At its most basic, a budget is a plan for your money. A well-organized budget can help you take control of your finances and disperse your income with purpose. With a structured and organized budget, you’ll have enough money sorted to pay your bills, grow your savings, and still enjoy yourself.
The first step of building this budget involves breaking down expenses into budget categories to get a clear picture of your spending patterns. After defining your budget categories, you can allocate funds based on your financial situation.
This guide presents a list of budget categories found in any simple financial plan. We also offer suggestions for how much of your income you should devote to each type and a few money-saving and money-making tips.
Why are Budget Categories Important?
Budgeting teaches you to create a spending plan for your money and ensures that you have enough funds for the essentials. Following a budgeting method will also keep you out of debt if you have a personal loan to service.
Plus, if you’re persistent, you’ll never find yourself strapped for cash and will always have some extra money for whims. The basic idea behind budget categories is to see what you need to spend instead of what you already do.
Naturally, for a financial plan and budget categories to work, you must make more money than you spend. Moreover, it takes patience, dedication, and lots of self-control.
How to Create a List of Budget Categories
A budget is an incredible tool to reduce debt and build savings. But the thought of creating a personal budget from scratch can be overwhelming. Hence, the 50/30/20 budget rule can help people who don’t have the patience to track spending with detailed budgeting categories.
The 50/30/20 rule requires dividing and tracking expenses in three simple budget categories. With this method, you reduce the time spent detailing your personal finances and focus more on the big picture.
Here are the main budgeting categories:
- Necessities are bills that you must pay and items necessary for survival. Needs include rent or mortgage payments, property taxes, groceries, car payments, health care, insurance, debt servicing, and utilities. It’s advisable to allocate about half of your net income to cover your needs and obligations. If you exceed the 50% threshold on needs, consider reducing wants or downsizing your lifestyle.
- Wants are optional things most people spend about 30% of each paycheck on. Non-essentials include dining out, movies, sporting events, vacations, trendy clothing, and the latest electronic gadgets. Wants are all extras that you spend money on that make life more enjoyable, but your survival isn’t in danger without them. To save on non-essential expenses, you can work out at home instead of going to the gym or cook your meals rather than eating out.
- Savings refer to your emergency funds in bank accounts, IRA contributions to a mutual fund account, and investments. Try to allocate 20% of your net income to savings, investments, and debt repayment. This category can also include any extra loan payments you make to reduce the principal and future interest owed.
The Main 8 Budgeting Categories
Your monthly budget equals your disposable income, or the money you bring home after taxes, retirement savings, and deductions. This income is what remains for you to divide into your home budget categories. Below, we list the most significant segments you should allocate funds to from each paycheck.
One of the most vital budgeting categories is the money for your home. Ideally, housing shouldn’t exceed more than 35% of your take-home income. Hence, if you live in an expensive area, hitting this figure might be a struggle, and you may need to reconsider your housing choice.
The household budget includes mortgage payments or rent, taxes, and financial services. It also covers other housing-related expenses, such as home repairs and maintenance, HOA dues, and property taxes. Indeed, anything you pay to keep a roof over your head goes under housing expenses.
Groceries are an essential expense for every family but also a versatile category. As a result, your food shopping choices can help you economize. Many individuals include dining out, work lunches, and food delivery in this category, too.
Budgeters spending significant money on gourmet food and wine might want to put such expenses into the non-essential categories. Besides, most of us spend more than we need to when food shopping. Personal care items like soap, cleaning supplies, laundry detergent, and pet food all count in this category.
Water, electricity, heating, ventilation, and air conditioning are vital to every well-functioning household. The utility segment should cover all costs that keep these services up and running. Hence, you need to count gas, electricity, water, sewage, recycling, and garbage bills in this list. Most families also consider cell phone, cable, and internet expenses as part of this budgeting category.
Regardless of location, you will most likely need to get from point A to point B most days. As a result, having a car or getting around town is a considerable monthly expense. In big cities, you can go all over without a car. Still, accessible public transportation is not an option everywhere, and some people must find other means to commute.
Typically, the transportation category includes car payments, registration and DMV fees, gas, maintenance, parking fees, tolls, and public transit expenses. This budget segment also refers to train, metro, or bus passes; car insurance and repairs; oil changes; and car washes.
Medical Care (5-10%)
Maintaining your health and well-being is a top priority, so it’s critical to include enough in your budget to cover these costs. Thus, focusing on preventive medical care is way better than waiting until the last moment to act.
This budget category entails out-of-pocket costs for primary, dental, urgent, and specialty care. Also, be sure that you have enough set aside for prescriptions, medical devices, and supplies. If you have a separate category for insurance, remember to include life insurance, dental insurance, and other premiums.
Savings, Debt, and Investing (10-20%)
Often overlooked or underfunded, this home budget category is mandatory and should take up a significant portion of your personal budget. Although saving money doesn’t impact your day-to-day life, it ensures your financial goals and health down the road.
Every family should have an emergency fund for unexpected expenses and a retirement account such as a 401(k) or IRA. Without the backup fund, you may get blindsided by unanticipated medical expenses or a sudden job loss. Did you know that Americans over 55 are suddenly losing jobs at a significantly faster rate than before 2015? It can happen to anyone, really.
Keep your retirement account separate from your emergency fund. The 401(k) account is a long-term plan to support you during your golden years. This budgeting category can also help you pay down high-interest debt, such as credit card bills and title loans.
