointments in your budget.
Car registration/Auto Insurance
In some places, it happens once a year. And when you get that reminder that you haven't made that yearly car registration payment or your auto insurance is up for renewal there goes your budget. Don't forget to add this to your budget so you are ready when it's time to renew.
Doctor's visit and prescription
Everyone knows that health care is important. This is why it is surprising that this item gets forgotten while preparing a budget. No one plans to fall sick but it happens sometimes. The financial pressure becomes minimal if an amount is set aside for this on the monthly budget.
Fun time
I understand that you are trying to cut down on unnecessary expenses. So, capturing this in your budget may seem irrelevant.
However, if you take out time to evaluate your spending over the last year, you will realize you have spent quite a sum on taking your kids out or hanging out with your friends.
Since these expenses will happen at some point even if you don't plan them, wouldn't it be better to make provisions for them in your budget?
Setting it all up
So you have learned about budgeting categories and now eager to set up your budget. But you are still wondering how you are going to start. It is pretty simple. Follow the steps outlined below:
Step 1: Start with figuring out the best budgeting method for you. You can read more about budgeting methods here.
Step 2: Gather your financial paperwork. This includes things like bank statements, credit card bills, receipts for previous purchases, auto loan statements, and recent utility bills.
Step 3: Calculate your income. Find out how much your monthly take-home after-tax deduction. Also, calculate income from other sources outside your regular job.
Step 4: Create a list of your monthly expenses. This list should contain details likes entertainment, eating out, groceries, mortgage payment, and so on. Your credit card statements, bank statements as well as receipts for purchases made can help you out here.
Step 5: Determine your fixed and variable expenses. Fixed expenses are those expenses that must occur every month such as utility bills, rent, internet bills, and groceries. Variable expenses do not occur every time. An example of a variable expense could be clothes and accessories.
Step 6: Get a total of your monthly income and expenditure. This will show you are at a glance if you have a surplus or deficit.
Step 7: Make adjustments to expenses. The segment where you can downsize is the variable expenses. The rule of thumb is to cut down the money spent on anything you can do without.
So are you ready to create your first budget?
A budget is a necessary tool for building financial stability. However, it is not just enough to have a budget. Knowing about budgeting categories will go a long way in helping you come up with a personalized budget that will work well for you.
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