So last week we talked about recognizing how much you spend each month, and today we’re going to focus more on the exact areas where you spend your money. In other words, once you get in the habit of tracking your money, it’s time to start making categories for each of your expenses and figuring out how much money goes towards each one of them.
For example, my categories are housing, transportation, savings, food, and ‘other.’ When I look at my expenses, I notice that I spend the largest chunk of my money, about 40%, on rent and utilities. The next highest amount, which is about 25% for me, would be things that I need for my car, like gas and insurance. I try to spend about 15% on food, like groceries, restaurants, late night trips to In-N-Out, and that sort of thing. Finally I make sure to save at least 10%-15%. My smallest category is the ‘other’ category. These amounts are unique to me because what I like or value is probably very different than what you want and value. Since everybody’s budget is different, it’s up to you to figure out which categories are right for you. It’s also a good idea to make some smaller categories within larger categories. For example, within my ‘other’ category, I include ‘gifts for family’, since I spend a lot of money buying stuff for my nieces and nephews. You’ll get a better understanding of where you spend your money if you’re more specific about your categories.
My categories may or may not be overwhelming for you because we are different people. Don’t worry; when you create your own categories, it will make more sense to you. To recap, let’s not forget the reason for creating a budget: so we don’t spend more than we have and also to create a cushion for ourselves. Now that you know the first two steps, start creating your spending plan.
Next week we’ll talk about what to do with your newly formed categories. How many categories do you think you will have and why?