Want to get better at saving money but don’t know where to begin? Not to worry! In this article, I’ll highlight the 12 essential budget categories that everyone should include in their financial plan. A smart savings and frugal living lifestyle has personally saved me thousands of dollars over the past few years without sacrificing my quality of life.
Read on to learn about the 12 essential budget categories you should have.
Why Budgeting is Crucial for Financial Stability
Whether you’re on a low income and need to budget or are just doing it because you want to do better for yourself, you’re doing the right thing! Budgeting takes work, but it’s worth it. When you create and maintain a budget, you’ll understand exactly how much money you have saved and how much you need to still save to achieve your goals. Additionally, setting aside specific amounts of money in specific bank accounts gives you a visual of how much you have saved. I keep separate bank accounts for emergencies, travel and retirement. Keeping separate bank accounts helps me remain disciplined to keep saving and motivated to keep going with my saving and investing goals.
Calculating Your Expenses in Each of the 12 Essential Budget Categories
For each of the essential budget categories, you’ll need to create a monthly budget. The best way that I’ve found to do this is to undertake the following steps:
- Grab your bank and credit card statements from the last 3 months and print them out.
- Take out a notebook, pen and various highlighters or pencil crayons.
- Choose one colored highlighter or pencil crayon for each of the 12 essential budget categories.
- Add up the total amount you spent in each budget category and type them into an Excel document. Alternatively, write them down in a journal. Keep separate lists for each budget category.
- Each list will tell you approximately how much you spend on each budget category per month.
The List of 12 Essential Budget Categories
Regular Bills in the List of the 12 Essential Budget Categories
1. Housing
First on the budget categories list: housing. According to CNBC, you should set aside 30% of your income for housing. The 30% rule includes all expenses related to rent or mortgage payments and excludes utilities. If you live in an area with a higher cost of living, allocate closer to 40% of your income towards housing. This is what I personally do and it allows me plenty of wiggle room in the case that I need to move to a more expensive apartment.
2. Food
Food is an essential part of anyone’s budget. While you can – and should – cut costs where you can on groceries, meal planning and cooking, ensure you have enough funds budgeted for healthy food. Food costs include both groceries and restaurant and takeout expenses. However, only groceries are an essential expense. Therefore, I’ll talk about restaurant and takeout expenses in the ‘leisure’ expenses category later on in this article.
Take a look at your grocery store receipts from the past 3 months and get an average of how much you spent. Next, go through each receipt and highlight every single non-essential item you spent money on. This includes soda, chips and other snacks. Next, calculate the average of how much you spend on essential groceries per month. From there, you’ll get an estimate of how much you spend per month and will know how much more you can afford to spend on chips, candy and other fun treats.
3. Transportation
Transportation is another one of the 12 essential budget categories that everyone needs to include in their financial plan. Even if you drive to work or work from home, you need to get from A to B – say, home to the gym or grocery store and back! Include everything from car payments, gas, insurance and transit passes in your transportation budget.
4. Utilities
Utilities are another essential budget category. Typical expenses include electricity, water, internet and phone expenses.
5. Subscriptions
Subscriptions cover a wide variety of expenses including online newspapers, streaming services and even meal kit delivery services.
6. Personal Expenses
Personal expenses are a broad category and can include many different costs. Some categories of personal expenses include toiletries including makeup, skincare products, female hygiene products and shaving kits.
Other Expenses in the 12 Essential Budget Categories
7. Savings and Investments
Savings should be part of everyone’s budget. I’ve had the most success achieving my saving goals by treating my monthly saving and investing efforts as just another bill to pay. Remember: you are investing in your future self. Think about how you’ll feel 1, 2, 20 or 30 years down the line. How will you feel when you realize that your past self was diligent in saving up for that big vacation or a comfortable retirement?
Another strategy that has worked well for me is automating my investments. Many banks and robo-advising platforms let you set up automated transfers. On the day of your choosing, funds will be transferred to your other savings or investing accounts. When you automate your savings, you’ll reduce the risk of forgetting to set aside money.
8. Debt Payments
Millions of us carry debt and regular payments should be included in your expense calculations. Include your average monthly payment in your budget outside mortgage payments. Some examples of debt include:
- Student loans
- Lines of credit
- Interest on credit cards
- Personal loans i.e. money loaned from family and friends
9. Emergencies
Having an emergency fund is an essential part of everyone’s life. If you don’t have an emergency fund, start saving for it. Everyone should include emergencies as a line item in their regular budget just in case they need to dip into their savings and replace that income. Not sure how much to save? Generally, it’s a good idea to save 3-6 months’ worth of living expenses. If you are in a single-income household, are self-employed or cannot rely on family members should something happen, save 5-6 months’ worth of expenses. On the other hand, if you are in a dual-income household, you can likely get away with having 3 months’ worth of expenses stocked up.
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10. Healthcare
Depending on where you live, healthcare expenses can vary. Take inventory of what healthcare expenses you usually need versus what is covered under either your government healthcare plan or your employer coverage. Some examples of healthcare items and services you may need to budget for include:
- Eyecare
- Dental care
- Massage and chiropractic care
- Mental health services
- Certain prescriptions
- Insurance deductibles (i.e. the amount you need to pay that isn’t covered by your medical insurance plan)
11. Leisure
Leisure expenses include anything from gym memberships and soccer club fees to sports equipment and clothing. Expenses in this category tend to vary from person to person more than grocery or utility expenses.
