If 2020 taught us one thing, it was the importance of planning and managing our finances. Whether you’re working part-time, full-time, a college student, or all three, budgeting is the way to go to get ahead in life. An important aspect to budgeting is properly assigning budget categories.
Furthermore, knowing how much income you truly make is important. Strategically distributing that amount to cover your academic, living, and personal needs should be your numero uno priority. That means number one in Spanish, in case you don’t speak it.
To set up a simple yet solid budget, you’ll need to learn to assign all of your regular expenses to clear budget categories. Doing so helps you keep track of how much you spend, where your money goes, and spending patterns. This allows you to adjust them, just in case you spend one dollar too many.
Now, you may wonder: “But where do I start?”
Don’t worry. We got you covered!
In this article, we’ll be breaking down the basic budget categories you need to have and a simple technique to allocate your future income.
Paydays are the best days! Now that you have your paycheck, it’s time to designate a place for every dollar.Now, there are three fundamental budget categories: Needs, wants (don’t forget to treat yourself!), and savings (you may include investments).
A basic yet effective budgeting method is the 50/30/20, where 50% goes to needs, 30% to wants, and 20% to savings. You can also alter these proportions based on your liking (e.g., 60/30/10). You can also use the 70/20/10 method which is more flexible or zero-based budgeting to assign a role to every dollar.
This is a great starting point to understand what budgeting looks like, but let’s break these down into further details, shall we?
Main Budget Categories (Necessities)
Your monthly budget should always be based on your disposable income. This is the money you take home after deducting taxes and other deductions.
This amount should be able to cover your needs, such as housing, food, utilities, transportation, insurance, and educational essentials (if applicable). After all that, hopefully you’ve got some left for savings.
These should remain separate from your wants, as we will explain below this section. When we said we got you, we mean it.
Without further ado, let’s dive into the recommended budget categories:
Whether you’re living in a studio home, a shared flat, or a house, this identifies as your housing expense. This is almost always your most significant living cost. It cover rent/mortgage payments, property maintenance costs (e.g., repairs or appliance replacements), and property taxes.
Keeping a roof well over your head is essential to help you stay productive and gradually grow in all life’s aspects.
2. Food (glorious food) and groceries
Ah, yes, if this isn’t the greatest source of happiness, then it probably should be! We need food to live, but you knew that already. That’s why this is a primary budget category. Most people may think this category is just groceries, but realistically, you’re probably eating out every once in a while. At most. Right?
With that being said, this category should account for those occasional restaurant feasts, work meals, and impromptu food deliveries when your stomach sounds the hungry alarm.
But, this also means you will have to be able to distinguish which meals are considered needs vs. wants. This budget category should be specifically for needs and needs only. Hint: having beers or going to fancy restaurants likely falls into wants.
Water, electricity, gas (if you have a gas stove), and internet are four everyday essentials that pretty much serve as the bloodline of your home. This category should be enough to account for all of these expenses. Because trust us, you do not want to spend a whole winter or summer without proper heating or cooling.
Depending on where you live, this may also include other expenses such as sewage, mobile data, and cable (no judgment here).
Unless you have wings, commuting from your home to wherever you need to be is an integral part of all of our lives. Whether you use a car, motorbike, bicycle, or public transport, there will be costs to cover.
This category may consist of expenses such as public transport fees, car payments, registration fees, gas (be strong to all Canadian readers), and parking.
When it comes to how you commute, this is entirely up to your lifestyle. But we highly recommend taking advantage of public transit or using portable vehicles (such as bicycles, e-scooters, skateboards, etc.) whenever possible. If you’re on a tight budget, this can be a major game-changer! And I wish it were much more prevalent than it currently is in the U.S.
5. Insurance (an absolute essential)
We know, we know, but hear us out. Insurances may not seem like they’re worth the investment right now, but trust us, it will be a cost lifesaver. Just like facing the pandemic, we have to plan for the unplanned, which is where insurance comes into play.
