Love it or hate it, if you want to be financially successful, you need to budget your money and understand budget categories. Getting your finances in order and building wealth takes planning, and your budget can help you do just that.
For many people, budgeting is just not any fun. It means limits or lack of or even punishment.
I personally prefer the word “plan” to the word “budget” because it doesn’t sound so constraining. But having a budget broken out into budget categories in some form is really important for your financial success.
Ever heard the saying from Benjamin Franklin, “Failing to plan is like planning to fail”? If you don’t plan, you can’t win.
The process of budgeting doesn’t have to be difficult or complicated.
There are several advantages and disadvantages of budgeting, but it’s generally a positive thing. You just need to create a system that works for you. And this means the right budgeting method and budget categories.
In this blog post, you’ll learn all about budgeting and how you can win at it!
1. Determine which budgeting methods will work for you
There are some pretty solid reasons why you should be using some of the methods of budgeting. It helps keep your spending in check, tracks your expenses, and teaches you to control your money — and not have it control you!
It’s the first step in helping you build wealth.
Having a budget allows you to enjoy life without the stress of how to pay for it later. Because “later” rarely comes. Paying for things in the present instead of the future allows you to truly enjoy yourself and live the life you want.
I was able to save $100,000 in just 3 years by making a budget and sticking to it, and you can find out how to save 100K, too! Imagine what you can accomplish with a little planning.
People will often allow their emotions to cloud their judgment when it comes to planning their finances, but if you look at your money objectively for what it really is, a tool, then it’s easier to make your plans! Once you decide what your priorities are, your budget should reflect them.
Try different methods to decide which is best
So how do you make a budget? There are a variety of ways in which you can budget and create budget categories.
The method you choose is entirely up to you; the most important part is picking a style that works for your life. Trust me, even if you currently hate budgeting and need a better budgeting system, there’s a style out there for you!
Finding what works for you is the most important step because not everyone’s brains process information the same. You may like one of these methods or a hybrid of a couple of them. You may choose to start budgeting weekly or prefer a biweekly budget or monthly.
The most important thing is to just do it. If one doesn’t work, try a different one. That said, below are four different ideas that you can try.
Envelope or cash system
The cash-based budgeting system is simple. Subtract your expenses from your income and then put the amount of each expense into its own envelope. These envelopes are your categories.
Using cash may also make it easier to stick to your budget. Studies have shown that you spend less when using cash. But you don’t have to use cash for all of your expenses when using the envelope system.
You can keep the money for your big bills in virtual envelopes that you track through a budget worksheet or an app. Then, put actual cash for your smaller expenses or day-to-day transactions in actual physical envelopes.
The cash envelope system works best for categories that you can use cash for on a daily basis. So, things like clothes, food, eating out, fun, kids’ expenses, etc. Do not make it overly complicated, or it will be hard to follow and stick to.
Learn more about getting started with the cash envelope method, and be sure to check out our reviews of the best cash envelope wallet options.
Percentage breakouts
Another way to look at your budget is to break down your household income into percentages, then plan out your spending and savings accordingly. The most common percentage breakdown is the 50/30/20 budget. That means that:
- No more than 50% of your income goes toward your needs and essentials (things like housing, transportation, food, etc.)
- No more than 30% of your income goes toward wants and non-essentials (travel, getting your hair done, shopping, etc.)
- At least 20% of your income goes toward savings and debt repayment.
Keep in mind that these percentages are not set in stone. Remember this is YOUR budget, and you can choose to spend less on one category to put more in another, like savings or debt repayment.
So, for example, you can select a 35/30/35 breakout, a 35/35/40 breakout, or even a 25/25/50 breakout. The goal is to set percentage breakouts that make sense for you.
Just be mindful of how much of your income you’re spending on housing alone. A good rule of thumb is to keep your housing costs to less than 30% of your income. Otherwise, you won’t be able to put as much money towards your other goals, like saving and investing or becoming debt-free.
It’s helpful to maintain a budget worksheet for this method, too. Using one of the best budget templates or a worksheet is helpful to see where your money is going. It can help you create your budget easily from month to month.
Other common percentage methods include the 70-20-10 budget, the 30-30-30-10 budget, the 80-20 budget, and the 60-30-10 rule!
The reverse budgeting approach
As the name implies, reverse budgeting is the opposite of most methods, where you subtract your expenses from your monthly income.
In this method of budgeting, you focus on savings goals, such as paying off a certain amount of debt or saving a certain amount of money each month, in addition to paying your bills.
