How to use budget categories

Love it or hate it, if you want to be financially successful, you need to budget your money, and budgeting success means understanding your budget categories. Knowing the different types of things you can spend your money on will help you determine which ones apply to you and your financial situation. So let’s talk about the different categories you may need, including a list of budget categories!

Sometimes the easiest way to choose budget categories yourself is to go through a large list and select the ones that apply to you. You may not need every category, and that’s okay. It all depends on what items you need to include in your personal budget.

4 Main budget categories and subcategory lists

Below is a list of the 4 main categories of budget expenses and a list of subcategories for each. I’ll also discuss what each category means and how to arrange the subcategories clearly:

1. Finance for yourself in the future

What you do now affects your financial future. That’s why it’s important to have a category in your budget that suits your future self. This group of categories includes:

Why having a plan for the future is important

Have you ever heard the words “pay yourself first”? It should be a regular part of any plan you develop. For this reason, the “finance for the future” category focuses on forward thinking.

But what does “pay yourself first” mean? Before you pay bills or make purchases, some of your earnings should, if possible, be transferred to a retirement account for yourself in the future and to emergency savings accounts for a rainy day.

Time passes very quickly, and planning for a future version of yourself will ensure that you can enjoy retirement and not have to rely on the government or your children to take care of you. According to the National Institute of Retirement Security, 40% of older Americans in retirement depend on Social SecurityTherefore, it is important to save now for the future.

Having an emergency fund or even a rainy day fund will also give you a buffer against unexpected costs, so you can rely on your emergency savings instead of credit card or other debt.

Almost According to Nerd Wallet, 50% of Americans want to focus on saving for emergencies. Therefore, it is extremely important to add this to your budget in case something unexpected happens and you have to pay for it.

This group of categories also includes money to pay off any debt you have incurred (e.g. credit card debt, car loan, personal loans, student loans, etc.) because it is important to pay off your debt as quickly as possible. you can so you can focus on building wealth. It may not seem like it, but debt settlement is actually future-oriented because it will give you more security and money later.

2. Essential

Your essentials are things that can’t be taken out of your budget or put off until later. These are things you have to pay for to have a good quality of life, so they should be at the top of your budget category list. The “essential items” category will include:

• Mortgage or rent repayment
• Utilities (e.g. water, electricity, internet)
• Groceries and food budget
• Transportation costs and/or car payments
• Tenant insurance
• Homeowners insurance
• Property taxes
• Health insurance
• Car insurance
• Life insurance (e.g. term insurance or whole life insurance)
• Disability insurance
• Dental care
• Childcare costs
• Pet’s food
• Essential personal hygiene items

Get really clear on what your most important things are

As already mentioned, the most important things are the things you need to live. However, this category does not include money for shopping or getting your nails done – these are not necessary things.

Instead, the most important ones focus on the categories you need to deal with. I mean the basics like rent and all categories of housing costs, transportation, insurance, and food.

Your essentials are costs that are non-negotiable and should be one of the first things you take care of when you get paid.

3. Life goals

Your life goals include saving for your future beyond retirement and other things you may want to pay for to improve your life.

While not as important as a car payment or groceries, “life goals” are a really important expense category to include in your budget.

Defining your life goals

Your life goals may include things such as medium-term savings and investments for the next 10-15 years, business savings, saving to buy a home, saving money for collegeand so on.

I recommend creating separate accounts to save for each of your different life goals. Personally, I have automatic deposits set up for various purposes and it has helped me stay on top of my savings!

4. Everything else

Anything that is not necessary and not saved for a specific purpose is considered unnecessary. But this category is usually the coolest and makes life more fun!

• Entertainment, e.g. concert tickets, movies, etc.
• Gym membership
• Eating out, such as fast food, cafes and restaurants
• Holidays
• Gifts e.g. for extended family and friends, weddings, anniversaries or birthdays
• Cable subscriptions or cable alternatives
• Streaming services e.g. Netflix, Hulu, Amazon Prime
• Interests, e.g. gardening, handicrafts
• Taking care of yourself, such as getting your nails done, going to the spa for a massage, etc.

Everything else should include fun money

The “everything else” category is where you spend your money. This is money you would spend on shopping or saving for an item on your wish list, traveling, entertainment, and anything else you normally do as part of enjoying the life you lead.

Having a category like this matters because sometimes you want to be able to enjoy your money even while paying bills and working on your goals. So it can boost your morale and allow you to reward yourself for your hard work.

In this category you can include things like going to the movies, dinners out, birthday gifts for friends, and other items.

By percentages for your budget categories

Once you are clear on your list of budget categories and subcategories. It’s a good idea to assign a percentage to each category. You probably won’t spend the same amount on each category. Some categories will require more income than others.

However, knowing what percentage of your income should be allocated to each category is a big part of keeping your finances organized and can help you improve your spending habits.

For each of the 4 main categories listed above, Below are general guidelines on how to allocate your money. However, depending on your individual expenses and goals, the percentages may look slightly different for you.

• Finances for the future: At least 20%
• Essentials: 50%
• Life goals: 15%
• Everything else: 15%

Remember that you can adjust the budget category percentages according to your goals and schedule. Remember that your budget is your money management plan for building wealth, and it should work well for you. Be sure to check out our sample budget.

Expert Tip: There’s nothing wrong with changing budget categories

Choosing a budget category is not a one-time thing process. Budgets are constantly changing and may need to change to meet current needs.

While you will likely always need to consider the four main budget categories, you may find that you need to adjust or change subcategories.

So make it a habit to constantly review your expenses, goals, and list of budget categories to make sure your spending reflects them.

How do you plan your budget categories if you’re focused on paying down debt?

If you’re focused on paying off debt, you should plan to pay off the largest amount of debt possible each month, rather than the minimum amount. So paying off debt may mean lowering the amounts you pay into different budget categories.

For example, you may need to spend less on entertainment or vacations and instead use the difference to pay off debt as quickly as possible.

As with anything involving money, sticking to a plan takes discipline. If you’re struggling with your plan at first, having an accountability partner is a great idea!

Contact a friend for support. We all need a cheerleader sometimes.

How many categories should I have in my budget?

The number of categories you choose for your budget depends on your expenses, goals and expenses. That said, it’s a good idea to create categories for:

• Long-term savings goals for future home and debt repayment
• Your things and needs
• Other life goals
• Unimportant things like travel, expenses, or fun money

You can then divide these main categories into smaller subcategories. While there is no perfect number of categories, it’s a good idea to start with at least these four main categories.

What are the four main categories in the budget?

The four main groupings of categories in a budget are future finances, essentials, life goals, and everything else. You can call each of them a different name, such as “retirement and savings” or “discretionary spending,” but the core idea behind each category is the same.

You’ll likely need all four categories to create a balanced budget, although the subcategories within each of the main categories you choose will vary depending on your expenses and even your goals and lifestyle. For example, in your main “Future Finance” category, you might have subcategories for 401k/IRA, emergency savings, and student loan repayment.

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Use these spending categories in your budget today!

Like any art, mastering budgeting takes time. Additionally, part of good budgeting is defining budget categories. Knowing what category something falls into can help you decide whether you’ll save money by buying now or later.

Budgeting can be difficult, but categories can help! If you need practical budget advice, that’s okay too. The most important thing is to start and keep going even when the going gets tough, knowing that making a plan will help your finances.