The Only Three Budget Categories You Need to Stick to Your Budget

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When starting a budget, it can be pretty daunting to work out which budget categories to use when dividing up your expenses.

Should you include a category for every possible thing you could spend money on? Or should you keep it straightforward and only have a few of them?

Both strategies definitely have their pros and cons. What’s ultimately important though is to find a balance between having a budget that’s detailed enough to show what you’re actually spending your money on – and one that’s not so detailed that there’s no way you’ll actually stick to it.

We always prefer to keep things as simple as possible and budgets are no exception. This is mainly because over-complicating your finances makes it far less likely that you’ll continue to manage them properly over the long term.

Which is why we always recommend breaking your spending down into only a few key budget categories.

What categories should I include in a budget?

You basically need to have enough categories so that however your money is used, you can put that use under a specific category.

The aim here is to have a budget that reflects every single dollar that comes in and out of your bank account, so that you can see where all of your money is going to compare this to your spending goals. 

This will then let you easily make any tweaks to your spending habits to better realign this towards achieving your financial objectives.

And while some people recommend having a bunch of separate categories to reflect this, we much prefer to stick to just three basic budget categories.

What are the 3 main budget categories?

The three main budget categories for your spending are:

  • Needs
  • Wants
  • Goals

That is, every single dollar that goes out of your account can be placed under one of these umbrellas.

Budgeting in this way makes it way simpler to track your spending under each category, as you’ll be dealing with only three overall numbers rather than the 150 little sub-categories that can fall under each of these.

And as we mentioned, it also makes it far more likely that you’ll continue to stick to this from month to month. After all, who wants to keep an eye on dozens of budget lines when you can simply have three to monitor and adjust?

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What are the categories of expenses – in more detail?

The slightly tricky part, at least at first, is to figure out which expense falls under which budget category. In particular, a lot of people struggle with the difference between “needs” and “wants”.

This is also a problem that a lot of people have in their day to day spending, especially when they convince themselves that something they “want” is actually something they “need”. Before you know it, your spending is ballooning as those so-called “wants” build-up.

This is actually another reason why using these budget categories can be really helpful for anyone trying to bring their spending under control, as it shines a spotlight on where you’re spending more than you should be.

So to help you do this, here’s a breakdown of each of them.

Needs

Needs are those things that you absolutely have to pay for, no matter what.

They’re also often fixed expenses – or, at the very least, don’t fluctuate too much from month to month.

That doesn’t mean that they can’t be reduced, as they absolutely can. But we’ll get to that further down.

Expenses that are considered “needs” include:

  • Groceries – that is, food you buy at a supermarket, not your bill when you go out to a restaurant
  • Housing costs – this includes your mortgage or rent, housing maintenance, any fees or taxes on your home
  • Insurance – we would include all types of insurance under this category, including health insurance, car insurance, house insurance and life insurance
  • Transport – if you own a car, this could include the gas, maintenance costs (although not unnecessary improvements), registration and parking. Otherwise, if you take public transport, those costs fall under here
  • Utilities – we all know what these are: electricity, gas, water and so on. Having a phone and internet have reached the point of basically being a necessity, so they are fine to include here. Cable charges, however, should be kept out of this category.
  • Healthcare – any required medical expenses can also be placed here
  • Education – your kids’ school fees
  • Household supplies – all those fun purchases like toilet paper, dishwashing detergent and cleaning supplies can all go here
person with calculator creating their budget categories

Wants

These are all the fun things on which it’s great to spend money – but that aren’t strictly necessary for you to survive.

Sure, you could argue that your life would be terrible without Netflix or that you have to go to the gym. And I get it!

But these are also things where, if times became really tough financially and you couldn’t spend money on them, you’d still be able to live.

And that’s the distinction you have to make here: if you really, truly know that you don’t actually need something, it should probably go here.

