Ask anyone what their number one advice for financial management is, and they will say Making a Budget. And that’s because budgets are such powerful tools.
No matter what you financial situation is, and what your financial goals are, making a budget is essential. Budgets help you reach your financial goals, simply by allowing you to track your spending.
But that doesn’t mean budgets are simple. There are so many budgeting methods, some of which are quite complex. And of course there is no right or wrong way to budget and it totally depends on what suits you.
But I can tell you one thing. You do not NEED a million categories and make it more complicated than it needs to be. I have tried a couple of methods, but none of them made much sense or were too much work to begin with. Finally, I settled on a really simple budgeting method and here is how it works:
You divide every expense that you make in a month in these ctaegories:
Savings & Investments:
This is probably the most important budget category. And we swear by the save first, spend later rule. We use credit cards only to earn points, but each month, we know hoe much credit we can put on the credit card. In order to be able to pay it when it’s due and not go into credit card debt. This rule has saved our asses so many times. Not even kidding.
Living within or below your means is a great habit to master when you are an adult. And quite an important one too. Otherwise before you know it, you are buried under debt.
And even if you are in debt, these are usually the debts that have the highest interest rates and it is advisable to pay them off first. More on that in another post.
But saving some money each month and investing comes first and then come the other expenses. And one thing that really helps us do that is treating the savings and investments as an expense. Consider that this money is gone and you don’t have it now. Now whatever is left, you can only spend that. For the savings we have quite a few categories, but I won’t go into those details right now.
GROCERIES & Other consumables:
This monthly expense category includes everything that is a consumable product. So groceries, soaps, detergents and other cleaning supplies, paper towels etc, everything goes into this category. This works really well for us because we usually buy all these things together anyway. So putting all that expense under one category is such a time saver.
Now, I have seen some people include their clothing etc in consumables, but we don’t because we don’t buy a lot of clothes on a monthly basis. But I guess it’d make sense for families with kids.
This category also includes eating out or take aways because that’s essentially a consumable. We also include our dog’s food in this category along with any medications that he gets.
Any expenses that are related to housing, go into this category.So whether it is your rent or mortgage payments, loan payments etc go here. Some of the expenses that we document in this category are:
- Rent Payment
- Mortgage Payment
- Electricity Bills
- Water & other utilities
- Home insurance
- Cable and Wifi
Insurance and loan Payments:
We club these two together because they are both big payments and needs to done first as and when the paycheque rolls in. So all the insurances except house insurance or renter’s insurance and all the loan payments goes in this category. Some of the things we include are:
- Car Insurance
- Health Insurance
- Credit card payments (essentially a loan)
- Student loan Instalments
- Home Loan instalments
Week-ends and Recreational Activities:
This is where all our road trips and recreational activities come in. So any expenses that we do over on the weekends, like road trips, Shopping, movies , bowling etc all come under this category.
Yes, shopping comes under this budget for us, because the only shopping we end up doing is during the weekend. We aren’t big online shopping fans and think that online shopping is such a waste of time that you keep adding things to your cart, only to abandon the cart. That’s what I used to do anyway.
So everything from the weekends is under this category except the food that we eat. That of course is documented under the consumables category. Hope that makes sense.
Travel & Travel things:
Each month, we set apart some money for our travel plans and this is documented as a saving towards our travel fund. Whenever we plan a trip or book tickets or accommodations, it goes from this budget.
But on months when we aren’t booking any tickets or travelling, we simply add money to this budget and treat it as untouchable. Travel is one thing that we both are really passionate about. it could be something else for you. So, whatever it is that ignites your passion, save some money aside for that.
And by travel things, I mean any bags/ travel gear that we buy for our upcoming trips is documented as an expense under this category. Even if it is a clothing item.
What’s also included in our travel category is all the tech that we buy for taking photos or videos. So any cameras or extra batteries, microphones, SD cards etc all come here. And that way, everything travel related is all under one place.Of course we don’t have these expenses on a monthly basis, but it works well because it allows us to look at the bigger picture at the end of the year.
So these are the 6 budget categories that we have. And honestly, we haven’t ever felt the need for any other categories. And this budgeting method is so simple to use and works so well for us.
You don’t need a complex budget with over 100 categories that is overwhelming. You need something simple that you can wrap your mind around. And for us, this budgeting method is it.
Hope you found some of these tips helpful. What is your favourite way to budget? Let us know in the comments.