Budget Categories and Percentages

People often get confused and overwhelmed when starting to budget because they don’t know how to choose budget categories and don’t know how much to put in each category. That’s why I’m going to walk you through EXACTLY how to choose your budget categories and percentages.

Budget Categories 

It’s important to know where your money is going, but having too many budget categories can be counter-productive.  Not everyone’s budget categories will be the same, but here are some basic guidelines:

Budget Percentages

So now you’re thinking to yourself, “OK, great!  I’ve got my budget categories figured out, but how much should I put in each category?”  There’s no hard and fast rule to answer this question.  Every family is unique and what might be important to your family will not necessarily be important to someone else’s family and that’s going to be reflected in your budget.

There are two ways to go about setting budget amounts. 

OPTION 1 (the “meh” option):
Use generic budget categories and percentages

The percentages below are based on your net income (take-home pay after taxes).  They are basic guidelines you can use to get started if you want to take the quick and easy route and/or have no historical data to go from.

• Rent/Mortgage (20%-30%)
• Utilities (5%-10%)
• Groceries (10% – 15%)
• Dining Out (3% – 8%)
• Entertainment (3% – 8%)
• Childcare (10% – 20%)
• Kid’s Activities (5%)
• Household (5%)
• Insurance (auto, health, & rent/mortgage) (5% – 15%)
• Personal Expenses (5%)
• Gifts/Charitable Contributions (2% – 5%)
• Debt (credit card, student loans, auto loans, etc) (0% – 15%)
• Savings for Retirement (10% – 20%)
• Things you’ll save up for (vacation, holidays, car, etc) (this really depends on what you are specifically saving for)

This option is called generic for a reason. It does NOT take into account YOUR personal lifestlye. I do not recommend using generic budget categories and percentages.

OPTION 2 (the better option):  Create a budget based on your current spending habits

This will require a bit more work that option one, but I encourage you to take the time do go through it because it can be a real eye-opening experience as it will allow you to see where your money has been going.

1. The first step is to gather your historical spending data for the last three months.  If you are using a debit card for the majority of your spending, then you can most likely download this information in a .csv file from your bank.  But if you can’t download it from your bank, you will need to compile it by hand.  Grab your bank statements for the last three months and open up a spreadsheet on your computer.  You will then need to enter every transaction into the spreadsheet.  Break up the transactions into months so you can see your spending month-by-month.
2. Now that you have your historical data, your next step is to categorize every transaction from the last three months into one of the budget categories.  This categorizing can be confusing, but hang in there, mama!  It doesn’t have to be perfect.   I really encourage you to try to limit yourself to using one of the 14 categories suggested above.  This is because the more categories you have, the harder your budget is going to be to maintain.
3. Now it’s time to total up your budget by month.  If you are a spreadsheet whiz, you can use a pivot table to do this, otherwise, just go through the list and total up each category.
4. When you have your monthly totals for each category, it’s now time to find the average for each category from the last three months.

You’re done!  Armed with the average for each budget category, you can now see how much your family has been spending and where all your hard-earned money has been going!

Once you have your historical data you can now tweak it to create a budget.  Like I said before, this can be a real eye-opening experience.  So many of us are overspending, but we aren’t sure what to do about it.  But as the cliche goes, “Knowledge is Power”.  Don’t beat yourself up over past spending habits, there is literally NOTHING you can do about them now.  But what you CAN do now is decide you are ready for a change.  Now that you can see where your money is going, I encourage you to share these figures with your partner (if that applies to you) and decide how you’d both like to change your spending going forward.

When creating your budget there are a couple things to keep in mind:

1. Budget for every dollar.  You are no longer a victim of your spending!  You are now going to tell your money what to do.  Any dollar that doesn’t get told where to go will mysteriously slip away into the night.
2. Set aside time at the beginning of each month to reflect on last month’s budget and create a budget for the coming month.  I’m not kidding, literally schedule it on your calendar.  Tell your partner and carve out time to go over the numbers.
3. Remember that a budget is a BEST GUESS at where you money is going to go.  Once you’ve created your budget for the month, it doesn’t need to change.  You might wind up overspending in one area.  That’s OK!  Was this month an anomaly because you forgot to budget for an event that occurred?  Or did you just budget too low and need to bump up that category.  Or maybe it’s just an area that you are working on.

Overspending

It happens. If you overspent in a category and there’s no particular reason why other than it’s a weakness for you or your family, you could make it a goal next month to cut back in that area.  Leave notes for yourself in locations where you’ll see them when you are about to spend from that category.  This might be in your wallet, on your phone, on your computer or on a kitchen cupboard door.

A common mistake that I see people make with their budgeting is assuming that it has to be strict and rigid and that once the budget is set, you can’t deviate from it. But the truth is: budgets are just a plan. They aren’t hard and fast rules. A budget is just a guideline for what you think you’ll be spending (and making). I have a FREE 1-hr training that explains The Three Mistakes You’re Making with Your Budget (hint: this is one of them). Make sure you head over here to watch the free training – you aren’t alone! This is a common misconception!

If you find that your family is consistently overspending in a certain category, then feel free to dive into that category a bit (Yes, I’m giving you permission to create more categories… temporarily).  For example: Are you consistently going over budget on groceries?  Try breaking out your grocery bill into sub-categories like alcohol, vitamins & supplements, treats, body care, etc.  If the idea of sitting down with your grocery receipt to break out the expenses sounds exhausting, remember that you won’t have to do it forever, try it for one to three months, that should be long enough to show you where you are possibly overspending.

Another way to combat overspending in one category is, if you think you know what the culprit might be, try cutting it out for a period of time.  Last year our family’s grocery budget was getting out of hand so my husband and I decided to cut out alcohol for a month in January.  Not only was it beneficial for our livers, but we were also able to see the effect in our grocery budget.  Seeing that number go down for the month was empowering!

Good luck!  As always, I’m rooting for you!