This includes:

  • Clothing – yes, you need some clothing to survive. But as you presumably have this already then, unless it’s completely unwearable and you’re only replacing it with the necessities, it’s a “want”
  • Entertainment – this can be practically anything on which you spend money to have a good time. So the Netflix and gym subscriptions we just mentioned? That goes here.
  • Restaurants and bars – While at-home food costs can be considered as a “need”, that doesn’t apply to everything you eat and drink. So if it’s out of the house, consider it a “want”
  • Vacations – if you’re saving up for a vacation, that goes elsewhere. But when you’re on vacation and start to splash some cash, that spending should be placed here.
  • Beauty/wellness – sorry, that mani/pedi can’t be counted as a “need”, no matter how much you’d like it to be
  • Other personal expenses – this is basically a catch-all for anything else on which you spend money

Goals

This is easily the most important one out of all the budget categories, as it makes sure that you’re allocating money every single month towards achieving your financial objectives.

You may think that you don’t have any leftover money to allocate here – or at least not enough to do what you want.

But this is exactly the point of a budget: to give you a clear idea of your spending, take control of your money and make sure there’s always enough available to keep moving closer towards your goals.

woman writing in notebook next to laptop assigning expenses to budget categories

This includes key expenses such as:

  • Paying off debt – this is probably the most important one of all, as if you carry any high-interest debt, you’re going to struggle to make any progress towards your other financial goals. This makes it critical that you’re putting money towards this every single month. And note that your mortgage doesn’t fall under this, as it’s generally low-interest enough to be considered a “need”.
  • Growing your savings – perhaps you’re saving up for a vacation, a new (secondhand!) car or some upgrades to your house. Whatever it is, it can go here.
  • Building your emergency fund – you should always have three to six months of expenses saved up in case of a rainy day, so any contributions towards that should fall under the “goals” tab
  • Contributing to your retirement fund – this includes not only voluntary additional contributions but any automatic deductions from your paycheck that go towards accounts like your 401(k)
  • Other investments – if you also choose to invest your money outside of a traditional retirement account, you can also place those contributions here

What are the most simple budget categories percentages?

The method of dividing your expenses between the three main budget categories of needs, wants and goals comes from one of the best budgeting methods out there: the 50/20/30 budget.

This is a super simple, yet extremely effective way to do your budget, as it involves having the objective of dividing your money up as follows:

  • 50% of your money should go towards your needs
  • 20% of your money should be allocated to your goals
  • 30% of your money can then be spent on wants

Why should I do my budget like this?

The advantage of budgeting in this way is that it becomes really straightforward to figure out how much money you should be allocating to each “bucket”.

Rather than trying to play with how much money you can spend on eating out, getting your hair done and buying a new top this month, you’ll immediately know that you have 30% to pool together for spending on all those things.

(Because they’re wants, not needs. Just wanted to clarify that again!)

But remember: once you’ve used up all the money in a bucket, that’s it. So this means no dipping into your goals to pay for your wants, for example.

It also makes sure that every single dollar has a job. 

After all, these are percentages of your after-tax income. Which means after putting all of your money towards each of these expenses, you should have exactly $0 leftover.

(And if you have a negative figure, it means you’re spending more than you’re earning. This is, safe to say, bad news and needs to be something you fix as soon as you can.)

What are the four steps in preparing a budget?

Breaking the budgeting process down into manageable steps will greatly increase the chance of you actually sticking to your brand new budget.

It will also show you how little time is actually needed in order to budget properly, meaning you’re far more likely to continue to do this from one month to the next.

1. Calculate your income

The first step is to list all of your income sources. This could be your salary, any money earned from a side hustle, cash from a one-off sale or dividends paid out on an investment.

Remember that we’re focusing here on after-tax income – that is, what you actually can spend.

man on phone

2. List your expenses

The next step is to list all your expenses. There’s no need to assign them to budget categories yet – just write down what you spent and on what.

This may take longer the first month, but you’ll get the hang of it quickly. Simply going through your bank accounts can help although, if you tend to buy some things in cash, you may have to start tracking these in an app as you go (there are plenty of free ones to do this).

3. Categorise your expenses and work out the percentages

Here’s where the budget categories come into play. This step involves you assigning each of your expenses to one of the three basic budget categories, based on the tips outlined in this article.

And once you’ve done that, calculate the total amount of each category as a dollar amount (or whichever currency you’re using!) and then figure out your spending in each budget category as a percentage of your total income.

4. Review and make a plan 

By having determined each of the percentages in the previous step, you’ll now be able to see if you’re spending too much in one category – meaning you’ll also be spending too little in another.

For example, if 40% of your income is going to wants but only 10% is going to goals, it’s time to assess where you can make cuts to your wants so that this money can be targeted towards your financial goals instead.

