Budget Categories – Pick Useful Headings

Picking Budget Categories - A Useful Guide

A common question when you start tracking your spending is: How do I choose which budget categories to use?

Some categories are very obvious, but overall you can end up with too many categories, or categories that are less useful in your attempts to adjust your spending. Since this is the source of all the information you use to control your spending, it’s important to get it right.

Remember: Recording your spending is only a tool, and you need to make that tool as useful as possible.

Basic Principles

We’re categorizing our spending into budget categories for two main reasons:

  • To have a snapshot of how much we can spend in a month, and how close we are to that limit
  • So we can spot where there are opportunities to reduce our spending, and then create mini projects to reduce the cost of specific categories one by one

As a consequence, you want to group together costs that are similar because they need to be tackled in a similar way, or because they typically occur at the same time.

Picking Budget Categories

Pick budget categories that reflect how, when and where you spend your money. Here are a few examples.

You should, for example, have a rent or mortgage category. This is an important item and likely a major part of your monthly spend.

You’ll also want a utilities category, for your gas, water, electricity bills. I personally add my internet connection to this category because I consider that an essential utility as well. There’s no point in dividing each of these into separate categories.

When you challenge yourself to reduce your utility costs, you tackle the whole category at once. You’ll look at each contract and see if there are better value alternatives out there.

Groceries is an important category, but separating out groceries from things like washing powder, diapers (nappies for those of us in the UK), light bulbs, etc, is not really useful. We shop for all of these things at the same time, in the same place. Reducing the cost of these items will be a single exercise.

However you choose your categories, you should try to keep the number below 15 if possible, below 20 in any case.

Suggestions for Budget Categories

Here are some suggestions to get you started.

General items are in bold. Items that only apply to certain people are in italics. If you have too many categories, try combining a few (like transport and car, for example).

  • Rent – or mortgage, depending on your situation. Include any residence charges
  • Residence tax – if the city taxes your abode
  • Utilities – gas, electricity, water, home internet
  • Groceries – food, consumables
  • Cell Phone
  • Cleaner – if you have one
  • Childcare – babysitting services
  • School fees – if you have any kids in school or are taking classes yourself
  • Snacks – including sandwiches for lunch, coffees and treats
  • Transport – your metro, oyster or subway costs as well as any taxis you take
  • Car – Lease or loan payment, parking, insurance and fuel
  • Medical – doctors, pharmacies, physiotherapy or any other treatment
  • Memberships – Gym and clubs, but also newspapers and subscriptions
  • Insurance – if you have life insurance, home contents insurance, etc
  • Entertainment – dining out, movies, theatre, concerts, massage, etc
  • Holidays – flights, trains, hotels, rental cars, travel insurance, etc
  • Personal Care – Hair dresser, pedicure, manicure, etc
  • Pet Costs – food, vet, insurance, etc
  • Home Goods – furniture, kitchenware, electrical goods, etc
  • Clothes
  • Loan Reimbursement
  • Emergency – if you don’t have any savings set aside, you should create an emergency pot that you add to monthly, and never use. One day you’ll be happy it’s there

This is not a prescriptive or complete list. You should pick budget categories that reflect your real life situation and spending habits.

Remember that subdividing your spending into lots of tiny buckets is counterproductive. It makes the analysis less meaningful and it makes the recording process tedious.

There are much more complex ways of recording your spending but these complex methods are not useful here. To keep things easy to understand you should do everything you can to keep it simple and picking easily remembered budget categories that make sense is an essential first step.