When’s the last time that you sat down and took a look at your budget? If you’re wondering at the end of every month where all your money has gone, you may discover that introducing budget categories can simplify your life! Budget categories have helped us stop busting our monthly budget over and over again.
It can be overwhelming when you have a budget set each month, but you still have no clue where all the money is going.
It’s enough to drive anyone mad, really.
What’s a person to do when they want to really get a hold of their budget to finally start to understand her finances?
They need to utilize budget categories as often as possible!
What are the 3 main budget categories?
While there are a lot of subsections that categories can have, there are actually three main budget categories that every single person has to work with.
The 3 main budget categories are:
- Fixed expenses,
- variable expenses,
- and non-necessities.
The first is fixed expenses and includes items that you have to pay for each and every month where the cost doesn’t vary. Mortgages and car payment are two examples of fixed expenses.
The second budget category is variable expenses, and those are items like utilities, groceries, etc.
The last budget category is what everything else falls into, and that is non-necessities. This includes fun outings, shopping sprees, etc. Basically non-necessities is all the “fun” stuff!
What are examples of monthly expenses?
Being an adult means that we all have bills to pay, but that doesn’t mean that all of our monthly bills are the same as each other. Your budget should be personalized to you and your goals.
For example, some people live in larger houses or drive newer cars, and this causes their monthly budget to be quite different from someone who has a smaller mortgage and drives around in a car that is already paid off.
It’s really not possible to compare numbers when it comes to monthly expenses, but all people have some sort of bills that they are required to pay each and every month.
Examples of monthly expenses include:
- Car payments
- Insurance premiums
- Utility payments
- Health Insurance
And so on. Those are just some of the monthly expenses that the majority of people pay monthly.
How should you assemble your budget?
It’s up to you how you come to decide what your budget is monthly for all your needs.
A smart way to look at creating a budget is to break down all the bills and expenses that you know you have every single month.
Once you have an idea of what those are, it’s a little bit easier to create a budget that you can then stick to and thrive on.
Budget Categories and Why They Matter
Even though there are 3 major budget categories, there are other subsections of each one that you really need to break down and get figured out.
If you’re looking for a breakdown of budget categories on how you should spend your money, here are some simple suggestions.
These suggestions will help you know how much of your monthly income you should be paying towards certain expenses every month.
Again, these are just suggestions – make certain you always set your budget based upon what you can afford.
Fixed and Variable Expenses
These budget categories are combined together to showcase how much you should consider spending each month on these areas.
Housing (no more than 25% of your monthly income)
This is your mortgage, insurance, PMI, HOA fees…everything.
Your monthly payment really shouldn’t exceed 25% of your monthly take-home pay.
Food (10-15% of your monthly income)
This will vary depending on the size of your family or if anyone has any type of allergy needs.
Utilities (up to 10% of your monthly income)
The bill will vary monthly for this as well, but it shouldn’t be a huge burden for your monthly expenses.
Healthcare Insurance (10% of your monthly income)
Again, another factor that will stay stagnant for the year but more than likely will increase year after year.
These are just a few of the expenses that you’ll need to be prepared for when you start thinking about budget categories.
These expenses can be hard to gauge because, in all reality, this entire category is really all about stuff that you don’t have to have!
A good rule of thumb is to try to limit any expenses that aren’t necessary to less than 10% of your income.
We realize that this can be difficult to do – especially at first.
If you take a look at your budget, there’s a good chance that the majority of your money is being spent in this category.
When you’re having fun and being active, you really don’t tend to notice how much money you’re spending over and over again.
Some examples of non-essential expenses are:
- Personal spending (gym memberships, new clothes, gifts, magazine subscriptions, beauty procedures, etc)
- Entertainment (date night, vacations, movies, streaming services, etc)
- Miscellaneous (car washes, dog grooming, etc – anything not already budgeted for)
5 Steps to Create a Realistic Budget
1. Calculate How Much You’re Spending Each Month
The first step is to calculate how much you’re spending right now. You can do find this out by looking at your bank and/or credit card statements.
You’ll want to look over the last 6-12 months of statements because some bills may be due just a couple times a year. Two examples of this would be life insurance and taxes.
You’ll want to add up all of your spending over the past year, and then divide by 12. This will tell you your average monthly spending.
2. Figure Out Your Income
Now that you know your monthly spending number, you want to know your monthly income. This would be your salary, as well as, any extra money coming in through the year. Additional money may be birthday month, alimony, interest, rental income, etc.
3. Set Your Financial Goals
Now that you know how much you’re spending and bringing in, it’s time to set some goals.
The first step is to see if you’re spending more than you make per month. So you’ll just want to take the number from #2 (income) and subtract the number from step #1 (spending).
Then, you can see where you can cut back. This can help you get into the positive numbers if you aren’t already, or if you are always spending less than you make – it will help you save more!
You may also like our: Money Saving Challenge to Start Today!
4. Start Tracking Your Spending
Now that you have your big numbers and goals set, it’s time to track how much you’re spending and how well you’re staying on track with your goals.
5. Be Kind to Yourself
As you set your goals and track your progress, remember that every day or month won’t be perfect.
One quick goal we set was to have a $1000 emergency fund that way if an unexpected expense pop up we could pay it out of that versus our daily budget.
Putting It All Together
Once you sit down and start putting the money to the places that you’re spending it, you’ll start to realize why it’s important to understand and utilize budget categories a lot more in your life.
Not only do they help you see where you’re spending a ton of money, but they also help to keep you in line with the budget.
Using budget categories is a super simple way to set financial boundaries and goals for yourself while still allowing a bit of financial wiggle-room to have some fun, too.
Have you ever used budget categories in your financial planning or tracking before?
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