How detailed do you need to be with budget categories? Do you separate lunch from dinner or lump everything into a few categories for budget simplicity? And which method is better?
Some people love to budget, just like some people love to organize. However, this is not most of us. How far should you break down your personal budget categories in order for the budget to be effective?
Do you need to separate entertainment into movies, books, concerts, plays, opera, symphony or can you lump it under one broad “Entertainment” category?
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Keep it simple – except when it comes to your problem areas. Don’t buy a lot of clothing? Then you probably don’t need to break down into budget categories like ‘work,” “gym,” “dresses,” “shoes.” “Clothes” should be sufficient.
Troubleshooting By Category
If you spend too much on food, though, it’s better to be specific. “Groceries,” “dinner out,” “lunch,” and “delivery” can each stand as a separate category so you can see what’s being spent where. If your grocery bill goes up because you started cooking more at home, it’s good to see this breakdown.
If you have a broad category that seems to be creeping up, breaking it down will provide some insight into what the specific problem is.
“Utilities” might encompass everything from your electric bill to your cell phone bill but breaking it down helps when the category jumps in July because you’ve been running the air conditioning non-stop. Now you can see the problem and know you have to rein that in for August.
Having more categories can help you catch mistakes too. A fraudulent charge on a credit card might be hidden if it’s in a category where you regularly spend a lot of money but if you have smaller breakdowns, it’s easier to spot and to resolve.
Family Budget Categories
Unsurprisingly, there are many, many schools of thought on household budgeting. Our sanity-saving recommendation is to think of broad categories here, like “Housing”, “Food”, “Medical”, etc.
If you start breaking it down into household budget line items – like diapers, pacifiers, stuffed bear no. 1 – your system will break. It just becomes too difficult and time-consuming – particularly when you have a family – to do budgeting that way.
If you’re wondering where to get started, create a monthly expenses list for one month to see where you’re spending, and then create the categories for your budget from there. For more in-depth info, check out our podcast with Family Inc’s Douglas McCormick on how to manage your family like a business.
Business Budget Categories
If you have a business, that budget should be entirely separate from your personal budget. Remember back to our episode on small business taxes, when Jamaal warned us about mixing the two. The IRS does not look kindly on that so keep them apart.
Otherwise, keep these categories as simple as you can, within reason. If you’re running a small business, being able to spot problem spending areas before they get out of hand is crucial. First, break down your expenses into one-time and recurring costs, then smaller categories like “Lease payments”, “Salaries”, and “Office Supplies”.
The important thing is that you budget at all. If it’s kind of a hobby, go nuts. Have a thousand budget categories. Color code them in Excel and wow your accountant. But if you hate budgeting, that’s fine too. Break it down only as far as you need to in order to have a good handle on things. Tell us in the comments how many categories your budget has.
Blue Moon: A Belgian white.
Mint: The easy way to budget.