The right personal budget categories will set your household 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.
Ultimately, 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.
The One 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 and health care costs 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, 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.
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The Five Essential Budgeting Categories
There are many different budgeting methods, as everyone has different needs. Still, there are some things all people should budget for. These five categories are monthly obligations for most people. In other words, you can’t put them off until next month.
When approaching these essential categories, it’s best 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 and your family, so accurately tracking your expenses to develop these categories is key.
One trick is to use Rocket Money. 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. Learn more about how it works in our Rocket Money review.
#1. Housing
I’ve found it best to have an entire category for one recurring monthly expense — my mortgage payment. If you rent, this category would be your rent payment.
Why not include other housing expenses such as repairs and home improvements? They’re not regular, they’re irregular. (Remember that budget category everyone needs? Those dire home repairs would fall into that.)
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. Regular expenses, like mortgage and rent, can’t be put off. That creaky floorboard or other home maintenance can often be pushed back a month or two.
Second, it’s easy to overspend with rent and mortgage. 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.
Note: If you have renters insurance or homeowners insurance, this is something you’d want to include in the below section on insurance, not under housing. These things, while important, aren’t as essential as the roof over your head.
#2. Transportation
Whether it’s car payments, public transportation, gas, ridesharing services, or parking fees, 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.
Again, don’t include auto insurance under this category, as that will be covered by your general insurance section in the budget.
#3. Food
Everybody eats. Still, a monthly budget for food can range from a few hundred dollars a month to over $1,000. While it’s best to use actual data, a good rule is 10-15% of your income should go to food.
It’s also important when taking into account how much what we eat impacts other areas of our lives and finances. In other words, you want your budget going toward the right foods. Focusing on eating the right foods will also help you cut back on eating out, as many restaurants and fast food chains offer food with little to no nutritional value. Eating out can quickly inflate your food spending, so focusing on eating better foods is a win-win.
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.
Related: Top Cash Back Apps for Groceries: Apps That Pay You for Your Receipts.
#4. Utilities
Having your water or electricity shut off is no fun. Budgeting for utility spending is essential to any budget. Depending on your living situation, you’ll want to include any utilities, such as:
- Water
- Gas
- Electric
- Cable and 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. For example, if you’re not using all your cell data every month, consider lowering the amount of data that comes with your plan.
A few tips to lower your utilities:
- Check out The Ways To Wealth’s list of ways to save money, which includes tips on cutting back your energy expenses.
- Get the free app Trim, which analyzes your accounts to find to help you determine where you can save more money.
#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 you budget for insurance often comes down to how you pay for health insurance and dental 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 expense a family has beyond their mortgage. And because it comes out of your paycheck, many times it goes unnoticed. This is still affecting your take-home pay, meaning it’s still an expense.
You may also have additional insurance types, such as disability insurance, vision insurance, or others. This is also where you’d include those.
Six 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 six categories all allow for certain degrees of flexibility. Expenses and allocations here will differ based upon your goals.
#6. Debt
Paying off high-interest debt is the best financial move one can make. There’s no investment that can guarantee the 15% or more 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 loan payments 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.
#7. 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. Everyone has some kind of annual payment that comes once a year. Prepping for these in advance can make all the difference. 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.
This is also a place where you could estimate costs like school supplies if you have children. You know they’ll need school supplies when the year begins, so save up throughout the year to make it easier when this expense arrives.
#8. Quality of Life
This is the catch-all category for everything that makes you happy. Consider this your fun money for special occasions and true personal care, or those moments where you feel like spending a little extra on a fun night out.
Maybe it’s travel, gym memberships, or Netflix. Whatever it is, this is your true miscellaneous category for all the things that bring you joy. How much money you allot here is entirely up to what your budget can afford.
#9. Savings
Every budget needs a savings category to encourage building up a healthy savings account.
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. Revisit this section of your budget regularly to adjust it so it fits your lifestyle and income.
#10. Education
One category I added to my budget after reading The Personal MBA was a Personal R&D (research and development) Budget. This is a portion of your budget dedicated specifically to bettering yourself as a professional. It’s easy to push skill-building spending to the side in favor of other spending. A section of your budget dedicated to this will help you grow as a professional.
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.
#11. 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. A gift or giving section of your budget will also allow you to sporadically give gifts to those who help you in a pinch, or those you simply want to surprise. Who doesn’t like a gift every now and then?
Making Personal Budget Categories Personal
As I said at the top of the post, this is by no means a one-size fits all solution, as there is no such thing. The goal is to use a budget to get more of what you want out of life.
Use these categories as a framework or guideline, and create a budget that matches your life. Making a budget that’s truly yours will set you up for success, and help you work toward financial goals you can feel good about.
Regularly revisit your budget to ensure you’re not overspending or under-saving, and have fun with it. Your financial and personal health will thank you for it.
