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A common question among those who are beginning to budget is how many categories should my budget have?
The short answer is it depends.
The long answer well that the rest of this post.
I say it depends, as the number of categories you need depends on what you hope to accomplish by budgeting.
What your reason for budgeting?
That is the first thing you need to figure out before you make categories for you budget.
You can check out my post six reasons to budget.
Or we can rephrase that question. What do you want to accomplish from budgeting? Or if you been budgeting for a while what are the benefits you most enjoy?
Take a minute or two and come up with an answer to those questions. Once you have an answer write it down as you be referring back to it as you set up your budget categories.
There are 6 sections when it comes to budgeting categories. You don’t need to get super specific with every section but you should have a least one category for each of them.
You probably already have some sort of income category. Basically, it’s how money enters your budget. In YNAB they call this to be budgeted.
Some people have multiple sources of income and as such also have multiple income categories.
Personally, I found it easiest to have one category for income and then add notes to the transactions as needed. But this depends on your goal for budgeting.
My goal with budgeting is to manage my money better and help me save more. Tracking my income then isn’t important and it doesn’t help me achieve my goals.
If you have multiple streams of income that you want to track. It might be helpful to break it down into more specific categories.
Take a moment and think if having several categories for your income will help you reach your goals.
If it won’t help, do yourself and favour and only make one category for income. Keep things simple, you’ll thank yourself later.
2. Fixed Expenses
This is a very general section as fixed expenses are any expenses that are constant. It might be your rent, phone bill, or any other bills you have with fixed amounts.
Please note we aren’t including your savings or debt repayment here. We’ll cover both of those things later.
One of the easiest ways to come up with categories for your fixed expenses is to first make a list of the expenses you have. Then once you have a list see if any of them are similar and can be lump together.
You still want to have a clear picture of where your money is going but you don’t want too many categories that will get confusing.
For example, if you have lots of fixed expenses relating to housing you might make one category for all of it. So you would then have a category for housing its specific enough you know where your money is going without having to keep track of a million different categories.
You might be tempted to create an individual category for each monthly expense. Think carefully before doing anything like that. Remember you only want enough categories to help you reach your goals as your budget should be doable.
Bonus tip: while you are going through your fixed expenses set them up to be paid automatically. This makes it easier for you and in some budgets software like YNAB you can even set up transactions to repeat themselves.
3. Variable Expenses
The next thing we are going to set up categories for is your variable expenses. This would be anything you purchase on a monthly basis that isn’t a fixed amount. Some common variable expenses are gas, groceries and other household expenses.
I don’t include fun expenses in here so, for example, eating out and entertainment. To me, they are things I want not things that I need so they aren’t a priority while budgeting.
Take a look at all your variable expenses. And then just like the fixed expenses see if there is anything that you can put into the same category. It is your choice on how specific you want to get here. You could even combine some of them with your fixed expenses.
As long as your budget helps you reach your goals it doesn’t matter how you budget.
Bonus tip: Keep one of your categories pretty general for any misc expenses that crop up.
Depending on why you’re budgeting this may add a lot of categories to your budget. I use my budget to help me save and as such have approximately 10 saving categories. That may sound like a lot but saving more is one of the reasons I budget so I made categories to help do that.
If you want to save more but aren’t sure how read my post about 5 ways to save more.
I would recommend having a few different saving categories. I like having 3 so an emergency fund, retirement savings and then more of general fun savings. Of course, you can break that down further if you wish.
You might have a couple of emergency funds. One for your car and one for medical expenses. As I said earlier it doesn’t matter what your budget looks like as long as it helps you reach your goals.
Figure out how many savings categories you need. It depends on your situation of course but I would recommend at least 3 to start with.
5. Debt Repayment
If you are currently in debt you have been probably waiting for this to come around. And I mean let’s be honest most of us are in debt in this day and age.
You know the drill by now. Think of the different debts you have set up categories for them that help you reach your goals. Once again you can combine them with categories you already created.
So if you have a housing category you might want to put your mortgage payment with that. It depends on what easiest for you and what best for your goals.
If you are only skim reading this part because you don’t have much debt. Stop and focus for a minute. There still one category you need here and that is money people owe.
So the next time you pay for someone and they owe you money back. Or maybe someone borrows some cash. You put it through this category.
This way their issues won’t mess up your budget. If you don’t expect repayment on something and gift the thing to them don’t put it through here. This category is for money people owe that you are expecting to get repaid.
6. Fun Money
Finally the last and the most fun section. Let’s make some categories for fun things. So basically anything you do because you want too or find it enjoyable should find a category here.
You don’t need a lot of categories here. It also a bit of your money to blow on whatever you want.
Personally, I have two categories, a social life fund for when I do things with other people and a me fund for things I do for by myself.
Once again take some time and set up some fun categories. It doesn’t have too many as long it works with your goals.
Now that you finish all of that I can give you an answer to how many categories your budget should have? Go back and count how many categories you made that is how many your budget should have. But seriously the number doesn’t matter as long as they help you achieve your goals.
Something I like to do now that I have all my budgeting categories is arrange them from most to least important. It doesn’t have to be a perfect representation of how you feel.
You this to be good enough so when you go to budget you are budgeting money for what most important to you first. This way if you start running out of money halfway down at least the most important things are covered already.
You put a lot of work into your budget categories today but this isn’t the last time you’ll need to think about them. Over time things change and you might need to change your budget categories to reflect that.
Those changes don’t always have to be big and completely redo everything. Sometimes even changing the name of a category can improve it functionally.
So remember do what works for you and your goals. And check back regularly after all this is just the beginning.