Then, as long as you meet your monthly goals and pay your bills without exceeding your income, you can do what you like with the money left over.
Zero-based budgeting
Another form of a budget is the zero-based budgeting example. This is the method that Dave Ramsey advocates using. Basically, a zero-based budget is planning for every single dollar in your budget.
So, instead of having $X amount left over at the end of the month, you have $0 left (on paper anyway). When you are planning out your budget, you account for everything you can think of in the budget so that every dollar has a job.
You won’t really have zero dollars at the end of the month because you have accounted for different savings funds in the budget. The method is effective because it creates intentionality with every dollar so that what is “left” doesn’t disappear every month.
Budgeting using a spreadsheet vs. an app
Budget spreadsheet or an app? Which should you use? The answer is to use what works best for you and makes it easy for you to keep up with your budget.
Some people love an organized chart for their money — they don’t have to worry about bank security or what’s happening with their personal information. And using a budget worksheet allows them to get really close to their numbers.
Do you like this approach but are worried about being able to access it when you’re not home? Google Drive is free and makes it easy for you to upload your budget worksheet for easy access on your mobile devices.
Apps, on the other hand, can make it really simple to budget, especially if you can connect your bank accounts to them so your transactions can be tracked automatically. These days, most apps have extreme levels of security.
But sometimes, there can be delays in transaction updates. And apps are not always as intuitive when it comes to categorizing transactions, which will require you to spend some time setting things up.
That aside, for the most part, all you’ll really need to do once things are set up is check in frequently. It will help you ensure your transactions are tracked the right way and set up alerts to keep you on top of your budget.
Whether you choose a budget worksheet or an app, you can set up your budget to be reflective of any of the above methods. Be sure to check out our example of a budget.
2. Create your list of budget categories
In order to successfully plan, you need to understand where your money goes each month. Only then can you create a plan to help you control your spending. This is where a list of budget categories comes into play.
You can break your monthly budget into four main budget categories:
Money for your future self, emergency fund, and debt
Ever heard the words “pay yourself first“? It should be a consistent part of any plan you make.
Before you pay any bills or do any shopping, a portion of your earnings should be diverted into your retirement account for your future self and your emergency savings accounts for a rainy day. No ifs, no maybe’s. Just do it.
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.
Having a fund for emergencies, or 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.
You can also include money to pay off any debt you have in this category or add it as a sub-category (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.
Your essentials and needs
Next would be your essentials and needs — the things you need to live your life. It does not include money for shopping or getting your nails done — those are not essentials.
Here are some examples of essential things you may need to include in your personal budget categories:
- Mortgage or rent
- Homeowners Insurance
- House repairs
- Property taxes
- Life insurance (Read term vs whole life insurance to find out which type is best for you!)
- Health insurance
- Auto insurance
- Utilities
- Personal care items
- Disability insurance
- Dental care
- Groceries
- Renters Insurance
- Transportation
- Pet food
- Internet
Your other money and life goals
Money and life goals include money you are saving outside of your retirement account, like your midterm savings and investments for the next 10 to 15 years, business savings, saving for a home purchase, college savings, and so on.
I recommend creating separate accounts to save for each of your different goals. I have automated deposits set up for different goals, and it’s helped me stay on top of my savings!
Everything else
This is where your splurge money would fall under. The money you would spend shopping or saving for a wish list item, eating out, traveling, entertaining yourself, and whatever else it is that you would typically do as a part of enjoying the life you have.
Here are some common splurging budgeting categories:
- Entertainment – concerts, movies, etc.
- Gym membership
- Fast food, coffee shops, and restaurants
- Gifts for friends and extended family’s weddings, anniversaries, or birthday gifts
- Cable
- Streaming services
- Hobbies
- Getting your nails done, going to the spa for a massage, etc.
Budget category percentages
For each of the categories mentioned above, below is a general guideline of how your money can be allocated:
- Money for your future self, your emergency fund, and debt repayment: At least 20%
- Your essentials and needs (e.g. shelter, food, transportation, insurance): No more than 50%
- Your other money and life goals: 15%
- Everything else: 15%
Keep in mind that you can change all of these according to your goals. Remember, your budget is your blueprint for how to manage your money so you can build wealth.
3. Succeeding with your chosen budgeting method
Budgeting doesn’t have to be scary and overwhelming. Once you get the hang of doing it, it gets easier and easier every month. Following these simple steps will help you streamline the process and actually stick to your budget.
Call it something fun
Call your budget something that you like, and that motivates you to keep up with it. Who says it has to be called a budget?
