Creating budget categories will help you stay on top of your finances and ultimately lead to spending that is in the best interest of your financial goals.
Adding budget categories to your financial plan will help you get a clear picture of where you currently are spending your money. Once you have a good idea of where your money is going you can create a realistic budget that you can stick with.
Budget categories are extremely useful when reviewing your progress. They can be used to determine if your budget needs tweaking or if you need to be a bit more disciplined.
Listed below are 15 common budget categories for your reference. The first seven categories are pretty essential so they should be considered first when creating your budget.
15 Common Budget Categories
1. Housing
Housing is your mortgage or rent. This is generally the budget category that has the largest amount of your income allocated to it.
2. Transportation
If you have a car then this includes gas, car maintenance and registration. You can include auto insurance in this category or you can lump it into your insurance category. as well if you prefer. If you have a car payment, it can be lumped into this category or your debt category. Again, whatever makes the most sense for you.
If you do not have a car, then transportation costs may include costs for the bus, train, bike, or another form of transportation.
3. Food
I recommend breaking this category down into two categories of groceries and dining out. When I did this, I had a really astounding clear picture of how much we spent dining out.
4. Utilities
Electricity, gas, cell phone, internet service, cable, water, garbage, and sewage are examples of utilities.
5. Healthcare
Medical co-pays, glasses, contacts, medications, and counseling are all examples of expenses that can be included in this category.
If your health insurance premium is deducted from your paycheck then do not include that in this budget category since we are using take-home pay as the basis for the budget. However, if this is not the case and you are paying health care premiums you will need to add that amount into this budget category.
If you want to track your premium and it is deducted from your paycheck, then use your gross income instead of take-home pay for your budget and itemize all your deductions from your paycheck into categories (healthcare, taxes, 401K, etc.)
6. Insurance
Insurance is another major expense. Home insurance, renters insurance, car insurance, disability insurance, and life insurance just to name a few.
7. Household items
These are items required to keep your household running. Toilet paper, cleaning products, toiletries, paper products, and other essentials needed for your home. This does not include desired items that are not required.
8. Clothing
Included in this category are clothing and shoes. I would not include uniform costs that are related to work or education. I would add those to another budget category.
9. Personal care
Haircuts, spa days, massages, and gym memberships can be lumped into the personal care budget category.
10. Entertainment and recreation
Movies, sports, games, bars/clubs, traveling and kids’ activities are all examples of entertainment and recreation.
11. Education/Child care
Tuition, books, housing, teacher gifts, school donations, uniforms, and school supplies are all part of education expenses.
Childcare costs can be added to this category if you choose.
12. Gifts/Donations
Birthdays, holidays, and all donations can be listed in this category.
13. Debt
I suggest breaking this one down into two categories. Debt Minimum and Extra Debt Payoff. The debt minimum is what you must pay so should be included in your budget. Extra debt payoff is what you pay above and beyond the minimum.
14. Savings
Any contributions to your savings account can be categorized here. If you want to subcategorize that could work as well. I have multiple categories. Emergency savings, Property tax savings, Income tax savings, Investment savings, Vacation savings, Holiday Savings, and Home renovation savings. This helps me keep track of my multiple savings goals and ensures that I am contributing a little bit regularly to each category.
15. Retirement
If you are contributing through your employer then there is probably an automatic deduction for this. You can track it as I mentioned in the healthcare section or you can use another method.
If you are contributing separately, then add this category to your list for sure.
How much should you allocate to your budget categories?
Once you have your budget categories you will want to determine the percentage of your income that you would like to allocate to each category. There is no magic formula for this. However, there are some guidelines you can use as a starting point.
The first seven categories on this list are pretty essential. Try to keep the combination of those to be no more than 70% of your take-home pay. That will leave you with 30% to distribute amongst the remaining categories.
Here is an example of what a budget might look like. based on the 15 budget categories above. Some of these may not apply to you and of course, your numbers will be very different but this gives you an idea.
Budget categories summary
Remember to add your budget categories when you create your monthly budget to help you track your spending. It is okay to make adjustments since your situation will vary depending on what stage of life you are in, what irregular expenses you have if you have irregular income and what your current financial picture looks like. Be sure to consider your values when creating your budget and your budget categories. Aligning your values with your spending can help you determine which budget categories are personally more important to you.
If you have any questions or need any help, please reach out to me.
Thanks for reading!
Stay balanced,
Jill