No matter how little or how much money you have, you need a budget. In fact, everyone does, but having a budget isn’t enough. Do you have or know your budget categories?
Having detailed budget categories shows you where your money is going. Here, I will be giving you easy steps to set them up fast.
A budget is simply a spending plan for your money and creating one is vital for financial success. Reason being that every other aspect of successfully managing your finances is built on knowing how much money you have coming in, how much is going out, and where it’s going.
By setting up your budget categories, you’ll be able to create a successful budget tailored to your lifestyle.
Get to know 4 Ways Your Lifestyle Can Solve Money Problems|GUIDE here.
This a table of what to expect:
Easy Steps To Set Up Your Budget Categories
There are so many ways to budget that it can be confusing. And if your budget is too complicated, you’re most likely not going to stick to it.
Now, the question persons ask while setting up their budget is: How many budget categories are too many? How many is too few?
Here is a solution – The 50/20/30 budget rule popularized by Senator Elizabeth Warren.
The rule is simple and straightforward. Let’s get to know the rule in its entirety.
The 50/30/20 Budget Rule
The basic rule is to divide up your after-tax income and allocate it to spend: 50% on needs, 30% on wants, and socking away 20% to savings.
50%: Needs (The Essentials)
This budget category covers those bills that you absolutely must pay and are the things necessary for survival. The needs category covers your “must-haves”.
It covers expenses like housing, HOA fees, utilities, transportation, parking fees, insurance premiums, and groceries among others. It does not include items that are extras, such as HBO, Netflix, Starbucks, and dining out.
30%: Wants (The Fun Stuff)
The budget category covers all the things you spend money on that are not absolutely essential. Anything in the “wants” list is optional if you boil it down.
This includes dinner and movies out, that new handbag, tickets to sporting events, vacations, the latest electronic gadget, and ultra-high-speed Internet.
20%: Savings (The Important Stuff)
This budgeting category is overlooked by too many people, but it’s the most important of all. So, it’s always advisable that you allocate 20% of your net income to savings and investments.
The “savings” category includes adding money to an emergency fund in a bank savings account, making IRA contributions to a mutual fund account, debt repayment (if you have any), and investing in the stock market.
Also, note that it’s important you have at least three months of emergency savings on hand in case you lose your job or an unforeseen event occurs. After that, focus on retirement and meeting other financial goals that follow.
Now that we know the basic budget categories and what percentage of our money to allocate them, let’s break the items in them down for better understanding.
Breaking Down Your Budget Categories
Before we go on, bear in mind that this is going to look a little different for everyone. For instance, if you have a mortgage, your home owner’s insurance may be part of your mortgage payment while someone without mortgage won’t bother about it.
The Essential Budgeting Categories | Needs
#1 Housing
For most budgeters, the housing expense category is by far the biggest. It covers anything you pay toward keeping a roof over your head.
Basic items in this budget category include:
- Mortgage
- Rent
- Home Owners Association (HOA) fees
- Home maintenance/repairs
- Property taxes
- Home improvements/upgrades
- Lawn care
- Home warranty
- Home security service
#2 Transportation
Regardless of your location and lifestyle, you need to get from point A to point B. This is why transportation is considered an essential cost and it encompasses a lot, whether you have a car or you don’t.
Here are the basic items in this budgeting category:
- Car loan
- Fuel/gas
- Car maintenance/repairs
- Annual car fees (registration, inspection)
- Tires
- Oil changes
- Parking fees
- Property taxes
- Public transportation (subway, taxis, Uber/Lyft)
- Tolls (EZ Pass)
- Roadside assistance (AAA)
#3 Utilities
Every well-functioning household needs water, electricity, and HVAC (heating, ventilation, and air conditioning). Now, your utility category should include all the expenses that keep these services up and running, including your gas, electricity, and water and sewage bills.
Here is a breakdown of items in this budget category include:
- Electricity
- Internet
- Cable
- Phone
- Heating
- Garbage
- Recycling
- Water
- Sewage bills
- Natural gas
#4 Food
Groceries are part of the major expenses in every family. In addition to groceries, many budgeters also include dining out in this category. However, if you’re someone who tends to spend a lot of money on things like gourmet food and wine, it’s advisable you put your non-grocery food expenses into one of the non-essential categories.
