There are literally hundreds of potential budget categories you could track. If you’re looking for an exhaustive analysis of those hundred categories, you’re in the wrong place; turn back now.
If you’re looking for a breakdown of the most common and practical categories and how to put them to work in your life, read on.
We need to get our brains and our hearts around our money. It’s obvious why our brains need to be involved, but why our hearts?
Unless we link emotion and desire to our money, we’ll have a hard time making the tough choices we sometimes need to make to be successful with it. I’ll speak more about this later.
We all know we should have a budget, but too few of us do. And I get it, I didn’t have a personal budget for my first 30 years of life.
It’s my wife’s fault I have one now, and I’m eternally grateful to her.
Over the past decade of budgeting, I realize the power a practical and usable budget can have. It tells us what we can afford and what we can’t. It allows us to forecast and plan for our future. And it gives us control over our money.
It’s for these reasons finding the right budget categories is critical to your success. Too many categories bog you down. Too few and you won’t have a complete picture. Let’s find your “just right.”
I’m going to highlight three approaches to budget categories and you’ll find they’re interrelated.
A key starting point to budgeting is knowing your monthly income.
The monthly income number we’re going to use for budgeting is your after-tax income, with any employee benefit deductions added back in.
For example, your after-tax take home pay may be $750, and your health insurance costs $200 a month, and you’re contributing $50 to your 401(k). In this example, the number you’re going to budget with is $1,000 ($750 take home + $200 health insurance premium + $50 in 401(k) contribution).
Let’s get started
10 General Categories
Putting together your personal budget will be specific to you and your situation. The listed percentages serve as general guidelines. We’ll be digging deeper into percentages in the next section as well.
As you embark on your budgeting journey, you’ll discover many items that don’t fit neatly in a specific category. Shampoo, dishwasher detergent and personal training sessions are some that come to mind. As this is your budget, you’ll need to make the last call on where these items belong.
Wants Versus Needs Using the 50/30/20 Budget Guide
Understanding the difference between wants and needs is fundamental financial knowledge. Simply put, needs are things you can’t live without. Wants are things that accentuate.
Your ability to recognize this difference and to prioritize your needs over your wants will be a major driver to your long-term success. An inability to differentiate may prevent you from becoming financially successful.
For example, if your wants are consuming too much of your monthly income and there’s no money left over for needs such as long-term investing, you’re in trouble if you’re unwilling to make adjustments.
With only three categories, the 50/30/20 budget guide is straightforward. It’s based on your after-tax income with any employee benefits deductions added back in.
Needs. Only 50% of your monthly income should be dedicated to your needs, which are things you literally cannot live without, which include
Wants. Only 30% of your monthly income should be dedicated to your wants which are things that accentuate your life but could certainly live without, which include:
Debt repayment/Saving and investing. At least 20% of your monthly income should be dedicated to repaying debt and proactive saving and investing for your future.
Now that you understand the parameters of 50/30/20 and needs versus wants, go back to the 10 General Categories above and rethink how you’ll separate certain expenses.
Goals-Based Categories
I spoke earlier about the need to get your heart around your money. As you continue in creating your budget, you may find changes will be needed in order to reach your most important financial goals and objectives.
Unless we link emotion and desire to our money, we’ll have a hard time making tough choices. Using these six areas as our budget categories can be a helpful additional step in deciding which categories are right for you and your budget.
These categories do not have percentages tied to them. It’s more so designed to help you clarify your biggest financial priorities, and then to gain a better understanding of where changes will need to be made.
Family. All spending including but not limited to housing, food, clothing, insurance and utilities.
Community. All spending including but not limited to fun, social life, hobbies and friendships; think of extracurricular activities.
Money/Career. All spending, including but not limited to debt repayment, saving and investing. Career development, courses, training and certifications.
WellBeing. All spending including but not limited to your physical, mental and emotional wellbeing.
Personal Development. All spending including but not limited to your overall self-improvement and enrichment.
Contentment/Spiritual. All spending including but not limited to things and activities that bring you peace of mind and happiness.
Once you’ve gone through and determined how much of your spending falls into each category, I encourage you to figure out if the spending is a need or a want.
If you’d like to dig deeper into your goals and priorities, you can access our Goals Course for free.
Conclusion
Hopefully, you’ve gotten some clarity on how you want to use categories to put your personal budget together.
If you’re not currently on track to get where you want to go with finances, check out this post, which will help you get on track.
As you get started with budgeting, it’s important to be reviewing it on the same day every month. Put it in your calendar so you don’t forget to do it. Once you get the hang of it, and are feeling more comfortable, you can shift from monthly to quarterly.
Additional Resources
Here two episodes of the LifeBlood podcast featuring Jesse Mecham and Peter Polson, two industry leaders in the world of budgeting.
Check out our their companies and our Partners Tiller Money and YNAB.
If you’re ready to take control of your financial life, check out our DIY Financial Plan course.
We’ve got three free courses as well: Our Goals Course, Values Course, and our Get Out of Debt course.
Connect with one of our Certified Partners to get any question answered.
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Check out the LifeBlood podcast.
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If you’d like to help your kids get good with money, check out our Teaching Kids about Money course.
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