We’ve talked about creating a budget from scratch as well as provided a review of free household budget downloads that can kick start your budgeting. However, we haven’t really discussed how to go about separating your household budget into categories.
While it would be nice to just create a list of budget items that everyone can use, there are no two people that have identical income, expenses and spending patterns. For that reason, it makes sense to learn how to create your own instead of just using someone else’s list. Here are the steps you need to take to create yours.
Start With The Big Categories
Start by listing the big ticket categories. It is best if you can do this on a spreadsheet, as there will be a lot of modifications as you go through the process. The major categories are income, investments and savings, housing, transportation, food, clothing and entertainment. These are the top level categories that are common in every budget. Almost all of your daily and annual expenses will fall under these. This step is actually pretty simple, but when you have your list, then it’s time to start making your subcategories.
Add Subcategories to Your Budget
The next step in selecting your categories is to select subcategories. These are the more detailed levels of your budget. For exmaple, let’s take a look at the main category of housing. To get subcategories you’ll need to associate all expenses relating to housing to this category by making single line items on your spreadsheet. For example, you would include a line for your rent or mortgage, as well as for homeowners or renters insurance. You would also include such things as utilities associated with the house, maintenance fees, property taxes and any association fees. You’ll want to make a line item for each expense that you think is important, and for each of your main categories. Don’t worry if you forget something, as it will come to your attention in the next step.
Match Your Spending to Your Categories
At this point, you are mostly finished, but there are usually items that are forgotten. To find them, you’ll just need to start classifying all of your actual expenses. We find it best to do this by using a checking worksheet that can be used to create your budget. By putting a subcategory next to each expense you will be certain not to miss anything. This is really more of a process than a one time event. As you pay bills and go through your spending each month, new subcategories will appear. All you need to do is add them in to your budget.
If you’re looking for a list of categories to get you started, you can see what we put on our household budget template. We took a slightly different approach of making main categories based on discretionary spending, but the subcategories should be similar to the one’s that you will need. Here are the categories from that sheet:
Income: Your Primary Income, Your Spouse’s Income, Child Support or Alimony, Social Security Income, Disability Income, Pension Income, Investment Income, Real Estate Investment Income, Business Income, Other Income
Necessary Expenses: Payroll Taxes, Other income deductions, Rent or Mortgage, 2nd Mortgage or Home Equity Loan, Property Taxes, Water, Garbage, Gas & Electric, Auto Insurance, Auto repairs, Food & Groceries (not dining out), Clothing (necessary), Telephone (not mobile phone), Home or Renters Insurance, Healthcare or Insurance Costs, Dental Care or Insurance Costs, Life Insurance Costs, Student Loans, Home Repairs, Home supplies, Dry cleaning, Laundry, Investment Real Estate Expenses, Business Income Expenses, Childcare (daycare & babysitters), Child & Baby Expenses, Other dependent expenses
Discretionary Expenses: Credit Card Bills, Auto Loan (s), Gasoline, Cable or Satellite TV, Mobile Phone (s), Home Improvement, Home Security, Garden Supplies, Entertainment (not dining out), Dining Out, Travel & Vacation, Pets, Pet Care and Pet Food, Clothing (above what’s needed), Internet Access, Computer Costs, Gym membership, Beer & Alcohol, Cigarettes & Tobacco
Investment Spending: 401K, 403B deposits, IRA deposits, Employee Stock Plans, Brokerage Deposits, Other
Remember, there are an endless number of budgeting categories, but you can choose which are important to you so that you keep the number of them relatively manageable.
Do you have anything to add to this list, or any advice to share about budgeting categories?