When we set up a budget, we need to choose how we categorize our spending wisely. Within the budget, categories are the most important part in figuring out where your money is actually going. The first exercise in setting up a budget is listing all the categories and sub-categories that define your lifestyle. In general, I would recommend that all budgets begin with the following three main categories:
2. Financial Goals
Within each main category, start to brainstorm your sub-categories. Do this by thinking of things you spend your money on and determining which main category they fall under. The toughest part is making sure that your sub-categories are neither too precise, nor are they too vague. Here’s why:
Sub-categories that are too precise may lead to more work, since you will have additional categories that you need to keep track of. For example, having the following categories: Albertsons, Ralphs, Trader Joes and Whole Foods is too precise. How likely is it that you would go to each of these stores every month? Additionally, what information can you really glean from knowing that you spent $50 at Ralphs and $100 at Whole Foods? Not much. Instead, maybe group together all of your spending at these locations under “Groceries”. Knowing that you spent $300 in groceries is going to be more informative than knowing you spent $50 at Ralphs this month.
Likewise, categories can be way too vague. Having a sub-category titled “Food” does not give you much information at all. It doesn’t tell you if your spending is excessive when shopping for groceries, when dining out, or when celebrating birthdays and special events at restaurants. Knowing that you spent a lot on “food” last month does not specifically tell you where you can cut next month. Cutting on dining out may not help with the food budget, if it is the groceries that you are spending a lot of money on.
With this in mind, how is one to know if their category is just right? If this is the first time making a budget, I will provide some categories to consider. Off course, these cater to a particular lifestyle and are only meant to give you inspiration. Everyone’s lifestyle is drastically different, and a category that might apply to us (for example, automotive payment) may not exist in your life (in which case, Congrats!). Alter these categories as you see fit.