Building a budget can pay off quite literally: It provides guidelines for your money and helps you wrangle your spending and saving to achieve financial health. With smart planning, you can make your cash work harder for you and grow.
Many people think that a budget is all about deprivation, but it’s really about organization. A key step in developing a good budget is knowing how to categorize both your spending and saving. That can help you get a handle on where your money is going and how to make the most of it.
In this guide, you’ll learn how to divide your expenses into three main categories (namely, needs, wants, and savings), and then further separate things into smaller groups. This can help you truly understand your spending habits and optimize your finances.
Whether you’re just starting out on your independent financial life or if you’re looking to tweak your existing budget, this advice can help you better manage your budget categories and direct your spending goals.
Key Points
• Personal budget categories help organize and track expenses for better financial management.
• Common budget categories include housing, transportation, food, utilities, healthcare, 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.
9 Budget Categories for Needs
Of course, you probably are wondering what actually constitutes budgeting categories. First, focus on the needs of life.
This category, which represents 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% of your after tax income. Housing and utilities are likely to take up the biggest chunk, but ideally no more than 30% of income.
The percentages, however, are just guidelines. Because the cost of living in different states varies across the country, you may need to adjust your budget according to where you live.
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, telephone 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 (and auto insurance is required).
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
Yes, 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 a cool 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 portion.
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. Healthcare
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: Budgeting for Beginners
6 Spending 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.
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% 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.
1. Clothing and Personal Care
Treated yourself to a new but unnecessary shirt as part of a little retail therapy? Took 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 to get a bubble tea 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 concert, play, and movie tickets; books and magazines; cable and streaming services; downloading music; and attending festivals and fairs.
4. Gym Memberships, Self-care, and Grooming
You could just workout for free at home while watching a Youtube video, so health club memberships, 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
If you are traveling for business purposes to pitch a new account, that’s more of a “need,” but otherwise, a 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 bites the dust 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.”
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Categorizing Your 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 payments against debt above minimums here since this can ultimately save money on interest, it’s considered savings.
Here are specifics.
1. Emergency Fund
Financial experts recommend having three to six months’ worth of basic living expenses socked away in case of emergency. 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.
2. Retirement Savings
If you aren’t offered a 401(k) or something similar at work, you can still contribute to retirement savings account like an IRA. You might be able to find a low-fee, or no-fee, 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. 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 checking and savings 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.
4. Additional Debt Payments
If you can pay more than the minimum on your credit card bill or make extra payments on your loans, that can decrease what you are spending on interest. That in turn can help increase your overall financial health and wealth.
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Why Categorizing Your Budget Is Important
Categorizing your budget 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 can 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 can 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.
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 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 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 up 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, if you like.)
Recommended: Check out the 50/30/20 Calculator to see the breakdown of your money.
The Takeaway
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 down payment on a home), and funding your retirement.
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.
Need some help keeping track of spending? Many financial institutions offer tools that can help you see where your money is going and make the most of your savings.
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FAQ
What are the 4 main categories in a budget?
There are different ways to categorize a budget, but commonly, people focus on their take-home pay, their spending on their “wants,” their “needs,” and how much they save.
What categories should you have in a budget?
When building a budget, it’s important to know how much income you have after taxes, what are the expenses that are necessary for your survival, what is your usual discretionary spending (which some people call the “fun stuff” in life), and how much are you saving. Within the last three buckets, you can subdivide into more specific categories.
How do you organize a budget?
One good budgeting 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.
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