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Building a budget helps you track and manage your spending and saving to achieve financial health. And having the right budgeting categories is key to making a budget that works for you.
In this guide, you’ll learn how to divide your expenses into three main categories for budgeting (namely, needs, wants, and savings), and then further separate things into smaller groups. This process can help you truly understand your spending habits and optimize your finances.
Key Points
• Personal budget categories help organize and track expenses for better financial management.
• Common budget categories include housing, transportation, food, utilities, health care, debt payments, savings, entertainment, and personal care.
• It’s important to customize budget categories based on individual needs and priorities.
• Tracking expenses within each category helps identify areas for potential savings and adjustments.
• Regularly reviewing and adjusting budget categories can help maintain financial balance and achieve financial goals.
How Many Categories Should You Have in Your Budget?
While there is no set rule for the number of categories you should have in your budget, aiming for 15 to 25 categories is one rule of thumb that can give you plenty to work with and allow you to customize your budgeting categories. For example, there are three main categories — needs, wants, and savings — and within each of those are subcategories you’ll likely want to include so that you can create a budget tailored to your lifestyle.
For example, in the “needs” category, you could have such necessary expenses as housing, utilities, and groceries, while in the “wants” category, you might have travel, dining out, and entertainment.
Essential Budget Categories for Needs
The needs category typically represents the largest chunk of your budget. It 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% of your after-tax income.Housing and utilities are likely to take up the biggest chunk, typically around 30% of income.
The percentages, however, are just guidelines. Because the cost of living in different states and housing costs vary across the country, you may need to adjust your budget according to where you live.
Here are some specific expense categories for your budget.
1. Housing
Whether you pay rent or have a home mortgage, paying to keep a roof over your head is definitely a need. In addition, you may have property taxes to pay if you are a homeowner, and home maintenance costs can be part of this category for renters and owners alike.
2. Utilities
Depending on your living situation, you might pay for electricity, wifi, heating fuel, cell phone service, water, sanitation services, and other necessities.
3. Insurance
Having car, health, life, homeowners or renters insurance and possibly pet insurance can be important. You don’t want to wing it with this kind of protection. Also, auto insurance is required, and if you have a mortgage, the lender typically requires that you have homeowner’s insurance.
4. Groceries and Personal Care Items
Of course, you need food and toiletries as part of daily living. So the food you purchase to make meals, and items like toothpaste, go into your budget as “needs.” However, buying that $7 pack of cookies or $40 hair conditioner? Those might be better deemed “wants.”
5. Transportation
Car ownership expenses, public transportation, and the occasional Uber to get to urgent care can all be considered necessities.
6. Clothing
You need a warm winter coat if you live in the climates that get chilly, plus boots. And you need basic garments to wear to work and on your off-hours. However, if you buy an expensive jacket because you love it or yet another pair of cute shoes since they are on sale, those are not vital to your survival and should go in the “wants” category.
7. Debt
Minimum payments on outstanding debts like credit cards, student loans, auto loans, or personal loans would also go into the 50% needs category.
8. Parenting Expenses
Child care, as well as child support or alimony payments, go into the “must” bucket of your budget. Those are not discretionary expenses.
9. Health Care
Depending on your insurance coverage, you may have expenses related to staying well, such as copays, prescription costs, and the like. Treating yourself to a massage that isn’t medically required? That’s not a “need” but a “want.”
Recommended: 50/30/20 Budget Calculator
Top Expense Categories for Wants
Wants are flexible expenses that don’t qualify as needs. 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.
This expense category 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% of your spending. Go too much over that amount, and you could wind up depleting your checking account and with credit card debt.
1. Clothing and Personal Care
Did you treat yourself to a new but unnecessary shirt as part of a little retail therapy? Take yourself to the spa for a day? Or bought yourself a fancy watch since you got a promotion? Those are all wants. They aren’t necessarily bad things, but be clear that they are not vital to your survival.
2. Dining Out and Drinking
It’s part of life to meet friends and loved ones for happy hour or a nice meal, or using your debit card to get an iced coffee while running errands on the weekend. Or maybe you don’t feel inspired to cook so you order some Pad Thai for pickup or delivery. These are all discretionary food expenses vs. those that are vital to your survival.
3. Entertainment
While entertainment can definitely enrich your life, it goes into the “wants” category. This includes things like concerts, plays, and movies; books and magazines; cable and streaming services; downloading music; and attending festivals and fairs.
4. Gym Memberships, Self-care, and Grooming
You could work out for free at home, so health club memberships, and yoga or Pilates classes are “wants.” Same goes with self-care and grooming: Facials, manicures, and the like are considered discretionary. That $50 hair conditioner you can’t live without? That isn’t a “need” either.
