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Budget Categories: Long list or short list?

by Rob Bertman, CFA®, CFP® in Budgeting, Most popular blog posts
December 16, 2020
budget categories

Budget Categories: Long list or short list?

I recently started using Noom to log my meals and track my calories. (What does this have to do with budget categories? I’ll get there.)

The first thing I noticed is that I had wildly underestimated the calories I was taking in everyday. Logging my meals showed me how much I was actually taking in and helped me identify my spots of overeating, 

Most of the extra calories came in the form of 50 extra here and there throughout the day, but it added up. Then, the post-dinner eating was where I logged the most excess calories. (Nothing healthy gets eaten after 8pm!)

Just knowing and seeing where my calories were being eaten was so incredibly helpful. I lost 10 pounds in 5 weeks!

Think about tracking your spending like calorie counting. The end goal with calorie counting is to get to your ideal weight. The end goal with budgeting is to improve your spending habits and have more money left over at the end of the month. 

Budget categories are just like logging your meals. 

Budget categories help you figure out where the areas of overspending are coming from and give you the awareness to make positive changes in your spending.

Just like my calorie counting, you can get really granular with your budget categories or you can classify them more broadly. 

Which strategy works? Well…both will work. The question is which will work for YOU? 

What categories should I include in a budget?

Creating a budget is not a one-size-fits-all thing. Different systems work for different people.

If you’re a detail-oriented person who loves spreadsheets, then get as granular as you’d like. 

If you’re someone who is looking for a method that you can easily maintain, then use a simple budget and keep the budget categories to a minimum. 

The categories you should include in your budget depends on the kind of person you are.

Let’s take the food budget for example:

  • Simple budget categories: Groceries, Dining out
  • Detailed budget categories: Groceries, Coffee shops, Breakfast, Lunch, Dinner, Drinks, Fast Food, Snacks
what categories should i include in a budget

Let me show you both methods starting with the detailed budget, then I’ll simplify the categories for you. 

Finally, I’ll give you my bare minimum, 3 step budget system as a way to organize and track your spending that has proven to get my clients great results. This budgeting method is great for people who have had trouble getting their budget to stick.

Detailed List of Budget Categories

The first step is to make sure you’re capturing all of your spending. 

It’s helpful to start with a comprehensive list of budget categories to make sure you don’t miss anything. 

If this list seems intimidating, move on to the next section where I’ll simplify it for you. 

If a list of 182 separate categories sounds like heaven, have at it 🙂

Income

  • Salary & Wages
  • Self-employed income
  • Bonus
  • Tips
  • Tax refund
  • Gifts received
  • Alimony received
  • Child support received
  • Rental income
  • Dividend income
  • Interest earned

Housing

  • Mortgage/Rent
  • Homeowners association (HOA fees)
  • Homeowners insurance / Renters insurance
  • Property insurance (i.e. jewelry)
  • Home repairs / Maintenance
  • Property taxes
  • Home improvement
  • Furnishings

Home Services

  • House cleaning
  • Lawn care
  • Security system
  • Pest control

Utilities

  • Natural gas / Electricity
  • Landline / Home phone
  • Mobile phone
  • Home internet
  • Garbage
  • Recycling
  • Water
  • Sewer

Household Items

  • Cleaning supplies
  • Paper products
  • Tools
  • Toiletries
  • Laundry supplies
  • Postage
  • Furniture
  • Home décor
  • Pool supplies

Food

  • Groceries
  • Fast food
  • Coffee shops
  • Breakfast
  • Lunch
  • Dinner
  • Drinks
  • Snacks

Transportation

  • Car payment / lease payments
  • Car insurance
  • Gas
  • Oil change
  • Maintenance / Repairs
  • Personal property taxes
  • Registration
  • Public transportation
  • Ride sharing (Uber, Lyft)
  • Tolls
  • Parking Fees
  • Roadside assistance (AAA)

Medical/Health

  • Health insurance
  • Dental insurance
  • Vision insurance
  • Prescriptions / Medication
  • Doctor bills
  • Dentist visits
  • Hospital bills
  • Optometrist
  • Glasses, contacts
  • Chiropractor visits
  • Vitamins/Supplements

