The right personal budget categories will help set your budget up for success.

The fact is we all have different ideas about how we like to spend money. As such, there’s no one-size fits all budget.

The goal of a budget is to have your money give you more of what you want.

Therein lies the secret to deciding on the budget categories best for you.

Your goal is to maximize what your money can do for you.

In this post you’ll learn:

  • The 1 Personal Budget Category Every Budget Needs
  • The 5 Essential Budgeting Categories
  • The 6 Flexible Budgeting Categories You Don’t Want To Miss

The 1 Personal Budget Category Every Budget Needs

Instead of hoping for the best, it’s best to plan for the worst.

Unplanned expenses will happen.

Cars break down. Medical bills accrue. A home needs constant repairs.

When these things happen they can wreck an entire month’s budget.

But here’s the thing–they happen every month.

You don’t know what will happen, nor how much. But you do know there will be some unplanned expenses in the future.

So, budget for it.

In my family’s budget, we created a “Stuff I Forgot To Budget For” category. This term came from the popular budgeting software my wife uses, You Need A Budget.

This is the most important category in our budget. Any unplanned expenses go inside this category.

This allows us to survive whatever unplanned expenses hit that month.

The 5 Essential Budgeting Categories

These five categories are monthly obligations for most people. In other words, you can’t put them off until next month.

One tip here is to be as accurate as possible.

If you spend $1,000 a month on food, don’t put down $500.

This budget isn’t for anyone else but you.

What are then your real expenses?

One trick is to Personal Capital (Click here to sign up for Personal Capital and get a free $20 Amazon gift card). The free app will pull your recent expenses to tell you where your money is going. This way you can view expenses by category, merchant or date.

# 1 ) Housing

I’ve found it best to have an entire category for one recurring monthly expense–my mortgage.

If you rent, this category would be your rent payment.

Why not include other housing expenses such as repairs and upgrades?

First, it’s important to separate fixed and irregular expenses. When money is tight, you need to know what you can and can’t put off.

Second, it’s easy to overspend here.

Many mortgage companies allow you to spend up to 36% of your income on debt (known as the 28/36 Rule).

As I wrote in an article on financial ratios:

The first thing you need to know about the 28/36 Rule is it’s NOT a rule used in financial planning. Instead, it’s a rule lenders use to determine how much debt you can afford.

The rule states that you shouldn’t spend more than 28% of your monthly gross income on housing (Principal, Interest, Taxes, and Insurance). Then, total debt payments (housing + all other debt) should not exceed 36% of your income.

It’s important to look at this ratio from both a lender’s and consumer’s perspective. The purpose of the 28/36 Rule for lenders is to determine the largest amount of debt one can have.

In other words, this is the largest amount of debt banks have found you can take on with a reasonable chance of paying it back. This maximizes the bank’s bottom line, not your finances.

It’s often that one of the best financial moves someone can make is choosing cheaper housing. It’s easier to see this if you keep your housing payment separate from your housing related expenses.

# 2) Transportation

Whether it’s car payments, public transportation, gas or ride-sharing services…

…transportation is another big expense.

As with housing, this is another budgeting category where it’s easy to overspend. But unlike housing, it’s due to underestimating actual expenses.

One trick is to budget for the actual cost per mile driven for your type of vehicle.

For example, according to AAA, the average cost to drive a Sedan is 60.8 cents per mile or $9,122 per year. This includes everything from car payments to repairs to gas.

# 3) Food

Everybody eats but food budgets can range from a few hundred dollars a month to $1,000+.

While it’s best to use actual data, a good rule is 10 to 15% of your income should go to food.

It’s also important when taken into an account how much what we eat impacts other areas of our lives and finances. In other words, you want your budget going towards the right foods.

To see a list of foods that pack the most nutrition for the lowest cost, check out the Environmental Working Group’s Guide to Good Foods on a Tight Budget.

# 4) Utilities

Having your water shut off is no fun.

Depending on your living situation, you’ll want to include any utilities, such as:

  • Water
  • Gas
  • Electric
  • Cable & Internet
  • Cell Phone

This is another one of those budget categories where you can cut your household expenses fast. Consider every $50 you cut from your budget frees up $600 over a year.

A few tips to lower your utilities:

# 5) Insurance

A good rule is to buy insurance for anything that protects you against financial catastrophe.

For example, hospital visits, a car accident, a house fire, or not being able to make an income if you’re hurt.

On the other hand, it’s best to not pay for insurance on anything that can be protected by an emergency fund. For example, a broken cell phone and warranties on appliances.

If you live in the U.S., how much your budget for insurance comes down to how you pay for health insurance.

But it’s health insurance that likely makes up for a significant amount of your budget.

If your employer covers it 100%, you’re in luck.

If you’re paying part of your premium, make sure to know exactly how much that is. Health insurance is often the second biggest expenses a family has beyond their mortgage. And because it comes out of your paycheck, many times it goes unnoticed.

As for other types of insurance, which are important, but don’t cost as much as health:

6 Flexible Budgeting Categories You Don’t Want To Miss

Remember, budgeting is all about getting more out of your money.

Want to travel more? Budget for it.

Want to retire early? Budget for it.

The goal is to decide beforehand where your money goes based on what’s important to you. The following 6 categories all allow for certain degrees of flexibility.

Expenses and allocations here will differ based upon your goals.

# 1) Debt

Paying off high-interest debt is the best financial move one can make. There’s no investment that can guarantee a 15%+ return that high-interest credit card debt carries.

If you’re in this situation, my recommendation is to make getting out of high-interest debt a priority.

It’s all but impossible to get ahead when you’re accumulating high-interest debt.

If there’s other debt, such as student loans or car payments, your goals may mean making only the minimum payment on this debt.

While not ideal, it’s important to understand where you are today. Then, have a plan to get where you want to go.

# 2) Annual Payments

Come January I get hit with a $450 annual fee for a credit card I carry.

Every July I renew with Amazon Prime. Every April I get hit with an annual life insurance premium. In April and October, I pay my car insurance in full.

It’s rare that a month goes by where I’m not paying an annual payment.

If you do not plan for these expenses, they can set back an entire month’s budget.

For example, for the $450 annual fee, I set aside $37.50 a month. That way, I know the money is there come January.

Why does it make sense to pay a $450 annual fee for a credit card? It allows me to save thousands on travel each year. If you’re interested in learning how, check out The Ways to Wealth’s FREE Guide To Redeeming Credit Card Points for Travel, by entering your email address below:


# 3) Quality of Life

This is the catch-all category for everything that makes you happy.

Maybe it’s travel.

Or, expensive dinners.

Or, clothes.

# 4) Savings

How much you save each month depends on your goals.

If you’re trying to retire early, you may want to save 50% of your income.

If you’re trying to get out of debt, you may have a 0% savings rate.

# 5) Education

One category I added to my budget after reading The Personal MBA was a Personal R&D Budget.

As Josh explains:

A Personal R&D budget can provide you with guilt-free spending on anything that will improve your skills and capabilities. R&D exists because it works. Investing in your personal skills and capabilities can enrich your life and open possibilities to additional income sources.

# 6) Gifts/Giving

Gifts to others, whether it’s to friends or to a charity, is an important part of any budget.

Events such as weddings, baby showers, and Christmas are well-known in advance–it’s wise to plan ahead.

Personal Budget Categories Summary

As I said in the top of the post, this is by no means a one-size fits all because there is no such thing. The goal is to use a budget to get more of what you want out of life.


Related Reading on The Ways to Wealth



Ideas for simple budgeting categories. It doesn’t get any easier than this 12 category budget for minimalist. #budget #budgeting #moneymanagement #personalfinance