Some people prefer to place insurance in a budget category based on what they’re insuring for (e.g., putting car insurance under the Transportation category). However, keeping all insurance in one budget category is recommended. Again, this is based on your personal preference.
Insurances may include health insurance, renter’s or homeowner’s insurance, car insurance, life insurance, and disability insurance.
If you aren’t a student, you can skip this, but if you are, please read on. Anything from textbooks, stationery, notebooks, course access codes, tuition, and fees should be placed in this budget category.
Ensuring that you are healthy, alive, and kicking has been a long-standing priority, especially in these days. Getting regular check-ups for general and dental care can go a long way to a healthier life. Consider this an investment.
Now, healthcare comprises of various expenses, which include primary care, specialty care (psychologists, ophthalmologists, dermatologists, etc.), dental care, emergency care, drug prescriptions, and other medical supplies (or devices).
Last but certainly not the least is savings. When we say savings, we don’t just mean pennies you place in a piggy bank. This also covers investments and debt payments (if applicable).
This category is the underrated budget category that some may choose to ignore. But in fact, it is an absolute essential, especially when we all know how unpredictable life can be.
With that being said, 5-15% of your savings should go towards a retirement fund (such as a 401k or a Roth IRA).
But before you even start doing that, make sure you have 6 months’ worth of emergency funds as a cushion. This allows you to have time and resources to resolve any personal or financial setbacks. Keep this separate from your savings and checking account.
Paying off debt early is the way to go to save you from those dauntingly high-interest rates. As a bonus, we recommend one of these two methods to pay off your debt:
- The Avalanche Method. Tackle debts with the highest interest rates regardless of their balances.
- The Snowball Method. Tackle debts with the lowest balance regardless of their interest rates.
Money-wise, the avalanche method works best. But psychologically, the snowball method works best. It’s up to you.
Investing some money into assets such as stocks, bonds, or cryptocurrencies, can help you maintain good financial health and wealth in the long run.
Flexible Budget Categories
Now that we’re all sorted for our living needs, it’s time we get to the good stuff, aka our wants! This consists of personal expenses, entertainment & recreation, and miscellaneous. All of these categories may change from time to time, depending on how much you spend on the primary budget categories. Those ones must always come first.
This covers everything you need to fulfill your personal care needs and lifestyle. These expenses include shoes & clothing, home furniture & decor (for the jolly seasons perhaps), and gym memberships (for all the athletes within we all possess).
2. Entertainment and Recreation
Another term we like to use for this budget category is your fun money which is pretty much self-explanatory! Working hard is important, but maintaining a healthy work/life/college balance is even more critical for both our mental and physical health’s sake.
These may include things like streaming subscriptions (e.g., Netflix or Disney+), a Friday friendly football game in town, vacays, wine tasting trips, and your hobbies, to name a few.
This category is the “overflow” category to cover categories that might need a little help on covering. This includes unexpected fancy dates, those overpriced textbooks, or that last-minute haircut for a job interview.
The bottom line on budget categories
As you can see, managing your finances isn’t as hard as you thought it would be. All you need is a proper framework or blueprint, and to be as strict as you possibly can with it. This is done by allocating your disposable income to categories with preset percentages of the income you earn. And they all fall under three fundamental components: Needs, savings, and wants.
The primary categories are essentially your needs and savings. These include your housing, food (groceries included), transportation (for your daily commutes), education, healthcare, and savings (including debt payments and investments).
In contrast, the secondary categories basically sum up your wants. This includes personal expenses (e.g., gym membership and clothing), entertainment and recreation (e.g., streaming subscriptions and hobbies), and miscellaneous expenses (serving as an extra fund to cover your uncovered costs from other budget categories).
To set up and keep these budget categories in check, you can simply create your very own template on an Excel spreadsheet or download a template you can find online. As long as you get started, things will fall into place.