A list of all the bills you pay each month can do the trick when you’re creating your first budget, but if you want to see the needle move when it comes to achieving your goals, then it’s time to categorize your expenses. It doesn’t take long but it makes a big difference. Trust me, you’ll be happy you did.
When Justin and I created our first budget, it was just a list of every expense we paid each month on a sheet of notebook paper. Mostly it was the debt we owed, our rent, and food. It was fairly simple to keep track of and worked for us at the time. As we got further along in our budgeting journey and started to pay off debt, put money into savings, manage our grocery spending, and keep up with household expenses, the line items on that list became overwhelming.
And that is when the act of categorizing my expenses made all the difference.
Why Should You Categorize Your Expenses?
At first, it was just to clean up the page and make my budget make a little more sense to the naked eye, but what I found was that when I categorized my expenses I could see where we were spending our money and make adjustments so that we could achieve our goals.
For example, one of my categories is lifestyle. It catches everything from spending money to subscriptions to internet service and anything else that isn’t a “need”. When I noticed that we were spending a significant amount on that category and struggling to make the minimum payments on our debt it became really clear what needed to change. I didn’t need to eliminate the entire category, but at least one thing had to go. It made it easy to pick and choose which one that would be.
What Categories Should You Use?
Deciding which categories to use was probably the hardest part of this process for me. Knowing that, I thought I’d share the categories I use and what I put in each category so you don’t have to guess as you work your way through this process.
And, if you want a FREE printable version of this – you can grab it HERE.
Category 1: Giving
I’m listing these categories in order of what I believe ranks highest priority for our budget and the first category is giving. When I see this at the top of my budget, I know that’s going to be the first expense that gets fulfilled with the income I bring in.
For us, we aim for 10% and allocate that directly to the giving category before dispersing the rest of our income across other expenses.
Category 2: Housing
One of the biggest expenses that most households have is housing. This could include:
- Mortgage or rent payment
- Utilities (Water, Sewer, Garbage, Electricity, Gas)
- Security systems
- Pest control
- Lawn or yard maintenance
…and anything else that fits your situation.
Most of the items in this category will be NEEDS – meaning that without them, you won’t be able to safely or securely keep your family in that place of residence. However, you may find that an occasional LUXURY (like lawn or yard maintenance) sneaks in as well. Just be aware of that if you need to cut expenses from your budget in the future.
Category 3: Food + Household Expenses
Anything you purchase at the grocery store can be included in this category. That includes household cleaners, laundry detergent, paper products, etc.
In our case, I break down our grocery budget by week and then add a “household” line item for anything that isn’t edible. This allows me to keep tabs on how much we are spending on food AND keep from overspending on the non-edible items.
Category 4: Transportation
Another important category to consider is transportation costs. These could include:
- Bus fares
- Uber or other ride-sharing service
- Gas
- Licensing fees
…and anything else related to getting you from point A to point B and back again. Keep in mind that this does not include any vehicle-related debt payoff. We’ll include that in the debt category in a moment.
Tip: I have a line item in my budget for yearly licensing fees so that I’m not caught off guard. I split the expected total over the 12 months so that there’s no fluctuation in our budget when it’s time to pay those fees.
Category 5: Savings
Whether you’re working toward fully funding that emergency fund or saving for another cause, it’s important to track your savings in a category of its own.
In our case, we have a couple of different savings funds we use, including:
- Emergency fund (for actual emergencies)
- Home improvement fund (so that we are prepared when we need to replace an appliance or repair unexpected damage)
- Medical expenses fund (to prevent unexpected mishaps from derailing us from our goals)
- Vacation fund (family vacation, anyone?)
- School year fund (for all of those school year expenses that have the potential to destroy the budget)
- Generosity fund (for times when we need to just be generous to someone around us)
We started fairly early on in our budgeting journey using all of these funds. And I know that it might seem silly to have a home improvement fund when the emergency savings fund isn’t intact, but we found that when we funded both at the same time, we were more specific about where the money came from when something went wrong.
Not to mention, it’s much easier to feel like you’re making progress when you zero out the school year savings fund instead of the emergency fund. Just something to think about.
One of the other funds that a lot of people choose to have is a general savings fund, but that’s a step that comes well after fully funding your emergency fund. So, if you haven’t done that yet – that’s where your focus should remain.
Category 6: Debt
The debt category is just like it sounds – anything and everything that you owe money on (not including your home). This might include:
- Credit cards
- Vehicle loans
- Home equity loans
- Personal loans
- Student loans
- Medical loans
…or any number of other things.
You can list them in order of your debt snowball payoff or the order of highest priority, but whatever you choose – make sure you know exactly how much you owe and to whom you owe it. By categorizing these items, you’ll be able to see how much you spend each month on debt payoff and better allocate your income to achieve any debt payoff goals.
Category 7: Insurance
Insurance is one of those things that most of us don’t like to think about, but it can add up to a sizeable chunk of change within a monthly budget. This could include:
- Home insurance (if it’s not included with a mortgage payment)
- Renter’s insurance
- Health insurance
- Vehicle insurance
…among other things.
Tip: If you have a quarterly or six-month insurance premium, consider dividing up the total amount by month so that you’ll have enough to pay it when the bill arrives. There’s nothing worse than being blindsided by a large bill when you didn’t have much to spare to begin with.
Category 8: Lifestyle
When it comes to the lifestyle category, I like to think of these things as “wants” or “nice things to have”, but not necessarily needs. That means that if all else fails, I can cut these things from my budget to purchase food, make a house payment, or pay for gas to get back and forth to work.
Tip: Justin and I only had one or two line items in this category until well into our second year of budgeting. Nearly everything we had went to paying for our needs, funding our emergency fund, and paying off debt. So, just keep in mind that if you’ve used your income to cover the previous categories, but don’t have any leftover – that’s okay. Just skip it for now and come back when things improve a bit. I promise, if you stick with it, things will improve!
The sky is the limit with this category, but some things you might consider include:
- Spending money
- Pet care
- Child care
- Streaming services
- Gym membership
- AAA
- Phone
- Internet
…and many others. These things will be unique to you and your family’s desires and wishes, but just make sure that you can afford them – without sacrificing something you need.
Categorize Your Expenses and Achieve Your Goals
And now it’s your turn. Have you categorized your expenses? If not, now is a good time to do just that. Once you’ve completed that task, take a critical look at how much money you are spending in each category. Are you allocating your income in a way that helps you achieve your goals? If not, it might be time to reconsider some of those line items.
Grab my FREE worksheet HERE to help you do so.
If you’re struggling with how to categorize your expenses, it can be helpful to remember that your budget isn’t set in stone. As your income, needs, and goals change, it will need to change, too. So, don’t hesitate to make adjustments now so that you can get results sooner.
I’m cheering you on!
Sarah
P.S. Want more resources to help you manage your budget this year? Join the Lemon Blessings Membership. You’ll receive access to over 50 printable worksheets, menu plans, grocery lists, and more. Find it HERE.
