If you want your budget to be effective, you need to organize it in a way that is easy to understand. Since my first budget back in 2011, I have changed the way I organize my budget at least a half a dozen times.
The way you organize your budget is critical because it will ultimately help you allocate your future money towards expenses that have not happened yet. By assigning money towards different categories, you not only make sure basic needs are met, but you get to choose how to spend the money that you do have.
Ultimately, when choosing your budget categories, you are choosing what's important and what's not. What things are worthy of your hard-earned income?
Throughout my budgeting journey, I have realized there are two ways to organize your budget using categories.
The first way is by lumping all categories into a single master category. For example, in your budget, you might only have one line item titled “utilities” instead of breaking it down into all of the smaller categories like cell phone, water, sewer, gas, electricity, etc. Most people believe this simplifies their budget and saves time.
The second way people use categories in their budget is by breaking each category down and allocating money towards each particular thing. For example, instead of just listing “food” as one of their categories in their budget, people will list eating out, groceries, kid's lunches, etc.
So, the question becomes which method is the best? The truth is, it depends. If you are an experienced budgeter like me, you might end up using both methods at the same time. Crazy right?
Breaking your categories down has a lot of useful benefits. If you are just starting out and are creating a brand new budget, I do recommend breaking your categories down. Breaking things down will give you powerful insight into where your money is actually going and spending areas that might be causing problems. Catching mistakes becomes easier as well. If you are paying close attention to your spending, you are more likely to catch fraudulent charges or billing errors.
The most important thing to remember when choosing which categories to use is to keep things simple. If you don't spend a lot of money on clothes, there is no need to break things down into shoes, work, gym, dresses, etc. Having one simple category titled “clothes” will be okay. If you have problems areas in your budget, like spending too much money on food related items, then I would suggest breaking things down into eating out, groceries, lunch, etc.
If you have a business, it's imperative to keep your business budget separate from your personal budget. The IRS does not look kindly on mixing the two together, so make sure you make a separate business budget.
Here are some recommended budgeting categories to help you organize your budget. Keep in mind that you do not have to include these categories in your personal budget. These are just recommendations of some of the things that might be included.
INCOME
Income can come from many resources. The most popular source of income is employment income, but it's important to think about all the different ways you make money. As I mentioned here, it's important only to list guaranteed income in your budget. For the purpose of being thorough, I will list many sources of income in this article but never depend on income that is not guaranteed.
Examples:
- Salary/Wages
- Tax Refunds
- Investment Income (IRA or 401k distributions)
- Interest Income
- Child Support
- Side Hustles
- Predictable Work Bonuses
- Alimony
UTILITIES
Most of us have to spend money towards utilities as part of our daily living. The most popular expenses in this category are electricity and water.
Examples:
- Natural Gas
- Trash
- Internet
- Phone (Landline & Cell phone)
- Water and Sewer
- Electricity
- Cable or Satellite
SAVINGS
Most people don't think about savings as part of their budget, but it needs to included. If you to save for a specific goal, it's important to treat your saving contributions as regular bill payments. “Paying yourself first” is a common piece of budgeting advice, and I am firm believer in this strategy. Not only do you have to take care of your current needs but you must also think about your future needs. Many people set money aside for emergencies and retirement.
Examples:
- Emergency Fund
- Retirement (IRA, 401k, Pension, Roth IRA, Simple Plan, etc.)
- Children's Future (Education, first car, childcare, UTMA, 529, etc.)
- Family Vacation
- Short Term Savings (this can be used for an unexpected birthday, an unplanned field trip, etc.)
HOUSING
Making sure you have a roof over your head is another essential budget item. When you own your home, your housing expenses are no longer just limited to a mortgage payment. You also have to think about household maintenance and repairs. If you are renting a space, your biggest expense will be your rent payment and renter's insurance.
Examples:
- Rent or Mortgage
- Maintenance and Repairs ( I suggest setting up a new savings goal of this category)
- Property Taxes
- Home Improvement
- HOA Fees
- Renter's Insurance (Check out Lemonade to save on renter's insurance.)
- Homeowners Insurance (Check out Gabi to save on home insurance.)
TRANSPORTATION
How much you spend in this category is entirely dependent on where you live. I was talking to a relative a short time ago, and she was telling me what she paid every month for parking. It costs her up to $30 per day for all day parking. Where I live, the most you could spend on all day parking is $7. No matter how much parking costs, it's also important to include things like car payments and gas in the category.
Examples:
- Auto Insurance (Check out Gabi to save on auto insurance.)
- Gas
- Car Payment
- Maintenance & Repairs
- Vehicle Inspections (Emissions Testing)
- Fees (Tags & Titles)
- Public Transportation (Bus Pass)
- Parking
FOOD
Everyone will have to include food in their budget. The difference is the amount. Some people spend a significant chunk of their income on food-related expenses while others master coupons and spend very little. This is by far the biggest problem area for a lot of families when it comes to budgeting, so I do recommend breaking this category down as much as possible. Feel free to make up your own categories that fit with your lifestyle. If you are trying to eat healthier, it would be interesting to see how much you are spending on organic food. Add an organic category in your budget to track it.
