How To Categorize Your Finances: 6 Ways to Split up Your Paycheck

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Categorize your finances

Every year I go over my financial goals and revise them for the upcoming year. To me, this is of ultimate importance because I refuse to be the old lady who literally lives in her shoes (or a house built out of her shoe boxes), or the girl with the expensive designer handbag without a dollar in it to buy her own drink or pay for her cab home.

I've been having quite a few money conversations with my friends lately. While everyone has been guilty of one money mistakes or the other, there's no better time than now to get your money situation where you really want it to be. Having a well-organized system in place will make it easier for you to accomplish your money goals. 

Don’t have a system? Don’t know where to start? You’re not alone. A 2019 poll by found that 33% of Americans don’t budget — even though pretty much everyone agreed that they should. It’s safe to say organizing and managing finances is a challenge for a lot of people.

Below is a breakdown of my own system and how I categorize my finances. You can use it as a guide to help you manage your own spending. 

1. Day-to-day transactions

I use my checking account for my day-to-day transactions like paying bills, grocery shopping, eating out, and gas. I don’t save any money in this account.

I also use this account to write checks and any automatic debits that I have set up. If you don’t currently automate your finances, it’s typically very easy to set up with your bank, creditor, or other online merchants. According to ACI Worldwide, consumer ACH (Automatic Clearing House) bill payments make up over 46% of total bill payments made. And that’s just one of many electronic payment services. 

If you use your checking account in a similar fashion (or plan to), it's a good idea to keep a cash buffer in it just in case an unexpected transaction hits — like annual membership fees or a larger-than-average electric bill. You'll want to track your spending very closely to ensure you're on top of your expenses. The last thing you want is to overdraft and incur fees.

2. Emergency savings

I keep my emergency savings in a separate account. It's kept liquid in the event I need to access the funds quickly. Similarly, your emergency savings should be easily accessible just in case of an unplanned situation.

If you don't have any emergency savings in place, set an initial goal of $1,000, especially if you have a high-interest debt to pay off. Once your debt is dealt with, the ideal amount of money to have saved for emergencies should be 3 to 6 months of your basic living expenses.

This will help cover things like loss of income due to a job loss and any unplanned expenses that may come up — rather than using a credit card and going into debt Once you get past the situation, you can then plan to replenish your emergency savings.

3. Short-term cash savings

Your short-term savings should be for things like buying a house, starting a business, etc. It's basically money you need in less than 5 years. You'll want to have this money in liquid or semi-liquid form and easily accessible (think certificate of deposit).

Note: Where you keep your emergency and short-term savings is up to you, but it's a good idea to set it up where you are not able to easily make transfers between these accounts and your checking account. This way, you're not tempted to dip into the accounts because they are convenient to access.

4. Retirement savings

Your retirement savings is for the long-term to fund your future lifestyle when you retire. To avoid your savings from being eaten away by inflation and to allow it to grow over time, investing your money is the way to go.

In the United States, examples of retirement accounts include the 401k, 403b, and IRA. These account types have several tax benefits and are offered by many employers. Or you could set up your retirement savings accounts on your own.

5. Other investments

Outside of your retirement savings, other investment types to consider include non-retirement investing in the stock market, investing in real estate, or in small business.

Having multiple investment types is a great way to diversify your portfolio. But you want to be sure you do your due diligence and research any investment you choose to put your money in.

6. Splurge and fun savings

This is an account where your fun money sits. Things like travel savings, shopping, and other splurges go in this account. While it's great to reward yourself, be sure to prioritize your main goals first.

If you do choose to reward yourself or make expenses splurges, ensure that they are not at the expense of your financial goals. Things like debt to pay off, saving for retirement should be first. 

In closing

Once you have your categories and accounts all set up, you'll want to tie them to your financial goals and your budget. Then, start tracking your progress accordingly. 

How do you categorize your own finances? Leave a comment below!

{Updated by Cristy S. Lynch}

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