Determining The Right Budget Categories

Creating a budget may sound like a hassle, but taking a moment to track, categorize, and plan your spending can really pay off, both now and years from now.

A well-planned budget helps you take control of your finances and use your money thoughtfully, rather than spending randomly—a habit that can cause trouble when it’s time to pay the bills each month.

And, budgeting doesn’t have to be complicated. The key is to break down your expenses into three main buckets (“needs,” “wants,” and “savings”), then further divide those piles into smaller spending categories. This can give you a clear picture of your spending habits, including areas where you may overspend.

Once you’ve identified all your spending categories, you can start allocating your budget percentages based on some general guidelines, as well as your unique financial situation.

Whether you’re just starting out or you’re looking retool an existing budget, read on for some simple ways to create budget categories and spending goals.

Getting Started With the 50/20/30 Rule of Budgeting

The 50/20/30 rule for budgeting (made popular by Sen. Elizabeth Warren in her 2006 book, All Your Worth: The Ultimate Lifetime Money Plan) can be a helpful guideline to use when you are first setting up your budget.

This book, their second, was written to help readers put their “money in balance” by focusing on needs, savings, and wants.

These guidelines recommend breaking your after-tax (or take-home) income into needs, wants and savings, and then allocating 50 percent of your earnings to needs, 20 percent to savings, and 30 percent to wants.

To see how your spending lines up with these guidelines, you’ll want to get out the past three or more months of bank and credit card statements and saved receipts, and simply start listing all of your expenses for each month, and then grouping them into categories.

Budget Categories for Needs

This category–the largest chunk–includes expenses that you must pay in order to live and work. You might think of these as things you actually need to survive—they’re sort of like the air, water, and food of your budget.

So, for instance, a fancy dinner out or a caramel latte are definitely food, but they wouldn’t necessarily go in this category. Groceries would though.

A good rule of thumb is to have this category take up about 50 percent of your after tax income. Housing and utilities are likely to take up the biggest chunk, but ideally no more than 30 percent of income.

The percentages, however, are just guidelines. Because the cost of living varies across the country, you may need to adjust your budget according to where you live. A two-bedroom apartment in San Francisco, for example, has a median cost of $3,146 , nearly three and a half times the median rent of two-bedroom in Boise, which is $929.

Minimum payments on outstanding debts like credit cards, student loans, auto loans, or personal loans would also go into the 50% needs portion.

Some categories you may want to list in this bucket:

•   Mortgage/rent
•   Homeowners or renters insurance
•   Property tax (if not already included in the mortgage payment)
•   Auto insurance
•   Health insurance
•   Out-of-pocket medical costs
•   Life insurance
•   Electricity/natural gas/heating oil
•   Water
•   Sanitation/garbage
•   Groceries, toiletries and other essentials
•   Car payment
•   Gasoline/Public transportation.
•   Internet
•   Cell phone and/or landline.
•   Student loan payments
•   Minimum credit card and other loan payments
•   Child care
•   Child support or alimony payments

Budget Categories for Wants

These are expenses that don’t qualify as needs and don’t include your savings and payments towards debt. Though it can sometimes be tricky to separate needs from wants, if you can live and earn your income without it, then it’s probably a want.

See also  How Can I Stop My Husband From Spending Money We Don't Have? - Marie

If you can live and earn your income without it, then it’s probably a want.

This is where you could put spending on clothing outside of what you need on a day-to-day basis, dinner and drinks out with friends, going to the movies, gym memberships, personal care, and miscellaneous spending.

As a general guideline, this category shouldn’t take up more than 30 percent of your spending. While you may need to give and take depending on your situation, seeing how much you are spending on wants in black and white may cause you to start thinking more carefully about these expenditures.

Could you have an expensive coffee every day? Sure, but budgeting may help you question whether you really want to—after all you only have 30 percent to spend and you might want to get some new clothes or a nice meal out instead.

Below are some categories you may want to list in your wants bucket:

•   Clothing, shoes, accessories, etc
•   Dining out
•   Take-out/special meals eaten in
•   Alcohol
•   Movie, concert and event tickets
•   Gym/club memberships
•   Travel expenses (e.g., airline tickets, hotels, rental cars)
•   Cable or streaming services
•   Self-care and personal grooming
•   Home decor

Budget Categories for Savings

Under the 50/20/30 rule, it’s suggested that savings take up 20 percent of your post-tax income. This is the money you’re putting toward your retirement, emergency fund, and other savings. You can also put payments against debt above minimums here–since this can ultimately save money on interest, it’s considered savings.

If you aren’t offered a 401(k) or something similar at work, you can still contribute to retirement savings. You might be able to find a low-fee, or no-fee, individual retirement account (IRA).

To fund nonretirement savings goals, it can be a good idea to open a separate savings account, ideally where you can earn higher interest than a standard savings account, such as a money market fund, online savings account, or a cash management account.

To make sure saving happens each month, you may also want to set up an automatic transfer from your checking account into this account on the same day every month, perhaps after your paycheck gets deposited.

Categories you might include in your “savings” bucket are:

•   Emergency fund
•   Savings account
•   401(k)
•   Individual retirement account
•   Other investments
•   Credit card payments above minimums
•   Extra payments on mortgage
•   Extra payments on student loans

Finalizing Your Budget Categories and Getting Started

Now that you have an idea of how to allocate your income based on standard budgeting categories, you may want to start building out your budgeting plan.

If you find that your monthly expenses (including savings) are higher than your monthly take-home income, you’ll likely want to make some adjustments. One of the easiest places to do this is within the wants bucket.

Here, you can scout for unnecessary expenses you may be able to do without. For instance, maybe you would be fine with one or two rather than four streaming services, cooking at home a few more times per week, or cutting back on clothing purchases.

It can help to keep in mind that the 50/30/20 guideline is just that, a guideline. Everyone’s situation is different and your numbers may vary depending on many different factors, including where you live, your income, how much debt you have, and your savings and investment goals.

The Takeaway

Regardless of where you are in the process, tracking your spending, putting expenses into categories, and coming up with a spending plan can bring significant benefits. These include being able to pay off debt, saving up for short-term goals (such as an emergency fund, a vacation, or a downpayment on a home), and funding your retirement.

See also  Get Out of Debt

The 50/20/30 rule can give you an general idea of how to allocate your income based on standard budgeting categories, and help you start building out your budgeting plan.

Do You Have a Question You'd Like Help With? Contact Debt Coach Damon Day. Click here to reach Damon.

If you find your new budget isn’t quite working, however, it’s perfectly ok to play around with these percentages, make adjustments, and find the best formula for you.

You may also want to remember that it can take a few months before a new spending plan becomes a habit–and to start seeing results.

Need some help keeping track of spending? A SoFi Money® cash management account may be a great option for you. With SoFi Money, you are able to see your weekly spending right in the dashboard of the SoFi Money app.

Ready to track your spending and stay on top of your budget? Get started with SoFi Money.

SoFi Money®
SoFi Money is a cash management account, which is a brokerage product, offered by SoFi Securities LLC, member FINRA / SIPC .
Neither SoFi nor its affiliates is a bank.
SoFi has partnered with Allpoint to provide consumers with ATM access at any of the 55,000+ ATMs within the Allpoint network. Consumers will not be charged a fee when using an in-network ATM, however, third party fees incurred when using out-of-network ATMs are not subject to reimbursement. SoFi’s ATM policies are subject to change at our discretion at any time.
SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).

2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.

3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.

For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal.

Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Lending Corp and/or its affiliates.
External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.