Getting Started Budgeting: How Should I Set Up My Spending Categories?

Written By Bram Stockbauer

When you’re first getting started with budgeting, one of the most important steps is determining what is – and isn’t – going to be included in your budget. Maybe there are a few things you’re currently spending money on that you’d rather cut out, or alternatively some things you hope to spend more on once you have a better idea of where your money is going. Either way, this is the perfect time to make the necessary adjustments. As a rule of thumb, your spending categories should be broken up into 3 general subsections: Needs, Wants, and, Savings. 

Needs

The needs category is made up of expenses that are unavoidable for one reason or another. Some of them are real necessities, like food and housing. Others are obligations you have, such as debt payments. You may also include non-essential but nevertheless important modern amenities such as WiFi and a phone plan. Here is a reasonable list of spending categories you might have associated with needs:

  • Groceries

  • Housing (Rent or Mortgage)

  • WiFi

  • Phone Plan

  • Hygiene Expenses (Toothpaste, deodorant, etc.)

  • Household Expenses (Paper towels, toilet paper, etc.)

  • Gas

  • Auto Insurance

  • Utilities

  • Other (non-mortgage) debt

This list isn’t exhaustive, but is a great start for most people. As you build your budget, other expenses that fall into this category will come to mind, and as they do you can add them to your budget.

Wants

The wants spending category consists of expenses that you could certainly get by without, but you want to allocate some money to anyway. It’s important to note there’s absolutely nothing wrong with having wants in your budget. The entire point of budgeting is to help allocate your money where you most want it to go, so being able to allocate it towards wants is great! Wants will include pretty much all non-savings expenses that don’t fall into the needs category. Because of how broad the wants category is, this is often where people have the most trouble deciding what should be considered a spending category all on its own. Here is a list of suggested starter wants categories:

  • Entertainment (Some people prefer to break this up into several subcategories such as: Eating Out, Going to the movies, etc. My preference is to keep it all as one category to provide myself the most flexibility, but you can do whatever works for you.)

  • Personal Money (This is money that you have total discretion over during the month. It's for satisfying random cravings, or making impulse purchases. Those are going to happen anyway, so you’re better off planning for them!)

  • Travel

  • Gifts

  • Hosting

The wants portion of your budget is where you’ll want to customize the most. Add any categories you want to suit your lifestyle.

Saving

The last main category that you should include in your budget is the savings category. Savings can include real savings, such as retirement accounts, emergency funds, or other general savings for down the line. It can also include faux savings - that is, savings that are really just preparing to spend in a few years. This might include putting aside money for a new car, a house, or a big trip you’re planning. While this saving is different from retirement saving, they both fall under the savings category in your budget. A starter list of savings spending categories might be:

  • Down Payment

  • New Car

  • Retirement

  • Emergency Fund

Conclusion

With each of these categories, remember that customization and flexibility are key. If you’re going to stick to a budget, you need to set it up for your own personal needs. Otherwise you’ll be unlikely to stay with it.

If you’re feeling motivated, but don’t know where to start, check out The Budget Lab’s templates in our shop! If you purchase the Budget & Spending Tracker, you’ll receive a free consultation from yours truly to make sure you fully understand it and are set up for success.

Bram Stockbauer