5. Travel Expenses
Traveling for a vacation or getaway is a “want.” So tally up any airfare, rental car costs, hotel or Airbnb, food, and tour/attraction tickets, and consider them “wants.”
6. Home Decor
If your mattress is worn and you replace it, that is a “need,” but deciding to buy a new couch because your home could use a spruce-up is a “want.”
Recommended: Fixed Expenses vs. Variable Expenses
Budgeting Categories for Savings
Under the 50/20/30 rule, it’s suggested that savings take up 20% of your post-tax income.
This is the money you’re putting toward your retirement, emergency fund, and other savings. You can also put additional payments on debt in this category — since it can ultimately save money on interest, it’s considered savings.
Here are specifics.
1. Emergency Fund
Financial experts recommend having an emergency fund with three to six months’ worth of basic living expenses socked away in case an emergency strikes. This could mean job loss or receiving an unexpected and major medical or car repair bill. You don’t want to have to resort to using your credit card for such things.
It can be wise to keep this money in an online bank account where you will likely earn more interest than at a traditional bank. You can use an emergency fund calculator to determine how much you should be saving for an emergency fund.
2. Retirement Savings
If you aren’t offered a 401(k) or similar retirement plan at work, you can still contribute to your retirement savings with an account such as an individual retirement account (IRA).
3. Other Short- and Long-Term Savings
You’ll also probably want to fund non-retirement savings goals, such as saving for a summer vacation or the down payment on a house. You might want to open a separate high-yield savings account for these things, where you can earn more interest than a standard savings account.
To make sure you save money each month, you may also want to set up an automatic transfer from your checking account into this savings account on the same day every month, perhaps after your paycheck gets deposited.
You can also do things like round up your spare change into savings. Every little bit of money you save can help you make progress toward your goals.
4. Additional Debt Payments
If you can pay more than the minimum on your credit card bill or make extra payments on your loans, it can decrease what you are spending on interest. That in turn can help increase your overall financial health.
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Why Tracking Expense Categories Is Important
Establishing categories for budgeting is important because it can give you a much better sense of where your money goes versus just paying whatever bills turn up.
• When you see how much cash goes towards the different kinds of “needs,” “wants,” and savings, you may be able to better manage your cash. Tracking your spending can bring greater financial insight.
• Also, as you categorize and tally your spending, you may see that much more than 30% of your take-home pay is going to ”wants.” That could convince you to recalibrate and cut back.
• Or you might notice that you are spending way more than 50% on “needs.” This could happen when you are just starting out in your career or if you live somewhere with a high cost of living. Again, you might look to lower costs.
How to Organize Your Budget Categories List
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 saving on streaming services by dropping one or two platforms, cooking at home a few more times per week, or cutting back on clothing purchases.
If your “musts” are eating up more than 50%, perhaps you’ll want to consider moving to a less expensive home or taking in a roommate. Another option could be to start a side hustle to bring in more income or train for a higher-paying line of work.
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.
There are also other budgeting methods to try, such as the envelope budgeting method, which you may find work better for your situation.
The Takeaway
Putting expenses into budget categories and coming up with a spending plan can potentially provide 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 down payment on a home), and funding your retirement.
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FAQ
What are the 4 main categories in a budget?
There are different ways to categorize a budget, but commonly, the four main categories in a budget are income, essential expenses (needs), nonessential expenses (wants), and savings.
What categories should you have in a budget?
When building a budget, it’s important to include categories such as the expenses that are necessary for your daily life (needs), your discretionary spending (wants), and how much are you saving. Within those buckets, you can subdivide into more specific categories such as housing, transportation, groceries, entertainment, and saving for goals such as a house.
How many categories should you have in your budget?
Having about 15 to 25 categories in a budget allows you to cover all the different components of your lifestyle so that your budget is comprehensive. This includes necessary expenses like housing, utilities, groceries, and transportation; discretionary expenses such as eating out, and going to the movies or concerts; as well as categories for the things you’re saving for, like a house and retirement.
How do you organize a budget categories list?
One good budget organizing technique is the 50/30/20 budget rule. This principle says that 50% of your take-home pay should go towards necessities, 30% to discretionary spending, and the remaining 20% should be saved. You can organize your budget categories under those three main areas.
Should debt be its own budgeting category?
Yes. It’s important to include debt as its own budgeting category because it helps you track the mandatory payments you owe. It can also help you measure your progress in paying off the debt. For instance, you might want to make additional payments toward debt to help pay it off faster and thus free up money in your budget for other purposes.
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