Examples:
- Groceries
- Eating Out
- Kid's Lunches (packed or school)
- Coffee
DEBT
Many people use this as a catchall category. I think it's important to break this category down as much as possible to accurately assess your current financial situation. The most popular line items in this category are student loans and credit cards.
Don't be afraid to break it down even further by listing each debt separately. So instead of just listing “credit cards,” break it down by listing every credit card you have (MasterCard, Visa, Discover, etc.). You could also list them as credit card #1, credit card #2, student loan #1, student loan #2, etc. It's easier to write the actual name of the creditor to help you track each debt.
Examples:
- Credit Cards
- Student Loans
- Installment Agreements (Tax Debt)
- Medical Bills
- Personal Loans
INSURANCE & HEALTH CARE
Insurance is an important part of planning for the future. Medical and dental can be very expensive if you don't have insurance to help cover some of the costs. With the new rules, you can even be penalized come tax time if you don't have proper medical coverage. Life and disability insurance are also important categories to consider.
Examples:
- Health, Dental, and Vision Insurance
- Life Insurance (Consider Bestow for term life insurance)
- Disability Insurance
- Prescription Costs
- Out of Pocket Medical Costs (Co-pays)
- Supplemental Insurance
PERSONAL CARE
Personal hygiene is important for every family, but the cost can depend on the size of the family. Laundry supplies can be vastly different for a family of two compared to a family of seven. This a big category and include things like clothing, salon costs, and gym memberships.
Examples:
- Salon Costs
- Hair Care Products
- Personal Hygiene Costs (deodorant, perfume, shaving cream, etc.)
- Laundry Supplies
- Shoes
- Clothing
- Dry Cleaning
- Gym Membership Costs
- Toiletries
- Recreation Equipment
LEISURE & ENTERTAINMENT
It will be hard to succeed with budgeting and saving if you don't balance it out with having some fun as well. Life is short, and you should never forget to live in the moment and have a little fun while still sticking to a budget and saving money. I still include things in my budget for things that bring me joy like a magazine subscription or a date night with my husband. It's all about balancing fun with money. It's okay to spend money on things we enjoy, but it's also important to make sure we are not overspending in these categories.
Examples:
- Vacations/Trips
- Crafts/Hobbies
- Charitable Donations/Giving
- Parties
- Movies/Concerts
- Subscriptions
EDUCATION
Depending on what school your child goes to, the early years can be pretty minimal for education costs. There are still other expenses that still need to be included in your budget for education. School supplies and sports activities are usually the most popular in this category.
Examples:
- Tuition
- School Supplies
- Books
- Sports/Extracurricular Activities
- Field Trips
- Education Fees (Registration fees etc.)
- Uniforms/Dress Code
CHILD CARE
With child care expenses on the rise, it's not unusual to spend a huge chunk of your income towards child care. If you have more than one child, you could be spending more than your mortgage payment. Child care expenses completely demolished our budget when we had my son four years ago. If you are a working parent, you must have reliable child care. It's okay to include all things child related in this category such as diapers and formula.
Examples:
- Child Care/Babysitters
- Child Support/Alimony
- Child Necessities (food & diapers)
- Kid's Allowance
MISCELLANEOUS
Most people have a miscellaneous category included in their budget for items that just don't fit in any of the categories listed above. It's okay to have a miscellaneous category but make sure that it's broken down into smaller categories. It's hard to track your spending if it's just listed as miscellaneous. List things out and allocate a certain dollar amount for each line item. The best way to control miscellaneous spending is by keeping a spending log for the next 30 days. Track where every dollar is spent and come up with your categories based on your tracking. Try to keep your miscellaneous category small and realistic.
Examples:
- Pet Care/Supplies
- Computer/Electronics Maintenance or Expenses
- Postage
- Holiday Spending (try creating a budget for each holiday like Christmas and Thanksgiving)
Are there budget categories that you are using that weren't mentioned. Let us know about them in the comments below!
That’s a great list! Some I might include are misc. work expense/income (ie: work/travel expenses and subsequent reimbursements), we keep HELOC under a separate housing category, and one family member only gifts money, so we have gifts as income as well.
But you are right in that budget categories tend to get re-done on a regular basis. Are piano lessons education or recreation? What about swimming lessons? Sometimes it seems like a coin toss.
So true Laura. I think the piano lessons and swimming lessons need to be added to whatever category works best for you. That’s why budgets are so unique. Some people may add the piano lessons as recreation because that’s what it means to them, while other people look at them as an educational resource. I love the additional list items. Thank you!