Top Budget Categories
Financial expert Dave Ramsey said it best when he explained how a budget is telling your money where to go instead of wondering where it went — sage advice all consumers would be wise to follow.
In this article, we’ll explore why you need a budget and what budgeting categories you should consider when allocating money on a monthly basis.
Top Personal Budget Categories
I’ve laid out the top personal budget categories you should consider in your planning along with some general advice on how much of your earnings should go to each area.
Keep in mind that each investor is unique. As such, your situation is most likely going to need to be tweaked according to your unique situation.
Disclaimer: What follows is a sample budget that is prepared for a single consumer who does not have to budget for a household and child care. While you might want to create some of your own categories, this should get you thinking in the right direction.
Your housing budget can include needs like home maintenance and repairs, mortgage payments, and rent and homeowners’ association (HOA) payments. It can also include items like toilet paper and services like dry cleaning, as well as separate categories that make sense.
If you’re thinking about buying your first home and you’re on a budget, consider buying a condo or an apartment to keep monthly expenses to a minimum. Homeownership can be very expensive. If you’re not ready to pay for a mortgage, there’s no need to take the plunge.
Savings and Debt (25%)
Pay down your student loans and credit card debt each month to keep debt at a manageable level. Skipping payments can wreak havoc on your credit score and put you in a position where you can’t get out without assistance in the form of a loan or credit consolidation.
If you have any money left over at the end of the month, put it into the high-yield savings accounts (HYSAs) and the stock market so that it can earn interest and grow. You may even want to set up automatic deposits to fund savings and investments so that the money automatically flows out of your accounts without you getting involved.
Two additional items you should prioritize in this category are starting an emergency fund and funding a retirement account. This can be achieved by opening an IRA or Roth IRA. Saving money for retirement is something all investors should consider.
If you’re allocating more than 15% of your monthly budget toward insurance, consider talking to your providers and looking for ways to lower your costs — especially if you’re working from home and barely driving.
As a side note, you need life insurance — end of story. And the time to sign up for it is when you’re young and healthy. If you don’t have life insurance yet, talk to an agent so that you can secure a great rate now.
To feel good and perform your best in life, you have to eat well, so make sure to budget for food each month.
If you’re on a tight budget, make a point to cook food at home, as opposed to eating out or getting take out. You should also make shopping lists when you visit the grocery store, which limits you from making frivolous purchases.
Personal Care (10%)
Personal expenses should be handled like your food budget. Don’t go overboard, but don’t be afraid to spend on yourself when it’s needed. For example, if you need new clothes go and buy them (within reason).
If you want to save up for a weekend getaway, do it. If you want that jumbo cinnamon bun at the mall, don’t let me hold you back.
That said, it’s a good idea to keep track of your personal spending so that you avoid buying with abandon on platforms like Amazon. For example, if you want a streaming service, stick with either Netflix or Hulu. You probably don’t need both.
You may even want to consider canceling a subscription temporarily and catching up on reading to save money. Similarly, you can also think about switching cell phone providers to lock in a cheaper plan.
Health and Wellness (10%)
Think of your health and wellness as a personal investment. Prioritizing your health while you are young can keep you healthy and may prevent you from getting sick later in life.
So don’t be afraid to put money into something like a gym membership or yoga class (but remember to cancel if you’re not using it!). It’ll pay huge dividends both today and down the road.
Transportation is another category you’ll have to consider when forming a budget. After all, you have to get around to work, the grocery store, and the doctor’s office, among other places.
The key is to avoid overspending on car payments. Cars are a liability and can cost a lot to maintain when you add up all of your routine tuneups and oil changes, not to mention surprises.
Why You Need Budgeting
From having enough money to cover health insurance premiums and property taxes to speeding up debt repayment and optimizing take-home income, there are a number of benefits that come with setting a budget and sticking to it.
Manage Your Cash Flow
If you’re like most people, you’re operating on a fixed annual salary. This means you have a finite amount of money to work with, so you need to be careful about where it goes.
Budgeting can help you ensure smooth cash flow all year long. That way, when it comes time to buy a ton of school supplies as a new year begins, you’ll have the extra cash you need to cover the costs easily.
If you aren’t diligent about tracking spending, you could wind up blowing through cash on things like takeout food, entertainment, and clothing.
This is an easy way to deplete your savings and spiral into debt — especially if you’re just starting out on your financial journey.
Plan for Life Goals
Future goals like starting a family, buying a house, and planning for retirement can sneak up on you.
Forming a budget helps you identify life goals so that you can start planning for them sooner — putting you in a better position to reach your target initiatives down the line.
Tips for Budgeting
Use a Budgeting Tool
Consider using budgeting software like You Need a Budget (YNAB) so that you can monitor your budget on your phone and learn as you go along. Some other popular free budgeting tools are Mint and Personal Capital.
Revisit Your Budget Periodically
Don’t be afraid to adjust your budget from time to time to reflect your changing financial situation. A budget is not meant to be set in stone.
One of the hardest parts about sticking to a budget is maintaining discipline and avoiding overspending on items like food and entertainment.
Sometimes, overspending is inevitable. For example, you may go out to dinner or upgrade your wardrobe. If this happens, try to adjust another area of your budget to keep your monthly spending in check. If you buy too much food, you may want to spend less on personal items that month.
Frequently Asked Questions
How can you make money in addition to a full-time job?
If you’re on a fixed salary and struggling to maintain a budget, you should consider starting a side hustle.
A side hustle or side gig is a job that produces a secondary source of income. For example, it may include babysitting or pet sitting, blogging, or taking online surveys through a site like Swagbucks. This can bring in extra cash to help make it easier to save and pay your bills, while also filling in the hours that you might otherwise be spending money.
How often should you update a budget?
It’s a good idea to revisit your budget every six months or so to make sure that your plan aligns with your changing financial needs. Don’t be afraid to update your budget when unforeseen expenses arise, like veterinarian bills or home repairs.
How do you budget for children?
Raising children is expensive and you’re going to need to prioritize their needs wherever possible.
When budgeting for a child, think short-term and long-term. You can expect to have to cover hospital bills and doctor’s visits, baby furniture and accessories, new clothes and accessories, food, home upgrades, and maybe even a new child-friendly car. And in the long term, you’ll have to start planning for college sooner than you might expect.
Planning for a child isn’t impossible, though, and plenty of hard-working families manage to do it while bringing in very little income.
What is the FIRE movement?
The FIRE (financial independence, retire early) strategy involves living an austere lifestyle in order to set aside as much money as possible toward retirement.
With the FIRE approach, you forego unnecessary expenses whenever possible and pursue an aggressive saving strategy.
The Bottom Line
At the end of the day, everyone needs a budget — regardless of whether you have a lot of money saved up or are just scraping by.
Having a budget is the only way to manage money, build, and preserve wealth. It can be hard at times and it’s going to require discipline. But as you stay the course, it gets easier. Your finances are going to improve, and you can also have the satisfaction that comes with being responsible with money.
Fortunately, there is an abundance of free online tools that can help you form a budget and stick to it. And if you need more advanced support, you can always work with a dedicated financial advisor … but make sure you can fit that in your budget.
Now that you understand the importance of budgeting, the next thing you should do is sit down and form a budget. The sooner you do it, the sooner you’ll gain control over your personal finances. Happy budgeting!