How Many Budget Categories Are Needed?

One common question I get from people trying to create a budget for the first time, is "how many budget categories do I need?" A great question for sure, but I also think it's the wrong question to be asking. Short answer: As many as it takes...

On the budget spreadsheet you get for signing up for updates there are 79 sub-categories and 11 main categories.

Budget Categories for budget spreadsheet
Budget Categories for budget spreadsheet

Why so many budget categories?

When you first create a budget, the hardest part is making sure you've got all possible expenses covered, lest you forget something that throws a wrench in your budget during the middle of the month. You want to be proactive with creating a budget every month, instead of just tracking your expenses and trying to reverse engineer your spending.

But, being proactive means you've go to take time to sit down and really think through which budget categories you'll need for the upcoming month.

It seems overwhelming at first, but as time goes on, some of those pre-determined categories can prove to be very useful when you forget things like car registration, or insurance that is due quarterly, or every six months.

In our situation, the bank that owns our mortgage doesn't offer escrow, so we have to save for our property taxes on a monthly basis. If we had to come up with a year's worth of property taxes ($3,000+) in one month, we would be frantic!

Deciding What Budget Categories You Need

YNAB budget categories
YNAB budget categories

^This is an example budget from YNAB^

Depending on what budgeting tool you are using, it may be easy to add or delete categories (YNAB makes this SUPER easy). If you're using my budget spreadsheet, it's not so easy to add/delete rows without changing a bunch of formulas. However, you can simply change some of the category labels that you don't need and re-name them to your liking.

For instance if your water and trash are in the same bill every month, you can change "water" to "water/trash" and ignore or delete the trash description below. Just be proactive in thinking through which budget categories you change or delete in case you need them some day in the future. It's good to slow down every month to think through if there are upcoming expenses that weren't there the previous month.

And if you forgot to save for Christmas, you're likely experiencing some panic with how you're going make it all work this year. So, start saving for it now! And put it in your monthly budget for all of next year.

How to decide on your budget categories

This is a tough question! Every personal budget or family budget is different, and so each one will have different categories in the end. What I typically suggest when working with people setting up their first budget is to change the labels to make sense for them. Because bottom line, if you can't remember what the money in budget category X covers, then the budget wasn't effective.

Use as many budget categories as you need to ensure you've covered all of your expenses, and month after month, fine tune them to suit your needs.

How do you approach your budget categories?