A budget is just a plan for your money at its most basic level.
A well-thought-out budget may help you get control of your finances and spend your money effectively. A budget serves three primary goals: Pay bills, invest for the future and enjoy life today.
The first step in creating a budget is to break down typical expenses into budget categories (including areas where you tend to overspend). You can start arranging your expenditures based on your financial position once you’ve defined your fundamental budget categories.
A list of budget categories present in a basic home budget is reviewed in this tutorial. It also recommends how much of your money should be allocated to each class.
Monthly budgets usually start with your after-tax income.
1. Housing Expenses:
A housing expense is everything you pay to keep a roof over your head. Housing expense is more than mortgage or rent. Property tax, HOA dues, maintenance is part of housing expense.
Housing cost is by far the most important category for most budgeters.
Covid has altered our view of the need for transportation to and from work. Still, with so many cars on the road, it is easy to see that we are still traveling one way or another regardless of their location or lifestyle.
Transportation could be a bus far, or car payments, registration and DMV fees, gas, maintenance, parking, tolls, and public transportation are typically included in this budget area.
Groceries are, without a doubt, a necessary expense for every family. Dining out is a component that many budgeters include in their spending plan (e.g., restaurant meals, work lunches, food delivery, etc.
Food is a necessity.
Although some people may disagree, gourmet food and wine are not a necessity and should be put in your non-grocery food spending in one of the non-essential categories.
The primary idea behind your budget categories is to divide them out so that you can see what you truly need to spend and what you want to spend separately.
Water, power, and HVAC (heating, ventilation, and air conditioning) are all essential components of any well-run household. Your utility category should include all costs associated with keeping these services operational.
This includes your utility bills for gas, electricity, water, and sewage. It will also cover your cell phone, cable, and internet costs for most families.
5. Insurance Coverage
The type of insurance we buy and how we categorize it is heavily influenced by our personal preferences.
Many budgeters group insurance together with the items they’re insuring. For example, health insurance would be classified as “healthcare.”
“Transportation” would be the category for auto insurance. This is a perfectly viable alternative.
Other budgeters include insurance as a separate category in their overall budget. In that scenario, it should cover all of your insurance payments, such as health insurance, life insurance, and disability insurance.
- Renter’s or homeowner’s insurance
- Home protection plans or warranties
- Insurance for automobiles
- Insurance for life and disability
6. Medical and Health Insurance
With an aging population and so many out-of-control health challenges in life, health insurance has become necessary. I know couples that the entire salary of one partner goes to buy health insurance, and they are happy with it.
It may not make sense until you find out that the husband is dealing with cancer treatment, and the cost is astronomical even with insurance and impossible to pay without.
This budget area includes any healthcare charges you may incur, such as:
- Out-of-pocket expenses for primary care and specialty care, (dermatologists, psychologists, etc.)
- Prescriptions for dental care that are urgent
- Medical supplies and equipment
If you opt to divide your insurance costs into different household budget categories, don’t forget to include your health insurance premiums.
7. Debt Payments, Savings, and Investing
A crucial household budget component and frequently overlooked (or underfunded). Although saving money has little impact on your day-to-day existence, it has a significant impact on your long-term financial health.
At a basic minimum, every family should have an emergency fund and a retirement account, such as a 401(k) or IRA, set aside for unforeseen needs.
You might not be able to handle what life throws at you if you don’t have an emergency fund, such as an unexpected medical cost, a car accident, or a job loss.
This is distinct from your retirement account, which is a long-term investment strategy to help you retire comfortably.
Understanding your pattern of debt, savings, and investing can help you prioritize where the money should go.
Budget Subcategories That Aren’t Required
The money you have leftover after you’ve budgeted for your family’s necessary needs is referred to as discretionary income. This account will be used for personal costs, pleasure, and presents.
Non-essential expenses are likely to fluctuate from month to month based on your spending habits. They’re also the simplest expenses to reduce if you want to pay off debt or increase your savings faster.
This is a catch-all category for any spending that could be classified as personal care or “lifestyle.” Gym memberships, for example, are an example of personal spending.
- Clothing and footwear
- Gifts for home decor and furniture
Because some personal care goods, such as soap and laundry detergent, are necessary, you may wish to include them in your food budget. After all, you most likely purchase them along with your other goods.
9. Recreation and amusement
This is where you put your “fun money” in your home budget. That’s critical!
For the majority of us, making time (and money) for leisure is critical to maintaining a healthy work-life balance. Concert tickets, for example, can be included in this price category.
- Sports competitions
- Vacations and family activities
- Subscriptions to streaming services and others (e.g., Hulu and Netflix)
- Restaurants (if not already listed under “Food”)
- Video game pastimes
To put it another way, this home budget area contains all of your leisure and fun. Enjoy it any way you want—you’ve worked hard for it.
Finally, this house budget area is for any expenses that your other budget categories aren’t covered. When you need a bit extra somewhere else, it can also be an “overflow” category.
If you have a large family, you may spend a lot of money on clothes and haircuts for your children. You might account for those products here if your “Personal Monthly Expenses” category is full.
Perhaps you’ve recently returned to school to complete your education. Your tuition and textbook costs may fall into this category in such a case.
Putting It All Together: Your Budget Categories and Percentages
You’re ready to start creating your budgeting plan now that you know how to divide your money based on simple budget categories.
Remember that this list of budget categories is only a starting point. Customizing your budget in a way that makes sense for you is the key to success.
If your new home budget isn’t functioning after a few months, make modest adjustments as needed until you’ve created a budget that works effectively for your specific needs. Effective budgeting takes time and effort at first, but the results—and the money you will save over time—will be well worth it.