Give it a nickname and a personality. The word budget is boring anyway!
Create a budget in advance of each month
Creating a budget in advance of each month means you kick off the next month with a plan, and you aren’t scrambling trying to figure out what to do. After all, new month new goals, right?
Plan to create your budget a few days before the month starts. You’ll have time to lay things out and figure out what your finances will look like in the upcoming month.
Once you get in the habit of creating a budget, you will even be able to plan out your budget for several months at a time.
Don’t assume every month will be the same
Every single month should be planned for separately. No two months will be exactly the same financially, so you want to prepare in advance for things like one-time bills or expenses, travel plans, events, etc. This is why it’s really important to create a budget specific to each new month.
Similarly, budgeting for life-changing events also requires some extra attention and a budget review. Whether it’s a new baby or you’ve paid off debt, sometimes you need to take a hard look at your monthly budget and accommodate those changes as needed.
Create your budget based on your projected income for that month
If you get paid one time a month, twice a month, or every two weeks, base your budget on that projected income so you know exactly how much you have to budget.
Keep in mind that if you get paid every two weeks there will be a month where you get three paychecks. So plan accordingly.
On the other hand, if you’re budgeting with a variable income, you may have some challenges getting it right at first. You’ll have to be even more diligent with tracking your spending and estimating your income, but it can be done!
Pay your expenses before splurging
Paying expenses first means paying for your essentials, debt, and goals (savings and investments) first before you do any splurging or miscellaneous spending.
The last thing you want is to find that you have overspent on what isn’t necessary and don’t have a way to pay your bills.
However, that being said, it’s ok to splurge. Just make sure you are building your splurges into your budget so you can enjoy them guilt-free.
Track your transactions
Tracking your transactions allows you to make sure you stay within your budget and keeps you conscious of your spending habits. You can track your transactions in a spending journal, spreadsheet, or with an automated app or online tool.
If you are just getting the hang of budgeting, it’s a good idea to track your transactions and check in with your budget every day. It will only take a few minutes, and it will help you stay on top of your finances. Plus, you’ll be building up one of the essential money habits of checking in on your finances frequently.
Expert tip
Creating a budget is not a one-time process. Budgets are ever-evolving and changing to meet your current needs. So once you find a method that you like, continue to check in with your expenses, costs, and goals to make sure your budget changes to reflect them.
How do you plan your budget categories if you are focused on paying off debt?
If you have debt, you should plan to pay as much as you can towards your debt each month. This would mean lowering the amounts you contribute to the different budget categories/buckets we discussed above and reallocating the difference to paying off your debt as quickly as you can.
If you can allocate your finances into these buckets and percentages and then track your spending against the buckets frequently e.g. once a week at the minimum (I personally like tracking my spending daily), you’ll be well on your way to budgeting successfully.
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.
What are the most common budgeting methods?
The envelope budget, percentage budget (e.g. the 50/30/20), reverse budget, and zero-based budget are the most common methods. They are all different from each other, so the chances are you’ll find one that is right for your lifestyle, and it’s important to find one that works for you.
However, if you don’t, keep searching for another method, or create your own!
How many categories should I have for a budget?
The number of categories you have depends on your expenses, goals, and splurges. You can have main categories for long-term savings goals and debt repayment, your essentials and needs, other goals, and then non-essentials like splurges or fun money.
You can then break these main categories into smaller categories. For instance, your long-term savings goals and debt repayment could be further broken into retirement savings and paying down your mortgage. While your essentials and needs category could be broken down into groceries, utilities, etc.
Which budgeting method should I try first?
If you are just beginning to budget, try out a percentage one like the 50/30/20 budget. It will give you a good starting place with your finances, and then you can change the percentages as needed depending on your lifestyle and goals.
Keep in mind that there are several different budgeting methods mentioned in this article you can try out too.
Related posts to budgeting categories and methods
The best type of budget is the kind that works for you! If you liked this article, check out these other great articles on budgeting.
Leverage these budget categories and methods of budgeting today!
Budgets don’t have to be complicated or a chore. Whatever method you choose, how you budget comes down to your personal preferences.
Like any art, budgeting takes time to master. It can take several months to really figure out what is and isn’t working. It means testing out a method or two and defining your budget categories.
If you slip, brush yourself off and get back on track. Take the lessons you learned about budgeting from the previous month and apply them to the next.
If you need hands-on budget counseling, that’s ok too. The most important thing is to start and just keep going even when it gets tough.