That way, you’ll be able to shift these percentages to 30% and 20% respectively, as per the 50/20/30 method.

And this leads you to the last of the four steps in preparing a budget – reviewing and making a plan.

That is, once you’ve seen where you need to make adjustments, it’s time to figure out how to do so.

Perhaps you don’t have to get take out twice a week. Or maybe you could switch your weekly dinner catch up with friends to a coffee.

Whatever it takes, you’ll now have all the numbers in front of you, making it far simpler to see where you can better manage your spending.

Can’t I just use a budgeting app?

You can definitely use a budgeting app to prepare your budget – but you’re still going to need to set spending goals, meaning the budget categories are still helpful even if you track everything through your phone.

The best part of using a budgeting app is easily the fact that it’s on hand at all times. Rather than carrying around a piece of paper to track your spending, which we all know would work for about half an hour, you can simply open up your budgeting app of choice and see where you stand for the month.

woman on phone checking budgeting app

I prefer budgeting apps that can automatically track your spending, but some people like to go for the ones where you enter each expense manually.

That way, you can keep a much closer eye on how your money’s being used in real time – rather than getting a nasty surprise if you only open the app every couple of days.

Which budget app is best?

There are a bunch of budget apps out there, although I always recommend Personal Capital

All you have to do is connect all your banking and investing accounts to your Personal Capital account and it will automatically tell you – for free – how you’re progressing and what changes you could consider making to your finances.

While there are other apps you might want to take a look at that focus solely on budgeting, I really like being able to see my complete financial situation in one place, including how my investment accounts are going, and Personal Capital is easily the best in the business for this.

Related: The 13 Best Budgeting Apps for Couples

What are five characteristics of an effective budget?

While different budgeting methods may work better for different people, they all have some main features in common.

1. Realistic

It’s all well and good to want to track 100 different spending categories. But if you know you’re going to give up on that in a week, a better budget for you is a much simpler one that still covers all the ways your money is being used

2. Allows for financial goals

No matter how tight things are at the moment, any good budget must include some money being allocated to your financial goals.

Whether it’s building an emergency fund or paying off credit card debt, you’re not going to be able to take control of your finances without making sure that you’re working towards your money-related objectives every single pay cycle.

3. Flexible

If your budget says that you can only spend $198 on groceries this month and then you accidentally spend $202, this shouldn’t be considered a budgeting failure.

Instead, an effective budgeting method like the 50/20/30 budget lets you move expenses around within the “needs” category, so that extra spending can simply be taken from another expense within the same bucket.

4. Lets you have some fun

Even if times are financially tough, you should always aim to give yourself at least some money for fun things.

Depriving yourself of everything for too long makes it much more likely that you won’t stick to your budget. Instead, even allocating a small amount of money to these kinds of expenses will make your financial management journey far more doable.

5. Gives every dollar a job

The aim of any effective budget should be to make sure that you know where every single dollar is being used – and, in turn, to let you make adjustments to your spending going forward so that this money is being used more effectively.

After all, if any of your income is being left out of the budget, you’re less likely to be monitoring where it’s actually going, leaving you open to wasting it.

FAQs

How much should I budget for household items?

Household items can fall under needs or wants, depending on what you’re buying and why.

Things like cleaning products, for example, will always be a need. Unless you’re Monica Geller and even then, it’s a stretch.

Where it becomes a bit more of a grey area though is when you’re buying things like furniture that could fall on to either pile.

Need or want?

Say you’re buying a new sofa. Are you getting one because you’ve just moved out of home and need one or because your other one is beyond repair? Then that’s probably a need.

But if you’ve just decided to redecorate or saw a great deal on a sofa that you just had to have, this starts to wander into “want” territory.

It’s up to you to determine which budget category your household purchase falls under but, as a general rule, it’s better to be conservative and assume most purchases are “wants”, unless you can clearly justify otherwise.

And once you’ve chosen the right budget category for the item you want to buy, then you can figure out how much to budget for it.

couple working out their budget categories on laptop

This is because you’ll now be able to check the relevant category and see how much money you have left in it. For example, if you’ve decided the sofa is a “want”, you’ll have to calculate how much you want to spend on your other wants to determine how much you can put towards your sofa. 