Insurance

  • Life insurance
  • Disability insurance
  • Long-term care insurance
  • Umbrella policy
  • Identity theft

Kids

  • Tuition
  • Daycare
  • Babysitter / Nanny
  • Diapers, formula – baby necessities
  • Summer camp
  • School or Extra-curricular activities
  • School supplies
  • School lunches
  • Lessons
  • Allowance
  • Toys
  • Kids discretionary spending
  • Child support
  • Kids clothing

Pets

  • Veterinarian visits
  • Pet food
  • Pet medication (i.e. flea shots, heart worm medication)
  • Pet toys/beds
  • Pet accessories (leash, collar, etc.)
  • Pet grooming
  • Pet insurance

Subscriptions/Streaming Services

  • Netflix/Hulu
  • Amazon Prime
  • Music (Spotify, Pandora)
  • Sports TV subscription (like ESPN or Fox Sports)
  • Software subscriptions
  • Magazines
  • Professional Society annual fees

Clothing

  • Work clothing
  • Athletic clothing
  • Leisure clothing
  • Alterations
  • Dry cleaning

Personal Care

  • Haircuts
  • Hair coloring
  • Hair products
  • Cosmetics
  • Nail salon
  • Eyebrows
  • Massages
  • Spa Services
  • Grooming
  • Gym Membership
  • Counseling/Therapy

Personal Development

  • Books
  • Personal coach
  • Self-improvement
  • Conferences
  • Online courses
  • In person courses

Financial/Professional Fees

  • Financial advisor
  • Lawyer / Attorney fees
  • Tax professional (CPA, online accounting firm)
  • Business consultant

Recreation/Fun

  • Movies
  • Concerts
  • Hobbies/Crafts
  • Hosting parties
  • Books
  • Entertainment
  • Sporting Events

Travel

  • Vacation
  • Trips to see family
  • Trips for weddings, bachelor/bachelorette parties
  • Souvenirs
  • Baggage fees
  • TSA Precheck or Global Entry

Technology

  • Mobile phone
  • Computer / Computer accessories
  • Speaker system
  • Wifi mesh system / Wifi extender
  • Smart home (Amazon Echo, Fire, Nest, Google)
  • Gaming system / Video games / Gaming accessories

Gifts

  • Family birthday gifts
  • Friend birthday gifts
  • Wedding/wedding shower gifts
  • Anniversary gifts
  • Baby/baby shower gifts
  • Teacher gifts
  • Service person gifts (mail carrier, home service, personal assistant, 
  • Thank you gifts
  • Holiday gifts
  • Special occasions

Charitable Giving

  • Charity/Donations
  • Tithing
  • Religious
  • Community
  • Political
  • Non-cash donations (Goodwill, Salvation Army, clothing, canned food, electronics, stock, etc)

Savings Goals / Investing

  • College savings
  • Retirement savings
  • New car savings
  • Health Savings Account/Plan
  • Emergency Fund
  • Brokerage investments
  • Traditional / Roth IRA
  • Down payment savings

Debt Payments

  • Credit card debt
  • Student loan debt
  • Medical debt
  • Personal loans
  • Auto loan payments
  • Back taxes
  • Past due bills
  • Alimony

There you have it. A comprehensive list of budget categories.

Unless you’re a spreadsheet wiz then this is probably too many. How do you know if you have too many budget categories? 

If there’s too much information and it becomes intimidating to create a budget, then simplifying will be better for you.

Simple list of budget categories

If you still want to track your spending in these different areas, we need to simplify these major budget categories and many subcategories.

Here’s a simpler way to consolidate all 182 listed above into 12. 

  • Housing – includes all housing, home services, utilities and household items
  • Food – All food
  • Transportation – all in cost of getting around town
  • Health – include all medical, health, personal care, insurance
  • Kids – Any kid-related expense
  • Personal development / Recreation – Also includes fun, streaming services / subscriptions, travel
  • Clothing
  • Technology
  • Pets
  • Giving – charitable and personal gifts
  • Financial / Legal / Professional fees
  • Net worth building – saving, investing, debt payments
simple budget categories
Simple Budget Categories

Family Budget Expert 3 Step Budgeting Process

Great! You’ve figured out your budget categories…Now what?