12. Miscellaneous Expenses
Last but not least on the list of 12 essential budget categories: miscellaneous expenses. Take some time to think about different expenses you have that don’t cleanly fit into the other categories. Some examples of miscellaneous expenses include:
- Technology such as headphones, a laptop or a smartphone
- Annual fees such as life insurance payments or a Canva Pro subscription
- Dry cleaning
- Clothing
This category is a little bit more difficult to determine average expenses. I find that the best way to determine how much I spent on each category is to look at all my one-off purchases from last year, add the total up and divide it by 12. This way I budget some funds to each month to cover these occasional and sometimes unexpected purchases.
Additional Budgeting Topics
Practical Steps to Take Alongside Creating 12 Essential Budget Categories
Budgeting is a crucial part of creating and executing a solid financial plan. However, it’s equally important you practice other smart money moves. Below are my top steps on other steps you should take to maximize your budgeting efforts.
Set Financial Goals
Budgeting is important, but why are you doing it? It’s important you know why you’re saving all that money. After all, you need to find a balance between enjoying life now and saving for the future. Speak with a financial advisor and come up with a saving, spending and investing plan that works for you.
Practice Frugal Living
Frugal living is a pillar part of a smart financial life. The practice of frugality entails being smart with your finances. A frugal person considers both the price and the long-term value of products and services. Some examples of being frugal include:
- Investing in higher quality cleaning products that last longer
- Taking the time to look for gently used goods at a secondhand store rather than defaulting to a trip to a department store and paying retail prices
Learn and Apply Negotiating Skills
Negotiating is a key aspect of being smart with your finances. If you’ve been a loyal customer of an internet service provider, ask for a discount. Regularly negotiate your salary. If you aren’t being paid what you’re worth, strongly consider looking for higher-paying work.
Consider Taking on Side Hustles and Adding Additional Income Streams
Increase your income by taking on a side or part-time job. Refer to this handy guide I’ve made on the many different jobs you can start today!
Spend Mindfully
Thinking before you spend is essential to staying on track with your finances. Alongside planning ahead and sticking to budgeting categories, slow down and ask yourself whether or not you really need to spend money on that new gadget or item of clothing. Oftentimes, I overspend when I’m tired, hungry or stressed. I find that when I eat proper meals, rest enough, budget and keep my stress at bad, I tend to stay on budget and minimize spending on stuff I don’t need.
In addition to spending mindfully, focus on the simple things in life that bring joy and cost little to nothing. Think about 3-5 experiences you can engage in for the next month. Some ideas include:
- Making a special latte and sipping it slowly on the back porch in the morning
- Shopping for special ingredients and cooking a brunch for the family you don’t normally make
- Going on a long drive in the countryside to let your thoughts wander
- Doing a 15-minute meditation session at home to reduce stress and increase peaceful feelings
Do Quarterly Reviews of Your 12 Essential Budget Categories
You’ve used the 12 essential budget categories, but you also need to review them regularly. Every few months, take a look at how much you spent in each category. Make necessary adjustments to your budgets. For example, if your current grocery budget is $300 but you’ve consistently spent around $400 per month for the last few months, adjust your budget accordingly and reduce spending in other areas.
I like to set aside an hour or two on April 1, July 1, October 1 and January 1 of each year to review my spending for the previous 3 months (January-March, April-June, July-September and October-December respectively). I find that 3 months is enough data to tell me how much I spend in each area of my life.
Avoid Lifestyle Inflation
Another incredibly important aspect of budgeting is avoiding lifestyle inflation, the phenomenon when one tends to spend more as their income increases. For example, when I started making 10% more annually, I tended to spend more money on clothing and takeout. After a few months, I quickly realized that I needed to curb my spending habits. There’s nothing wrong with treating yourself and making some lifestyle upgrades. However, if you’re constantly spending more and more, you’ll reduce your investing and saving potential. Additionally, you’ll eventually feel the pinch and will be constantly rushing to make more money to cover these expenses. Avoid lifestyle inflation by:
- Budgeting for special occasions, services and products within reason
- Ensuring you’re still setting aside enough funds to hit your saving and investing goals – if you’re on track with these, a little bit of lifestyle inflation is fine.
- Thinking before you spend aka. practicing mindful, intentional spending
- Prioritizing long-term financial goals over short-term gratification means you’ll be able to set aside more funds to take care of future you.
Find a Community
Becoming smarter with money is easier when done alongside family or friends. Choose a trusted loved one you can confide in and collectively work to improve each of your financial situations.
Celebrate Financial Milestones
Whether you’re on a low income, are a higher income earner or are somewhere in between, budgeting, saving and practicing frugal living is hard work. Just because you’re trying to become better with money doesn’t mean you can’t reward yourself! Each month, treat yourself to a simple reward for achieving your financial goals that month. Even something as simple as a latte or ice cream cone is a great way to motivate you to keep on track. Don’t deprive yourself. When you go too extreme with saving, you fall into cheap territory. There is a difference between being cheap vs frugal!
A Final Word on the 12 Essential Budget Categories
Planning based on the 12 essential budget categories is a solid way to start or improve your financial journey. Start small with a few essential categories such as food, clothing and shelter. Once you’ve mastered regularly budgeting for these expenses, move on to properly planning for investing, saving and debt repayment. Speak with a financial advisor before making any changes to your budgeting strategy. Most of all, have fun watching your savings pile up!
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Janita is a frugal living expert and owner of Frugal Fun Finance. With over five years of personal experience finding and trying out the best ways to make and save more money, she's eager to share her knowledge. Janita's strategies have helped her save thousands of dollars for funding investments and traveling to over 20 countries.
Janita completed training in personal finance at The University of Western Ontario and McGill University, two prestigious Canadian universities. Her expertise has been shared on GoBankingRates, Yahoo Finance, and NASDAQ.com.
