This is the second part in a series on Creating a Better Budget
The first installment of the Better Budget series set a foundation of clearly defined financial goals. Upon this foundation we can then begin developing a better budget. In this part of the series, we will define what should be tracked within your budget, and to what level of detail.
Better Budget Step #2 – Define Your Expense Categories
The key thing we need to get down on paper in this step are the expense categories you are going to track. There is as much art as science in this step. At a minimum, I suggest the following categories for your budget:
- Housing (this includes mortgage / rent, insurance, taxes, maintenance, association fees, etc)
- Food (groceries and eating out)
- Transportation (car payments, insurance, auto replacement fund, fuel, maintenance, etc)
- Medical / Health (insurance, co-pays, prescriptions, etc)
- Debt (not counting mortgage and auto payments)
Less Is More
If you are a data nut like me, you are probably starting to get a little squirmy right about now. After all, you can’t create just one transportation category! No, no, no… you need to at least break out fuel, payments, insurance, and maintenance. And Housing? No way – you need at least 6 categories… OK – take a deep breath and relax. Too much detail is what kills many a budget.
If you have been budgeting for a long time in great detail and it is working for you, then great! keep doing what you are doing. If you are new to budgeting, or what you have been doing has not been working for you, than go with the fewest number of categories you an get away with. Here are the reasons you may need to add more categories:
- You have expenses not covered by these categories given your specific situation. Possibly you have school aged kids and need to have a “kid’s activities” category, or a “college fund” category, or alimony, or whatever.
- There is a specific area within a category that is inordinately high. For example, you are freshly graduated from med school and have a crushing student loan balance. You may want to separate that out from the rest of the “debt” category.
- There is an area within a category that is highly variable – possibly fuel if you have to travel by car for your job some months. In that case, it may make sense to break out fuel into its own category.
- What are your “trouble spots”? If there are areas that you struggle keeping in check then you will probably want to track them in more detail. Let’s say that you always go way over the Food category. It may be worth breaking down groceries from eating out in order to isolate the real problem.
- It is related to a financial goal. If you have a financial goal of “getting out of debt” then you are likely going to want to track much more detail under the debt category.
The bottom line is to keep the list as small as feasible. Do not over analyze this, you can always further break down a category later.
Now go. Scurry off and put pen to paper and write down the key categories you need to track to keep your financial ship on course.
Step #2: Define Your Expense Categories.
Stay tuned for Part 3 of the series where we will establish the amounts for each category.