Alternatively, you may have to see how much you have to make cuts on other “wants” to afford the one you, well, want.

However, at all times, the overall goal should be for the total amount of spending in one budget category to add up to the corresponding percentage of your income.

Related: The Household Budget Percentages You Should Be Using

What are the grocery budget categories?

We mentioned above that groceries are “needs”, which is true in almost every case. That said, if you’re being laser focused on getting your spending under control, you may want to make the extra effort of dividing your groceries between wants and needs.

For example, milk for your family for the week? That’s a need.

But chocolate milk as an after-school treat? There’s definitely an argument to be made that that’s a want.

At the same time, our mantra around here is simple is best.

That is, rather than taking the time to individually divide up each purchase on your shopping list, we’d suggest that your time is better spent working to reduce your overall spending on groceries.

In fact, this is one of the best things you can do for your spending, given that food costs are usually one of the top three expenses for most households alongside housing and transport.

So, instead, why not try some other ways to cut your spending on groceries. We’ve listed some of our favorites below.

Use a cash back app

Cash back apps are some of the best ways to save money at the supermarket, as they basically work by giving you an in-built discount on practically everything you buy.

We always recommend Ibotta. It’s completely free and gives you money back at over 500,000 retailers on things like groceries, beauty products, medicine, clothes and more.

And the free $20 welcome bonus is pretty good too.

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Meal plan 

Preparing a meal plan each week is a great way to save  money, as it lets you build meals around whatever you already have in the cupboard. 

Plus, it can help make sure that you’re using every single grocery item you buy.

You can absolutely create a meal plan yourself but, if you can’t be bothered, it’s worth checking out $5 Meal Plan, a website that charges only $5 per month to send you a full four-week meal plan.

Try it first by getting a free two-week trial of $5 Meal Plan here to help you get started.

Always use a shopping list

By making sure you never step foot inside a supermarket without a list, you’ll easily be able to save hundreds of dollars on your groceries over time.

The trick is to commit to only buying what’s on the list – so no being tempted by candy at the checkout.

This should be easy to do once you start meal planning, as you’ll be able to build your shopping list based on what you’re going to be cooking for the week.

And not only does it help you to avoid buying extras, it also reduces your food waste as you’ll only be buying exactly what you’re going to eat.

Which is further money saved!

How do you classify personal expenses?

Personal expenses basically include anything that isn’t a need or a goal. This means it could theoretically be considered another term for expenses that are “wants”.

That may sound simple, but this is often the question that trips the most people up when trying to allocate money to their different budget categories.

woman on computer creating a budget

In particular, when you see that you have that big 50% bucket to spend on “needs”, it can be tempting to put something in that category when it really should be a “want”.

The crux of it is, as with most budgets, self-discipline is key.

That is, ask yourself when categorizing different expenses – and especially when deciding what’s a “need” – whether it really, truly could be considered that.

Or to use the more straightforward example we mentioned above: If you don’t spend money on this thing, will your life be at risk?

If the answer is no, it’s probably a personal expense and thus not a need.

What are examples of flexible expenses?

Flexible expenses are those that can be reduced or cut altogether without any major issues.

That is, it’s basically another term for “wants”.

So some examples of flexible expenses are:

  • Your membership fees for your amateur baseball team
  • Your Friday night after work drinks costs
  • Haircuts
  • Your Netflix subscription

It’s important to keep in mind that just because an expense can be changed doesn’t immediately mean that it’s considered a “flexible expense”.

For example, your electricity bill could be reduced by switching providers or installing more energy-efficient light bulbs.

But as electricity is a necessity, the fact that the monthly expense can be flexible doesn’t make it a “flexible expense” for these purposes.

Similarly, your Netflix subscription cost is likely the same from month to month, so could be considered inflexible. However, as you could cancel your subscription and your life would basically continue as is, this is what puts it within this category.

Final thoughts

Having a clear, workable budget that you’ll actually stick to depends on a few different factors, including a healthy dose of commitment on your part.

But simplifying the process is also a major part of this, which is why we recommend reducing your budget to just three main budget categories.

By keeping it simple yet effective, you’re giving yourself the best chance possible to get your spending under control and start focusing more on your financial goals. And this, in turn, will put you well on the way to securing your financial future.

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