By Jordan Watts
An effective household budget does more than just control your spending—it ensures you can enjoy life to the fullest. Beyond paying monthly bills and squirreling away money for your retirement savings, a household budget allows you to set and achieve financial goals that will bring real value to your life. Whether that means a week-long tropical vacation, buying a house of your own, or simply upgrading your monthly Netflix subscription to ad-free, it is entirely up to you.
To achieve those goals, though, you’ll need to create home budget categories that account for your dreams and necessary monthly expenses. Before you can begin achieving this type of financial success, you’ll need to create a budget and determine your personal budget categories.
All monthly budgets start with take-home pay, which is the money you bring home from your paycheck after accounting for taxes, insurance premiums, and other deductions. While there is no one-size-fits-all budget, there are a variety of free budgeting tools and apps available.
Consider what monthly budget method will work best for your needs. Do you like to know where every dollar is going? You might want to consider zero-based budgeting. Are you struggling with debt payments and bad spending habits? The envelope stuffing method might help you reach your savings goals effectively.
Regardless of what type of home budget you choose you’ll need to determine your personal budget categories next.
Budget categories are expenses grouped by a theme that makes sense with your personal spending. Creating a budget categories list can help you sort through the types of expenses you’re responsible for and provide you with a clear picture of your spending habits. Budget categories also make discretionary spending crystal clear, helping you to prioritize essentials and save money where you can.
Whether you live alone, with family, or with roommates, your budget categories should be a reflection of the personal finance goals of all contributing members. By tracking your spending within these categories you can often reduce financial stress and see rapid improvements in your savings accounts
Essential budget categories are required for a functional and healthy home. Housing, utilities, food, and transportation are all non-negotiable and essential budget categories, but this doesn’t mean that they’re all fixed expenses.
Housing covers the money that it takes to keep a roof over your head each month. This includes everything from rent or mortgage payments to property taxes, HOA dues, and home maintenance costs. Some folks also include renter’s or homeowner’s insurance premiums in this budget, as well.
Either way, housing expenses are typically a fixed expense and one of the largest expenses at that. You can expect these to account for 25%-35% of your budget.
Utilities are another high-priority category for your budget categories, allowing you to live in a comfortable and functional home. Expenses like electricity, gas, water, internet, and trash all fall into this category.
While utilities are often irregular expenses, especially with electricity bills varying by season, these bills are still unavoidable in most cases. That said, there’s no harm in ensuring that you cut costs where you can.
By monitoring your household energy efficiency and regularly comparing electricity plans and providers you’ll ensure you’re getting the best deal. In states with a deregulated energy market you can shop around for the best electricity plan for your home with EnergyBot’s Comparison Tool.
Still, financial experts advise that the average family should expect to spend 5%-10% of your monthly expenses on your utilities.
Whether you take a plane, train, bus, or bike, we all have to get places and that costs money. Transportation costs include public transportation, your monthly car payments, gas, car insurance, and unexpected expenses for maintenance.
Expect to spend about 10%-15% of your budget on the cost of getting where you need to be each month.
Are you cheffing it up in the kitchen at home? Or, are you the biggest foodie in your local restaurant scene? Either way, we all have to eat. While food and groceries are considered an essential expense, it’s up to you whether or not you want to include dining out in your food budget category or in your entertainment budget.
Typically a food budget will account for 10%-15% of expenses in a month for an average family, but this is an incredibly variable expense.
They say that you can’t put a price on good health, but that doesn’t mean you shouldn’t include health care costs in your budget categories. While health insurance can offset these expenses it typically doesn’t cover everything and even health insurance premiums can get pretty hefty.
At the end of the day, you’re bound to have some out of pocket costs and it’s wise to account for these ahead of time so you’re not dipping into an emergency fund. This category includes everything from annual checkups to clinic visits, prescriptions, general medicine, and serious medical expenses.
Out of pocket care costs are also highly variable expenses, even if your health insurance is a fixed expense. To be safe, you would be wise to budget 5%-10% each month.
Personal budget categories tend to be non-essential monthly expenses that you can cut or reduce if necessary. Entertainment and personal care expenses both fall under this category.
The saying goes “Work hard, play hard,” and having a healthy work-life balance is key for most folks to enjoy life. That’s where entertainment and leisure expenses come into play. This budget category can include an endless number of things, including those previously mentioned tropical vacations, premium Netflix subscriptions, and more.
A good home budget should help you to spend your money where it matters to you, so this is the place to really thrive. However, it’s wise to still be mindful of your spending, especially as this is one of your most flexible expenses.
While there is no set amount you should spend on entertainment and leisure, make sure you’re being thoughtful about your purchases.
Of all the budget categories up until this point, this one serves as the biggest catch-all for a variety of needs and wants, that all fall into discretionary spending. Everything from gym memberships to new clothes and shoes, haircuts and hobbies fall into this category.
You might even consider some of these purchases to fall into necessary expense categories– and that’s fine! The point is that you should treat these purchases with similar thoughtfulness as entertainment and leisure; if you have the disposable income to afford them then we certainly aren’t going to tell you how you should spend money. Just remember that most things on this list could be cancelled or cut back on in the case of a real emergency.
Beyond your physical wants and needs, categories for your financial obligations can help you to achieve financial stability in the long run. Categories that fall under financial obligations include debt payments, retirement accounts, and other savings or investments.
Did you know that almost 80% of Americans carry some sort of debt? While not all of this debt is necessarily harmful, it’s important that those with student loans, credit card debt, or personal loans take it seriously.
Debt repayment is essential for achieving financial goals and saving money, as debt repayment can often stretch your budget incredibly thin. The quicker you can get debt, especially high interest debt, the sooner you can reclaim that money to improve your quality of life.
Paying yourself first doesn’t mean splurging on unnecessary and trivial purchases, it means investing in your long-term savings to ensure strong financial health. Consider building up several different savings and investment accounts, including a(n):
Of these accounts, everyone should have an emergency fund to cover unexpected expenses. Life happens and you don’t want to be caught financially unprepared– an emergency fund will ensure that you have the resources to navigate difficult situations beyond what insurance protects.
Expect to save at least 5%-10% of your monthly income for your savings and investment category.
Remember your personal budget is not limited to the categories we’ve presented in this article. Feel free to add other categories as you see fit to meet the needs of your personal finance management. Some other categories to consider, based on your personal needs, include:
As you make more money you may find that your budget percentages and total spending evolves. This is natural. Just ensure that your personal spending continues to align with your financial goals and allows you to meet your daily needs.
Make sure to track your spending consistently to help stay on track and adjust as necessary. By checking you financial plan regularly you can ensure your budget categories stay relevant and aligned with your financial goals.
Ready to save with your home budget? You can start by comparing electricity rates with EnergyBot. Customers save an average of 20% on their monthly electric bills.
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