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Do you want to get your finances in order but don’t know how or where to start? Budgeting can be a great way to monitor your money and begin to understand where each and every dollar goes. And by breaking down your spending plan into different budgeting categories, you’ll be able to understand exactly how you’re doing financially.
In this piece, we’ll review some of the key budgeting categories that you should pay attention to. Let’s get started!
6 major budgeting categories
Each month, when you complete your spending plan, you’ll want to budget for these six major categories:
- Rent/Mortgage Payments
- Transportation
- Food/Groceries
- Utilities
- Insurance
- Debt Payments
Next, we’ll break these categories down one by one.
1. Rent/Mortgage – 30% maximum
Your housing expense is likely to take up the largest percentage of your budget each month. Common financial practice suggests that your rent or mortgage payment should not be more than 28% of your monthly take-home pay.
Ideally, it should be lower than this, but we’ll allow for up to 30% because of the cost of living issues nationwide.
Whether you are better off renting or owning a property is entirely up to you, your money goals, and what your budget says you can currently afford.
2. Transportation costs – 10-12%
Regardless of where you live, you’re going to incur transportation expenses. If you live outside of a major city, you’ll likely need a car to get you around from point A to point B.
Otherwise, you’re likely dependent on some combination of bus and rail travel, which can really add up when purchasing monthly passes over and over again.
This category is for budgeting your transportation needs, not rental cars for vacation travel or anything like that.
But there are other expenses to include here, including your fuel, vehicle registration, and auto insurance premiums.
In total, your transportation expenses should make up about 10-12% of your budget at most.
3. Food and groceries – 10-15%
Inflation in 2022 hit 40-year highs, and price increases were most apparent in the costs of different foods. The prices of meat, eggs, and produce have steadily increased, to name a few examples.
You should do your best to keep your grocery bill as low cost and healthy as possible. And while this is easer said than done, I have written a resource to help you.
Here is how you can spend less on groceries each week.
Your grocery budget is meant to handle of your food expenses, including other food, restaurant food, takeout, and delivery.
How you ultimately spend this money is up to you, of course, but your total food expenses should make up about 10-15% of your budget, including takeout.
4. Utilities – 10%
I hate utilities. In many ways, they are hidden costs. They add up quickly and can drain your budget, just to provide essential services nobody should live without. This budget category is designed to handle bills like the following:
- Electric
- Water
- Oil
- Natural Gas
Beyond your utility costs, I also like to include costs such as cell phone bills and your internet expense into this category, though I keep further luxuries such as cable and streaming services separate.
We’ve written a lot about cutting your electric bill in the past, and these strategies can be very helpful. More generally, though, you may be able to cut your utility expenses by:
- Installing LED bulbs to save on electric
- Changing your electric provider
- Negotiating with your cell phone company (apps like Rocket Money can do this for you)
If you are willing to switch service providers, you may also find short-term promotions for discounted rates on many services that can save you quite a bit of money over time, so make sure to be on the lookout for those too!
5. Insurance – 15% or less
Insurance is a necessity in today’s world. With policies available to protect both your assets and yourself, you’ll likely purchase some or all of the following:
- Auto
- Home
- Life
- Health
These are oftentimes thought of as the core insurance policies
Then, there are other types of policies that you may choose to purchase to protect your other assets, such as:
- Jewelry riders
- Supplemental health benefits
- Flood
- Renters
In aggregate, you should keep this insurance component of your budget to 15% of your budget if you can. Health insurance will make up the majority of this in all likelihood.
One good way to save money on insurance is to bundle services together if you are able to. Companies like Travelers and State Farm thrive off of quoting you home, auto, and even life insurance all in one monthly premium.
If you’re shopping around for insurance, you may be able to save a fair amount of money.
6. Savings and debt payments – 20-25%
Arguably the least fun of all your budgeting categories will be making payments on all of your debt(s). Things like your student loan payments, car payments, credit card debt, medical debt, and other loan payments fall into this category.
Thankfully, you do have options to lower your debt obligations. For example, you may consider consolidating or refinancing your student loan debt with a private lender.
You’ll also need to save money for the future. Generally, it makes sense to start with a six month emergency fund, before beginning to invest for the future. I recommend that you start investing within a workplace 401(k)/403(b) and an IRA, but you should consult with a financial advisor to understand what your best strategy is.
If you find that you don’t have enough money left in your budget to save enough money, you have two options:
- Cut expenses elsewhere in your budget
- Build a side hustle to increase your earnings
Budgeting tips to get started
With these six budgeting categories in mind, I’d also like to present some insider tips designed to help keep your household budget in line.
First and foremost, keep in mind that budgeting is a highly fluid process that will change from month to month. This underscores the importance of saving an emergency fund. Things are going to happen. You’ll need new tires on your car and you’ll need to fix something in your home, and that’s okay.
Preparing for it is the key.
Next, I recommend that you revisit your monthly budget periodically. You’ll want to complete your monthly spending plan in advance of a month starting, but I also recommend that you do a mid-month check-in to see where you may be performing well or lacking.
Finally, my last tip is to keep the process as simple as possible. It is okay to streamline your process. If you do, I recommend the 50/30/20 budgeting rule. Under this methodology, you’ll allocate:
- 50% of your take-home pay for essential expenses such as housing, utilities, health care costs and debt payments (needs)
- 30% would be allocated for wants such as recreation, entertainment and dining out
- 20% of your income should be set aside for savings or investments, as we’ve discussed
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studentdebtdestroyer.com is not a student loan lender.
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By joining our budget coaching incubator, you will get access to the most up-to-date tips and advice for money management. Our team of professional coaches are dedicated to helping you create a budget that works best for your lifestyle, so you can achieve financial freedom. We provide guidance on how to prioritize expenses such as rent or mortgage payments, transportation costs, food and groceries, utilities, insurance and debt payments while still having flexibility in your budget. With our help, you’ll find it easier to manage your finances and reach your long-term goals! Sign up today and let us guide you towards financial success!
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