How do we take all this information and transform it into something that will help you find more money in your budget?

Your spending should ultimately be a reflection of your values and priorities. But before getting there, my clients have gotten the best results by starting with my simple budget categories that help figure out where to cut spending without feeling like they’re sacrificing their lifestyle.

Many financial experts will tell you what percentage of your spending should go towards different budget categories.

Some like the 50/30/20 budget (50% to needs, 30% to wants, 20% to save money and pay off debt).

Others like zero based budgeting. The goal is to have every single dollar allocated to various budget categories each money. No dollar unaccounted for. This usually works best when using the prior month of income instead of trying to predict the current month’s income.

To me, these types of budgets are aspirational. In other words, it’s hard to all of a sudden start using these budgeting techniques and figure out how to live below your means when you already have the lifestyle you’re accustomed to. 

The first step with budgeting is always to track your spending then let that inform how you can make changes to cut your spending so that you can save more money, invest for the future, and pay off your pesky debt.

For example, if I asked you to cut your spending by 10%, where would you start?

Most people go through each category and see what they can cut back based upon other people’s judgements and where they are spending their money. 

But a budget that sticks is one that resonates with how YOU want to live YOUR life.

Step 1: Fixed, Flexible, Net worth – Simple Budget Categories

First, let’s see what expenses we can change without uprooting our life. 

For example, even if your mortgage is high, you might want to find other ways to cut your spending before thinking about selling your house.

Fixed expenses

These are things you don’t have control over how much you spend on a monthly basis. These bills are coming and you have to pay the amount or else it would significantly change your current life. 

Cutting your spending here means making a fairly drastic lifestyle change like moving, selling a car, possibly changing your kids’ school, etc.

Here are examples of fixed expenses:

  • Mortgage / rent
  • Auto payment, gas & maintenance
  • Utilities
  • School tuition / daycare expenses
  • Insurance
  • Pet expenses

One note: Fixed expenses are not the same as necessities. For example, the mortgage on a $400,000 house is not a necessity, neither are $500 per month car payments, but they would be considered fixed expenses.

Flexible expenses

discretionary expenses

A flexible expense is anything that you could change if you wanted to without a drastic change. It would include all discretionary spending, anything you could cancel, or places you could spend less money if you wanted to.

Here are examples of flexible expenses:

  • Travel
  • Technology / Electronics
  • Clothing
  • Dining out
  • Groceries (yes groceries are flexible)
  • Personal care / personal development
  • Gifts (charitable & personal)

Net Worth

This is a very important category than many budgets forget to include. How much of your money is going toward net worth building activities?

We easily think about saving and investing, but did you know that paying off debt also builds your net worth?

We’ll exclude housing payments / rent and auto payments from this since they’re included in the fixed expenses section.

A point of clarification: The money in this budget category is not always an expense. Sometimes it’s just cash flow.  For example, if you put $1,000 into your Roth IRA or your savings account, the money is staying with you. But these funds still need to be accounted for.

When you pay off debt with an interest rate, part of the payment is an interest expense and another portion goes to paying down the loan principal. We won’t worry about that nuance right now. Let’s just account for the full debt payment or transfer.

Here are places your money can go to build your net worth:

  • Credit card payments
  • Student loan payments
  • Personal loan payments
  • Retirement savings (401k, 403b, IRA)
  • Savings account transfers
  • 529 plan savings for college.
  • Short term and long term savings goals.

What comes after fixed, flexible & net worth?

Ok, so now you have your fixed and flexible spending as well as how much money is going towards building your net worth.

Can we use these budget categories to cut spending and find more money to save, invest and pay off debt? 

Heck yeah! Here’s how.

Step 2: Keep, Cut Back, Eliminate

budget priorities

It’s time to align your spending with your values and priorities and get rid of what would be considered wasteful spending on your terms.

The budget category to start with is your flexible spending, the least disruptive category to make changes to. 

Take a look at your flexible spending and decide what you’d like to Keep, Cut Back or Eliminate.

Here’s what I mean:

KEEP

These are the things that you enjoy spending money on. You not only like what you got for your money, but you also feel good about the amount you spend on it.

