Personal budget categories – the key to tracking your money
Creating and maintaining a personal budget isn’t hard. There are many different options including the old tried and true paper and pen method, using a spreadsheet, and even specialized software packages like You Need a Budget (my personal favorite). Regardless of which option you choose to use, all options require selecting categories.
What are personal budget categories?
Personal budget categories are a way of grouping your expenses so you can track where your money is going each month. When creating a budget, you’ll allocate a particular amount of money to a category then track your expenses against it. Once your expenses meet the amount allocated in that category, you have no more money to spend in that particular category.
Ready, Fire, Aim
When I created my first “real” zero based, month-to-month budget, I spent a great deal of time thinking through the categories required. I logged into online banking, analyzed all of my various transactions, looked at other example budgets, looked at books, thought about them some more, etc, etc. Bottom line: I spent way too much time thinking them through and as a result ended up with way too many categories. Needless to say, my budget was difficult to manage that month.
Since my first budget, I’ve added sub-categories in some places, and removed them in many others. Overall, I removed far more sub-categories than I added. In other words, I’ve significantly simplified my budget.
Don’t get caught up trying to come up with every little category you think you will need. While I took the more detailed to less detailed path, a better approach is to start off with high level budget categories and add sub-categories where when you want to break things out a bit, manage your money a little tighter, or just plain want to see a little more detail. Just pick a few high level categories and start budgeting. You’ll figure out pretty quick which categories you need and which ones you don’t.
For example, one initial category might be food. For the first month track all of your food expenses, including eating out in the food category. When making your budget for the next month, you might wonder “How much did we spend eating out?” Without going through each transaction, it would difficult to know the exact amount. This amount would become important if you are trying to cut back on your eating out expense or if you are trying to determine what percentage of your overall expenses eating out is. When you begin asking yourself these types of questions, go ahead and break the food category down into sub-categories such as: Groceries and Eating out.
Good starting points for personal budget categories:
Here are some categories that serve as good starting points:
- Transportation (Car payments, gas, insurance, subway fare)
- Personal (things like life insurance, hair care, medical expenses)
- Education (tuition, daycare fees, school supplies)
- Credit Cards
Let your personal budget categories evolve over time
I’ve been following a monthly personal budget now for more than 2 years and I’m still tweaking my categories. I even have to create new categories when expenses come up that I haven’t categorized before. The important thing is to just start somewhere, knowing the categories you initially choose won’t be perfect.
Choose the categories that work for you and meet your needs and don’t try to shoe horn your expenses into someone else’s categories. Remember too, don’t make them too detailed. If you do, you’ll just become bogged down in the details which makes your budget more difficult and time consuming to manage. This is a sure way to become discouraged. Keep your budget simple and easy to manage. The easier it is, the more likely you are to do it.
Personal budget categories are easy to adjust and can even be added/removed on the fly as you find you do or don’t need them. If my starting points above aren’t enough to get you kick started, head over to Google and do a quick search on budget categories and you’ll find lots of discussion and examples to choose from.
What categories do you use that I haven’t listed below? Did I miss anything? Any helpful tips you have to share? Add a comment!
Photo by: thievingjoker