When it comes to building wealth, one of the first steps you should take is creating a budget. Once it’s in place, you’ll have a blueprint for living below your means, saving, and creating a better financial future!
Despite having a budget, many people still are unable to build independent wealth. Most often, they struggle to stick with their plan, have set unrealistic expectations, or forgot to include key budget categories altogether!
As simple as budgeting may appear, it’s not one size fits all. While the core components of a budget are the same, everyone’s income, savings, and monthly expenses are different. Not only that, but your priorities and financial goals are unique to you as well.
Nevertheless, there are 8 essential budget categories in every spending plan. By including them all, you’re more likely to be on budget. In addition to that, you’ll enjoy a high quality of life today while also preparing for the years that have yet to come!
Here are 8 spending categories to include in your budget that ensure you’ll build wealth!
Budget Category #1 – Housing (~30%)
For most Americans, the largest budget category is our housing expense. Regardless of whether we rent or own, we’re most willing to splurge on the place we call home!
In today’s culture, a home is the ultimate status symbol. For most people, it shows the world that they’ve made it and are successful which often drives them to have the most expensive one possible!
Oftentimes when this happens, people overextend themselves. They rent or buy homes at prices they can barely afford, causing them to be house poor. Because of this, there’s now less money for their other types of expenses. Not only does this affect their lifestyle, but it also may handcuff them to a job for years to come!
Common Expenses in the Housing Budget Category:
- Mortgage/Rent
- Insurance
- Property Taxes
- HOA dues
- Reserve funds for future repairs and improvements
- Utilities, maintenance, and other potential hidden costs
Since this spending category takes up the largest percentage of your income, it also gives you the greatest opportunity to save! By reducing your housing costs by a small percentage, you’ll see the most significant savings. On top of that, you’ll have more money to put towards your other spending categories, many of which can improve your mental, emotional, and financial well-being!
Spending Category #2 – Savings (~20%)
Unfortunately, many people are forced to work well into their 60s, if not later. For them, saving money was likely never a priority while spending and hoping that something would be leftover, was!
At some point, you’re no longer going to want to work or heaven forbid, you’re unable to. When this day comes, you’ll want greater control of your time.
To have financial freedom, you have to save money throughout the accumulation phase. Once you have it, you can use it to:
- Start a rainy day savings account
- Payoff credit cards and other debts
- Contribute to your nest egg
- Invest in stocks, bonds, and alternative assets
- Save for your child’s college education
At first, one of your top priorities should be establishing an emergency fund. Once it’s funded, your extra money needs to get put to work. Otherwise, inflation causes it to lose value.
To ensure this doesn’t happen, determine the next best use of your money. Likely, it will be paying down debt, investing, or a combination of both!
By making savings a priority, you’ll start securing your financial future. But without it, you’ll be putting it at risk!
Budget Category #3 – Transportation (~15%)
For most workers, transportation is another important budget category. Spending here allows them to commute to their jobs, so they can earn income. Without transportation or pay, there wouldn’t be any money to spend on any of these budget categories whatsoever!
While transportation is a necessary expense, you don’t have to go overboard on it. Afterall, every vehicle can get you from Point A to Point B; some will just do it at a much higher cost!
Instead of buying a new vehicle, consider buying used. There are plenty of models that are safe, reliable, and fuel-efficient; they just don’t have a large upfront depreciation expense!
Common Transportation Expenses:
- Vehicle payments
- Maintenance/Repairs
- Gas
- Insurance
- Parking fees/tolls/registration fees
- Public Transportation
- Ridesharing services
Spending Category #4 – Food (~10%)
When it comes to saving money, most people can spend less on food. It doesn’t matter whether you’re eating out, getting delivery, or overbuying; there are ways for you to stop wasting money on food!
In fact, Feeding America estimates that nearly 40% of all food in the US gets thrown away. While farmers, distributions, and grocery stores play a role; consumers are often the most responsible party!
Many people overspend on food because they don’t have a meal plan or they buy too much. Instead of buying only the produce they need, they buy in excess which causes it to spoil long before it ever has the chance to be consumed!
Common Items in the Food Budget Category:
- Groceries
- Dining Out
- Food delivery
- Beer/Wine
- Household items*
For ease, you may want to include household items, like detergents and cleaning products in this spending category. Especially, if you buy them at the same time and place as you do your groceries.
To save money on food, think in terms of what you need and less about what you want. For instance, gourmet food items and premium wines aren’t a necessity. They’re splurges and lifestyle choices that should be included in one of the other budget categories, instead.
Budget Category #5 – Insurance/Medical (~10%)
Throughout their careers, many workers ignore their health. They get so engulfed in their work and getting ahead that they forget to take care of themselves. After decades of this and as stress mounts, something happens that forces them to make their health a priority!
Regardless of your net worth, being in good health makes you wealthy. Given that it’s one of only a few things that money can’t buy, it’s important that you take extra good care of it!
Common Expenses in the Insurance/Medical Spending Category:
- Insurance premiums
- Co-pays
- Doctor Visits
- Medicine
- Minor medical treatment
Budget Category #6 – Personal Spending (~5%)
Just like your health, taking care of yourself is also important to your overall well-being. Not only does this budget category help you look good, but in most cases it causes you to feel good about yourself as well!
Studies show that when people feel good about themselves, they’re also happier and more confident. With confidence comes productivity which also aids in reaching your most important goals!
Common Expenses in the Personal Spending Category:
- Clothing
- Self-care
- Haircuts
- Gym membership
- Toiletries
Personal development can also be included in this budget category. After all, learning new skills, taking classes, and bettering yourself can all boost your self-esteem as well!
Spending Category #7 – Lifestyle Expenses (~5%)
If you’re like most people, your lifestyle expenses are the most important of all the budget categories. It’s closely tied to your sense of happiness and quality of life!
Lifestyle Expenses Include:
- Movies, concerts, entertainment
- Hobbies
- Travel
- Fun money
- Gifts
- Pets
- Social events
- Special treats
Even though some people spend large amounts of money on their lifestyle, they’re still unable to make themselves happy. Most often, money isn’t the problem; it’s low job satisfaction, limited free time, and too few quality relationships.
If you need a boost, determine what a high quality of life means to you first. Then, set goals in each area of your life and start working towards them. You’ll likely find that as soon as you do, you won’t just feel better, you’ll also be back on the up and up!
Budget Category #8 – Miscellaneous (~5%)
Budgets have a bad rap. They’re often viewed as confining and restrictive which can limit your amount of fun. But with a miscellaneous spending category, you have a buffer that allows you to spend at your discretion!
The miscellaneous budget category can be used however you want. Some people use it as a buffer, catch-all, or to cover expenses that didn’t fit into any of the other spending categories. But, it can also cover overages, irregular expenses, or anything else you want for that matter!
Common Miscellaneous Expenses
- Overages in another budget category
- Charitable donations
- Random expenses for living in the moment
- Savings for a future big-ticket item
As straightforward as most of these budget categories seem, some will overlap. For example, a gym membership could be included as a health, personal, or lifestyle expense. But, it doesn’t matter so much where it’s included, just that it is!
Also, your spending categories may differ someone from the ones above or you might have additional ones to add. For example, if you have pets, kids, or other responsibilities you’ll need to incorporate them into an existing budget category or add a completely new one.
While these 8 budget categories serve as a framework for spending money, the amounts are not set in stone. After being on budget for a few months, try switching it up some. By then, you’ll have found which spending categories are most important. Favoring them will allow you to fully enjoy life as well as the process of building wealth!
Which budget categories should you be spending less money in? Comment below
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