Dear daughter,
A question most “budgeting beginners” ask is what budget categories I should have? The short answer is it depends on your expenses. However, here I’ll give some common categories almost everyone has.
All you have to do is to take a look at them and add any other category you usually spend money on.
The categories I use
These are the categories I use to create my budget every month.
- Investment. Yes, this is my first deduction because I pay myself first, always before paying the bank and other bills I must pay.
- Fixed expenses. This one is a broad category where I put all the expenses I cannot avoid. For instance, home loan repayment, insurance, homeowner association, electricity, water, (house) taxes and rates, internet (yes, this one is not a must, but I need it for work reasons), bank account fees, and fuel/transport. Quite a few, isn’t it? I have all of them together because I tracked them for a while, and I know I cannot avoid any of them. What you might want to do at the beginning is to have all of them separate, and with time you will see that is more practical to put them together. In any case, you will have to pay most of them every month.
- Extra mortgage payment. This one is not a must. I have it because I want to pay my mortgage early to be debt-free and pay less in interest, as I told you here. But this one you probably won’t need at this stage.
- Food. Do you know how much you spend on food every month? If you don’t, start tracking your expenses so you can have a realistic budget.
- Entertainment. Yes, you should allocate a budget for your entertainment. Not everything can be about work in this life. We need to allocate time, and money, for us to enjoy life.
- Miscellaneous. When you start tracking your expenses, you will see that some of them don’t fall in a specific category or, if you add a single category for every single expense, you will have a very long budget. I register those expenses in this category.
Other ways of creating budget categories
Some people divide budget categories into three “main buckets”: needs, wants, and savings-investing.
This can also be useful but at the beginning, I strongly recommend you not to try to organize too much.
Just do it!
Others spend time deciding what percentage of the income should be allocated to each category. You might want to do this but at a later stage, when you have at least three months of data on your spending habits. With this % analysis, you can refine your budget and realize if there is a category that is (unnecessary) draining your income.
Start tracking all your monthly expenses, at the end of the month, make a summary of what you spent and in which category you will place them. You will find out that most of them fall in one of the previous 6 categories I listed for you.
Now that you know what is a budget, and what categories you can have in yours, you need to track your expenses at least for a month. When you have that, at least for a month, you are ready to start creating your first budget. And I’ll show you how to do it in my next letter.
Don’t forget to let me know what are the categories that you are spending your income on these days. I might be able to give you some insights on how to optimize it.
Love you, Dad.