That being said, the basic items in this budgeting category include:
- Groceries
- Restaurants
- Fast food
- Coffee shops
- Alcohol
#5 Insurance
This category is mostly dependent on your budgeting preferences. This because many budgeters prefer to categorize things like health insurance under “Healthcare” or auto insurance under “Transportation” and this is a completely valid option.
However, if you want to go by our budget category, here are the basic items:
- Medical insurance
- Dental insurance
- Vision insurance
- Mortgage insurance
- Renters insurance
- Home warranties or protection plans
- Car insurance
- Life insurance
- Property insurance (i.e. jewelry)
- Disability insurance
- Long-term care insurance
- Pet insurance
#6 Medical & Healthcare
Maintaining your health and well-being is very essential. So, this category covers whatever you spend on healthcare that does not include insurance premiums.
Basic items in this budget category include:
- Primary care
- Dental care
- Specialty care (dermatologists, orthodontics, optometrists, etc.)
- Urgent care
- Medications
- Medical devices
Fun Stuff Budgeting Categories | Wants
#7 Personal Spending
This covers anything commonly considered personal care or “lifestyle” expense; it is a catchall budget category.
Basic items in this budgeting category include:
- Haircuts
- Hair coloring
- Cosmetics (makeup or services like laser hair removal, shower supplies)
- Salon services
- Massages/Spa
- Gym memberships
- Babysitter
- Subscriptions
- Personal hygiene supplies
- Dry cleaning expenses
#8 Recreation & Entertainment
This budget category covers your “fun money.” I’m not in any way saying that items here ain’t essential, they are. For instance, activities such as carving out leisure time (and money) are essential if you want to maintain a healthy work-life balance.
However, they still fall under wants and not needs as we can find alternatives to them.
Basic items in this budget category include:
- Bars/Going out
- Movies/Concerts/Sporting Events
- Hobbies/Crafts
- Hosting parties
- Books
- New technology (phones, computer, TV)
- Vacations
- Subscriptions (Netflix, Amazon, Hulu, etc.)
- Kids’ activities
- Restaurants (if you didn’t include this expense under “Food”)
- Video games
#9 Miscellaneous
This category is set up for anything you may not have already budgeted for or categorized. It’s highly personalized and varies greatly among families. For instance, someone with a larger family is most likely going to spend a fair amount on clothes and haircuts for your kids.
So, if you fall like this and have reached the limit in your “Personal Expenses” category, you can account for those items here.
Also, if you’ve recently returned to school to get a degree that will ultimately lead to a higher income, you can budget for your tuition and textbook expenses in this category.
Savings Budgeting Categories
#10 Savings
Although it’s arguably most important, it is often overlooked (or underfunded) category. It is called paying yourself first in the world of budgeting. Saving money doesn’t have much impact on your day-to-day existence, but it has everything to do with you and your family’s financial health further down the road.
Basic items in this budget category include:
- College savings
- Retirement savings
- New car savings
- Health Savings Account/Plan
- Emergency Fund
- Investments
In Summary
A budget gives you a plan on how to spend your money. And with budget categories, you can easily make account for the items you spend your money on.
Also, using the 50/20/30 budget rule, you can easily weigh set up your budget categories.
However, when you don’t dedicate money to these areas upfront, there will be no money left over. The reason being that money that isn’t assigned a job tends to disappear without a trace. , if you don’t fund these categories, you will never pay off your debt, save an emergency fund or invest enough to retire.
You May Also Like
- 10 Simple Ways To Save Money On A Tight Budget This Year
- How Much Of Your Paycheck Should You Save Immediately?
- Checking Account Vs Savings Account: Difference And How To Choose
- How to Ask For Money from Friends or Loved ones | Proven Tips
- Investing for Kids 101: Tips, Which Niche & How Much Should I Start With
- Money Management for Teens 101: How to Save Money as a Teenager
Leave a Reply
You must be logged in to post a comment.