How To Use Budget Categories

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

Budget categories

Sometimes, the easiest way to decide on budget categories for yourself is to see a big list and then choose the ones that apply to you. You may not need every category, and that’s okay. It’s all about which items you need to include in your personal budget.

4 Main budget categories and sub-category lists

Below is a list of 4 main expense categories for a budget as well as a list of sub categories for each one. I also elaborate on the importance of each category and how to clearly layout your sub categories:

1. Finances for your future self

Your financial future is affected by what you do now. And so it’s important to have a category in your budget that caters to our future self. This group of categories includes:

Why having a plan for your future self is important

Ever heard the words “pay yourself first“? It should be a consistent part of any plan you make. Because of this, the “finances for your future self” category is all about thinking ahead.

But what does pay yourself first mean? Before you pay any bills or do any shopping, a portion of your earnings should be diverted into your retirement account, if possible, for your future self and your emergency savings accounts for a rainy day.

Time goes by so quickly, and planning for the future version of you will ensure that you can enjoy your retirement and not have to depend on the government or your children to take care of you. 40% of elderly Americans are dependent on social security during retirement, according to the National Institute on Retirement Security, so it’s important to save for the future now.

Having an emergency fund, or even a rainy day fund, will also provide you with a buffer in the event of an unexpected cost so that you can rely on your emergency savings instead of a credit card or other debt.

Almost 50% of Americans want to focus on saving for emergencies, according to Nerd Wallet. So it’s incredibly important to add this to your budget in case anything unexpected comes up that you need to pay for.

Also included in this group of categories is the money to pay off any debt you have (e.g., your credit card debt, car loan, personal loans, student loans, etc.) because it is essential that you pay off your debt as soon as you can so you can focus on building wealth. It may not seem this way, but debt payoff is actually future-focused because it will offer you more security and money later.

2. Essentials

Your essentials are items that can’t be taken out of your budget or put off for a later time. They are things you need to pay for in order to have a good quality of life, so they should be one of the first things on your budget categories list. Your essentials category would include:

  • Mortgage payments or rent
  • Utilities (e.g water, electricity, internet)
  • Groceries and food budget
  • Transportation costs and/or car payments
  • Renters insurance
  • Homeowners insurance
  • Property taxes
  • Health insurance
  • Auto insurance
  • Life insurance (e.g. Term or Whole life insurance)
  • Disability insurance
  • Dental care
  • Childcare costs
  • Pet food
  • Necessary personal care items

Getting really clear on what your essentials are

As mentioned, your essential are the things you need to live your life. However, this category does not include money for shopping or getting your nails done — those are not essentials.

Instead, essentials focus on the categories that you need to get by. Meaning your basics such as rent money and any housing cost categories, transportation, insurance, and food.

Your essentials are your non-negotiable costs, and they should be one of the first things you take care of when you get a paycheck.

3. Life goals

Your life goals include things like saving for the future outside of retirement and other things that you may want to pay for to enhance your life.

Although not as essential as a car payment or groceries, “life goals” is a really important expense categories to have in your budget.

Defining your life goals

Your life goals might include things like your midterm savings and investments for the next 10 to 15 years, business savings, saving for a home purchase, saving money for college, and so on.

I recommend creating separate accounts to save for each of your different life goals. I personally have automated deposits set up for different goals, and it’s helped me stay on top of my savings!

4. Everything else

Anything that isn’t essential and isn’t saving for a specific goal is considered unnecessary. But this category is usually the most fun, and it makes life more enjoyable!

  • Entertainment e.g. concert tickets, movies, etc.
  • Gym membership
  • Eating out e.g. fast food, coffee shops, and restaurants
  • Vacations
  • 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
  • Hobbies e.g. gardening, crafting
  • Self care e.g. getting your nails done, going to the spa for a massage, etc.

Everything else should include fun money

The “everything else” category is your splurge money. It’s the money you would spend shopping or saving for a wish list item, traveling, entertaining yourself, and whatever else it is that you would typically do as a part of enjoying the life you have.

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

You might include things like going to the movies, dinners out, birthday gifts for friends, and other items in this category.

Using percentages for your budget categories

Once you are clear on your list of budget categories and sub-categories. It’s a good ideas to assign each category a percentage. You likely won’t be spending the same amount on each category. Some categories will require more of your income than others.

However, knowing approximately what percent of your income should be assigned to each category is a big part of organized finances and can help you with improving your spending habits.

For each of the 4 main categories mentioned above, below is a general guideline of how your money can be allocated. However, based on your individual expenses and goals, the percentages may look a bit different for you.

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

Keep in mind that you can adjust these budget category percentages according to your goals and timelines. Remember, your budget is your blueprint for how to manage your money so you can build wealth, and it should work well for you personally. Be sure to check out our example of a budget.

Expert tip: It’s ok if your budget categories change

Choosing budget categories is not a one-time process. Budgets are ever-evolving and might need to change to meet your current needs.

Although you will probably always need to include the four main budgeting categories, you may find that you may need to adjust or change the sub-categories.

So make it a habit to continue to check in with your expenses, goals, and list of budget categories to make sure your spending reflects them.

How do you plan your budget categories if you are focused on paying off debt?

If you are focused on paying off debt, you should plan to pay as much as you can towards your debt each month rather than the minimum payment. And so paying off debt might mean lowering the amounts you contribute to your different budget categories.

For example, you might need to spend less on things like entertainment or vacations and instead reallocate the difference to paying off your debt as fast as possible.

Like with everything money-related, sticking to your plan requires discipline. If you struggle with your plan initially, having an accountability partner is a great idea!

Reach out to a friend for support. We all need a cheerleader sometimes.

How many categories should I have for a budget?

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

  • Long-term savings goals for your future self and debt repayment
  • Your essentials and needs
  • Other life goals,
  • Non-essentials like travel, splurges or fun money

You can then break these main categories into smaller sub-categories. Although there is no perfect number of categories, it’s a good idea to start with these four main categories at the very least.

What are the four main categories in a budget?

The four main category groups in a budget are finances for your future self, essentials, life goals, and everything else. You may choose to call each of them by different names e.g. “retirement and savings,” or “discretionary spending” but the main idea for each category is the same.

You will likely need all four of these categories to create a balanced budget, though your sub-categories under each of the main categories you choose will vary depending on your expenses and even your goals and lifestyle. For instance under your main category, “Finances for your future self” you might have sub-categories for your 401k/IRA, emergency savings, and student loans payoff.

If you liked this article about budgeting with budget categories, check out these other great articles:

Leverage these expense categories in your budget today!

Like any art, budgeting takes time to master. Additionally, part of budgeting well is defining your budget categories. Knowing what category something belongs in can help you decide if you save for it or purchase it now or later.

Budgeting can be difficult, but categories can help! If you need hands-on budget counseling, that’s okay, too. The most important thing is to start and just keep going even when it gets tough, knowing that making a plan is going to help your finances.

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