Creating Your First Budget – Part 1 (Create Categories)

Note: This is the first of a multi-post series that goes into detail on how to set up your first budget.

So you’ve finally decided you want to take the plunge and create your first budget (or spending plan, if you prefer)?  Ok, so where do you start?

First, you need to determine what you will use to keep track of your budget and spending.  It could be something as simple as a spreadsheet, or a more elaborate solution like Mint.com or YNAB (my personal choice).

Next, you need to decide how you want to categorize your spending.  You can use something as simple as The Balanced Money Formula, where you just have three categories: Wants, Needs, and Savings.  You put 50% of your money toward Needs, 30% toward Wants, and 20% toward Savings.  You could go to the other end of the spectrum, where you have thousands of categories, even including one for toothpaste.  Or you could pick something anywhere in between.  I am very detail oriented, so my budget includes a lot of detailed categories.  I’ll get to my categories in a minute.

If you are going to create categories for items such as groceries, gas, housing, etc., make sure you look at more of a long term approach.  Don’t just look at how much you spend on a month-by-month basis, but look at your year-long spending.  In other words, try to think of all your expenses you pay semi-annually (car insurance) or annually (Christmas gifts, taxes, homeowners insurance, etc.).  My recommendation is to save some extra money in a general category for the first year to accommodate any irregular expenses you might have forgotten about.  Trust me, it’ll happen.

Wondering where to start with picking categories?  I’ll show you what my categories are right now.  I adjust them as time goes on, but this is what they look like right now.  Maybe it’ll help give you an idea on where to start.  Remember, you don’t have to be as detailed as I am (or you can be more detailed if you like), but this is just a starting point to make sure you don’t forget most items.

Charity
– Church
– Misc.
Clothing
– Hers
– His
Computer
– Hardware
– Software
Education
– Student Loan 1
– Student Loan 2
Food
– Groceries
– Restaurants
– J.D. Lunch (I have a special plan for this because my work has a really cheap and healthy lunch)
Gifts
– Misc. (used to accommodate birthdays, weddings, etc.)
Holiday
– Christmas Decorations
– Christmas Gifts
– Halloween
Housing
– Furnace Filters
– Furniture
– Household
– Improvements
– Lawn & Garden
– Mortgage
Medical/Health
– Dentist
– Doctor
– Medicine
– Optometrist/Contacts
Memberships
– Safety Deposit Box
– Sam’s Club
– Web Site Domain
– Web Site Hosting
Personal
– Cosmetics
– Hair Cuts
– Life Insurance
– Miscellaneous
– Toiletries
– Tools/Woodworking
– Taxes
Pets
– Food
– Grooming
– Heartgard/Frontline Plus
– Other
– Toys and Treats
– Vet
Recreation
– Entertainment
– Vacation
Savings
– Buffer (used for any over spending of other categories)
– Big Item (changes from month to month, but is basically any large item for which we are saving)
– Emergency Fund
– Roth IRA – J.D.
– Roth IRA – Megan
Transporation
– Car Insurance
– Car Payment
– Gas
– License Plate Renewals
– Repairs & Tires
– Service/Maintenance
– Drivers License Renewals
Utilities
– Satellite
– Internet
– Electricity
– Gas
– Phone
– Trash
– Water & Sewer

We don’t budget something to every one of these categories every month, but we do for most.  I know it might be overkill for most people, but I like having some smaller categories I don’t use much, just to make sure I have money in there when I need it (like furnace filters).  Some of the categories have a target amount we try to reach (like doctor, dentist, vet, emergency fund), then we just keep that money in there until we need it.

Spend some time thinking about what categories you want to use, and then I’ll cover what to do with them in Part 2 – Tracking Expenses.

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