The insurance budgeting category depends on your preferences. Some budgeters tend to categorize insurance with the things they’re insuring, such as placing health insurance into the Medical Care category. Some even choose to list car insurance under Transportation.
If you want to include a separate insurance bracket, it should entail health, car, disability, and life insurance. In addition, this segment can provide money for homeowner’s or renters’ insurance and home warranties or protection plans.
The Non-Essential Budget Categories Lists
Once you’ve budgeted for your family’s essentials, the remaining part is your discretionary income. Use these funds for things like personal expenses, kids, pets, recreation, and gifts. Non-essential costs can vary from month to month, depending on your spending decisions. These expenses are also the easiest to cut back on to settle your debt or boost your savings.
Personal Use (5-10%)
This budget category is a catch-all for anything considered personal care or lifestyle expenses. Various budget categories include different items, and some people stick to the bare minimum only. It can encompass a gym membership, gifts, clothes and shoes, haircuts, makeup, home decor, and furnishings.
Since some personal care products are essential, like soap and laundry detergent, you might want to place these in the Food category. Likely, you probably buy hygiene goods with your groceries anyway.
Family and Kids (10-15%)
Raising children is an expensive and life-long endeavor, but it is well worth the cost. So, you must plan expenses and fees for your kids with your eyes wide open. Being optimistic is a rewarding attribute, but your budget will thank you for being realistic about this budgeting category.
Child-related costs start the moment you decide to have a baby. You must provide funds for the birth, hospital care, stroller, crib, bath time, and bedtime supplies. Set money aside for food, medicines, daycare, babysitting, child support, clothes, and toys for newborns.
Once your kids grow, budget for summer camps, school supplies, fees, uniforms, and school lunches. Don’t forget sports and extracurricular fees, books, electronics, and birthday parties, too. By the time college comes, you’ll have your budgeting habits polished to perfection.
Additionally, pets are often like children to most families that adore animals, so they spare no expense for their puppy, kitten, or other breed of animal friend. For that reason, it’s imperative to place pet costs into this budgeting category.
Carving out leisure money is essential to maintaining a healthy work-life balance. This budget category can include sporting events, concert and theater tickets, hobbies, and video games.
Streaming services and subscriptions like Netflix, restaurants, family activities, vacations, and short tours are also part of your entertainment list. In other words, this budget category includes the fun side of your life, so enjoy it as much as you can.
The last home budget category targets anything left out from the primary budget categories. It can also serve as an ‘overflow’ category when you need extra money somewhere else.
For instance, if you have a larger family, you will need more money for clothes and shoes for the kids. If you’ve maxed out your Personal Use category, account for those items here. ATM and bank fees, postage, jewelry, and donations can also fall into this category.
The Budget Process
There are always ways to cut or save on almost all of the items we spend money on daily. Dropping some expenses is easy, while others are a bit tougher to renounce. Still, every dollar you set aside is a dollar you can dedicate to fun, paying off short-term loans, or investing.
Cut Down on Your Expenses
Having a list of budget categories doesn’t mean handling your personal finances has to be rigid. You can always cut fixed expenses, but doing so usually requires more drastic action than you may be willing to take. Luckily, even if housing costs over the ideal 35%, many of us can handle it.
To cut essential expenses, negotiate better rates on things like your cable, Internet, and cell phone. Better yet, cut cable altogether and switch to streaming services. Save money around your home by making your house eco-friendly and electro-efficient. Learn how to spend less on water, cooling, and heating, too.
If you use a car, save on commuting by taking public transit, cycling, or walking. Maybe you can’t walk to the office, but you might live close enough to reach the grocery or drug store on foot. Check whether the unlimited monthly public transit card is worthwhile. If you walk and bike more, it may be more convenient to take a pay-as-you-go card. Plus, you’ll also drop parking fees.
To save even more, utilize some grocery shopping tips. For example, make a list, shop during the sales, try couponing, and use cashback cards
Lastly, try to strike a better deal with your provider on your health insurance.
Reduce the Fun Budget Category
You’ve put in a lot of effort to generate income, and you deserve to use part of it for entertainment. But you can do fun things without pressuring your other budget categories. If you’re keen on going out to dinner, try a reservation app. Seated may give you $10-50 credit with giants like Amazon, Uber, or Target for each completed reservation.
Being hooked on the latest fashion doesn’t mean you should renounce thrifting altogether. Instead, check out vintage stores. It may take a few trips to grab a good piece, but it will be worth it once you do. Also, you can choose a free hobby such as trekking, jogging, or cycling. When it comes to vacations, you can always make use of early or last-minute bookings.
Lower Your Debt
If you are dragging some debt behind you, you can make it cost less. Try reducing your credit card debt with a balance transfer card or an online loan from DirectLoanTransfer. Next, consider refinancing your student loan debt at a lower interest rate. Focus on fees when applying for new credit, too. If your mortgage is too high, rent a room or find a roommate.
After creating a list of budget categories and trying to economize, you can focus on earning more. In most cases, boosting your income is more impactful than saving money.
Investing in real estate or stocks can be the fastest way to earn cash. You can also sell some of your unused stuff online. Use your time when commuting or waiting for an appointment to make money by answering surveys.
Set up your budgeting plan once you know how to allocate your income based on the above simple budget categories. Remember, this list of budget categories will only give you a head start. The key to success is to customize a budget that makes sense for you.
Make minor adjustments if your home budget isn’t working and it’s been a few months already. You need to do so until you have a budget that meets your needs. It will take some work initially, but the results and the money saved will be well worth the effort.