No two budgets look exactly the same, but they should all include at least these six categories.
Budgeting is a great tool to map out monthly income and allocate funds in a way that sustains comfortable and, ideally, happy lives. The tricky thing about budgets, however, is that they vary so much from one person to the next. While one person may need to budget for a mortgage on a four-bedroom home and the car payment on a Tesla, the next may need to budget for one-fourth of an apartment they share with three friends, plus a bus pass to get around town.
Here, we cover the categories that every budget should include, regardless of individual circumstances and income.
Whether housing means a mortgage on a large home or splitting rent on a small apartment, factor in what you spend each month for a place to rest your head at night. This should include your entire housing expense. For example, if you have a mortgage, include any private mortgage insurance (PMI), homeowners insurance, or property taxes that are lumped into that monthly payment.
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This is another category that can mean vastly different things for different people, but the idea is the same. In this category, set aside the money necessary for getting you from point A to point B on a daily basis. Do you have a monthly car payment? A bus pass? Maybe you rely primarily on rideshares, or live in the city and use a bike to get around. If you have a car, include not just your car payment, but also your monthly allotment for gas.
Groceries are an area where we have a lot of control over our spending. For example, sometimes I go grocery shopping once a week and completely stock my shelves with anything I could want. Other times I only go once every two or three weeks and buy the essentials, choosing to get by on cereal, lunch meat, and sandwich bread.
Whatever type of grocery shopper you are, account for your average monthly spend in this category. But also know that this is a category where you can sometimes cut back if necessary. You can also do things like cut coupons or use a credit card that rewards grocery spending to earn cash back on your shopping trips.
4. Monthly bills
This category covers a variety of things, but in essence, it refers to anything you get a recurring monthly bill for. The most obvious items here are utilities, like your electric, gas, and internet. But it should also include things like:
- Cellphone bills
- Trash pickup service (if you pay for one)
- Streaming, magazine, or other subscriptions
- Monthly memberships -- think gyms, country clubs, zoo or museum passes, etc.
Last but not least, don't forget to include credit card payments. Budget for at least enough to cover your minimum monthly payment, and if you have enough to pay your entire balance each month, even better.
5. Biannual or annual bills
While easy to forget about, the bills that fall under this category can be substantial, so it's important to include them.
This could be things like property taxes if you own a home (and don't pay them as part of your monthly mortgage payments). It could also include things like auto insurance premiums. If you own a vehicle, it's also important to account for the cost of renewing your vehicle registration.
Maybe you have a professional license or certificate that has to be renewed each year, or you pay once a year for season passes to see your favorite football team. Whatever this category means for you, divide your total expenses by 12 to ensure you set aside enough each month to cover the bills when they eventually come due.
6. Fun money
After you've accounted for all the essentials, include at least a little bit of money each month for something you enjoy. Maybe this means new yarn to keep up your knitting habit, an allotment for the salon to get your hair and nails done, or just some extra cash for dining out with friends. At the end of the day, when our work is done and our bills are paid, we need something to keep us happy and motivated, and it's ok to plan to spend a little money on that.
For any of those leftover funds…
You may find you end up with some extra cash. That's great. It's always a good idea to have an emergency fund for those unexpected repair and maintenance costs that unfortunately do crop up. You can take that extra cash and contribute it to a savings account until you have at least the recommended three to six months of living expenses tucked away for emergencies.
If your essential expenses are paid and your emergency fund is padded, then it's an excellent idea to take any additional dollars and contribute them to your 401(k) or IRA, or put them to work in your brokerage account.
As time passes, your career progresses, and hopefully your income grows along with it, you can adjust these categories as you see fit. If one day you find the essential categories no longer take up the majority of your income, you'll have more funds to allocate to fun, recreation, and investing for your future.
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