Think about the spending you want to KEEP in terms of you as individuals, as a couple, and as a family. 

Think about the things you enjoy doing that keep your relationship strong. Think about what keeps your family strong or ways you spend your money to raise your kids with the values you want them to grow up with.

But also remember to think about the things you enjoy doing on your own. It could be a social activity, a hobby, an interest that is important to you but others in your family don’t normally participate in them. Before my kids were older, this was seeing action or superhero movies for example.

If you’re married or financially attached, KEEPs as individuals can be tricky, because your spouse/partner probably isn’t interested and wonders why you’d spend your money here (and vice versa for their interests).

Just remember that you might not understand why it’s a keep for your spouse/partner, it’s important to them. It stays a KEEP with no veto power. You don’t have to agree here as long as one of you isn’t destroying your family finances.

Let’s table any arguing or judgment here so you can work together and agree on the next two categories.

CUT BACK

CUT BACKs are things you enjoy doing but there’s probably a way to do it for less money. We’re looking for a 20-25% reduction without feeling like you are drastically changing your life. You can either do it less often or find a cheaper alternative. 

Going out to eat (or ordering in these days) is a perfect example. If your normal food bill is $50, can you do it for $40? If you get lunch out 5 days a week, can you just pick one day to make it at home?

Next time you book a vacation, would the $200/night room be fine compared to the $250/night room?

That’s what a CUT BACK is. It’s nothing drastic. It just takes the edge off every time you spend money.

Go back and review your spending to see if you can find any patterns where you could cut back the traditional budget categories. Most of the people I work with pick Dining Out, Target, or Amazon.

If you’re having trouble figuring out how to make this happen, there are plenty of creative ways to save money.

Remember, you have to be in agreement here.

ELIMINATE

ELIMINATE is the easiest category to figure out. You are reducing your spending here to $0.

It could be that extra streaming service you’re not using. It could be something that’s detrimental to your health or your relationship. It could be something you simply forgot you were paying for until you saw it. These are things you cancel outright.

ELIMINATE items are not at all aligned with your values and priorities. No need wasting your money here. It would be better served building your net worth than spending it on something you don’t care about all that much.

Step 3: Track your spending in 3 budget categories or less + Track your net income

Take the patterns you noticed in your CUT BACKs and ELIMINATEs and track those traditional categories. Set budgets that are 25% lower than what you’ve spent in those categories over the last few months. 

Budgeting apps make this fairly easy because it will pull in the last 90 days of transactions and show you what you actually spent.

These budget categories (keep it to 2-3 tops) will be the only ones you track in your budget. 

Why not track all of your budget categories?

You only want to track spending that you are trying to improve. Tracking fixed expenses like your mortgage payment just clutters your budget (and your brain). It becomes a distraction to the information that will ultimately help you spend less money and save more of it.

If you’re not trying to improve it, don’t track it.

Along with the 1-3 budget categories, track your net income each month (your overall spending compared to your income). 

Most important piece to your budget is to get to a place where you stop living paycheck-to-paycheck and have money left over at the end of the month.

Then it’s all about having as much money left over as possible by your spending is fully aligned with your values and priorities. 

Budgeting is the #1 skill in personal finance

Why focus on the budget?

What good is it if you know how much money you need to put towards saving, investing and debt repayment if you can’t come up with the money in the first place to put toward these financial goals?

Figuring out whether you should pay off debt or invest comes after.

Budgeting is the key skill that will help you find that extra money so that you can reach financial independence. It will also make sure that you have money to cover unexpected expenses that come up.

You can decide if you want to use 100+ budget categories or keep it simple. Honestly, there’s no right or wrong way to do it.  The most important thing is that you pick a system that works for YOU.

Need Family Budget Help?

Are you just getting started creating your family budget? Not sure how many budget categories to include or how to start the process?

Maybe you’ve tried budgeting before but it hasn’t worked?

I’m here to help you create a budget that sticks while spending in alignment with your values and priorities as individuals, as a couple, and as a family.

Let’s start with a free 30 minute consult to see the kind of help you’re looking for, the challenges you’re trying to overcome, and if I can help you get there.

Want help but not ready to talk?

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