Whether you like it or not, budgeting is essential for financial success, and mastering budget categories is the first step towards a good budget. By being aware of the various categories of items you could spend money on, you can determine which are relevant to you and your financial circumstances. 

The 4 Four Primary Budget Categories

1. Your Finances for the Future

What you do today will have an impact on your financial future. Therefore, it’s critical to set aside money in your budget for future needs. Among the categories in this group are: 

• Contributions to retirement accounts, such as 401(k)/403b/IRA 
• Investing outside of retirement (e.g., index funds) 
• Account for health savings (HSA) 
• Fund for emergencies 
• Paying off credit card debt 
• Repayment of student loans 
• Additional debt repayment

Why It’s Crucial to Make Plans for Your Future Self

You may have heard the phrase “pay yourself first.” It needs to be a constant component of all your plans. This is why planning ahead is the focus of the “finances for your future self” category. Still, what does it mean to pay yourself first? 

If possible, allocate a percentage of your earnings towards both your emergency savings accounts for rainy days and your retirement account for your future self before you pay any bills or go shopping. 

Planning for your future self will ensure that you can enjoy retirement and not be reliant on the government or your children for care. Time passes by so rapidly. In the event of an unforeseen need, having an emergency fund—or even a rainy day fund—will provide you with a safety net so you can rely on your emergency funds rather than a credit card or other debt.

According to Money.co.uk, almost two-thirds (65%) of the UK citizens are reported to be saving towards retirement, with those aged between 25-34. Therefore, it’s crucial to include this in your budget in case you encounter unforeseen expenses. The funds to pay off any debt you have, such as credit card debt, auto loans, personal loans, college loans, etc., are also included in this set of categories. 

It’s important to pay off debt as soon as possible to focus on accumulating wealth. Although it might not seem like it, paying off debt is really about the future because it will provide you with greater financial security in the long run.

2. Essentials

The essentials are those things that you cannot live without or postpone. They should be at the top of your list of budget categories as they are necessary for maintaining a good quality of life. In your essentials category, you would have: 

• Rent or mortgage payments utilities, such as internet, electricity, and water 
• Budget for groceries and food 
• Car payments and/or transportation expenses tenants’ insurance insurance for homeowners taxes on real estate 
• Health coverage vehicle insurance 
• Life insurance, such as whole or term insurance insurance for disabilities dental treatment 
• Costs of childcare pet food 
• Essential personal hygiene products

Identifying Your Essential Needs

Your essentials are, as mentioned earlier, the items you need to survive. However, money for shopping or getting your nails done is not included in this category as they are not necessities. 

Essentials, on the other hand, focus on the categories that are vital, such as food, clothing, insurance, and rent or other housing expenses. Your non-negotiable expenses are your necessities, and you should prioritise them as soon as you receive your income.

3. Life Goals

Among your life goals are things like saving money for items you might wish to pay for later in life to improve your quality of life, such as retirement. “Life goals” is a crucial category to include in your budget, even though it’s not as essential as groceries or auto insurance.

• Savings for a child’s college tuition
• Training or certifications to support your career goals
• Savings to start a business
• Savings to relocate to a different country or city
• Down payment on a house
• Home improvement projects and repairs
• Contributions to worthy charities

Setting Personal Goals

Your life goals may include savings for your business, mid-term savings and investments for the next ten to fifteen years, savings for a home purchase, college funds, and so on.

I recommend opening separate accounts to save money for your various life goals. Personally, setting up automated deposits for specific goals has made it easier to manage my finances! 

4. Miscellaneous 

Everything else considered non-essential is anything that isn’t necessary and isn’t being saved for a specific goal. However, this category often provides the greatest enjoyment and enhances the quality of life!

• Entertainment such as cinema tickets, concert passes, etc.
• Gym membership
• Eating out in restaurants, coffee shops, and fast food establishments
• Holidays
• Gifts for birthdays, anniversaries, weddings, and extended family and friends
• Subscriptions to cable or streaming services like Amazon Prime, Hulu, and Netflix
• Hobbies such as gardening and crafts
• Self-care, including things like getting a massage at a spa or having your nails done

Fun Money Should Be a Part of Everything Else

The funds designated for “everything else” are your indulgence. It’s the money you use to travel, enjoy yourself, shop for things on your wish list, and engage in other activities that are part of living life to the fullest.

It’s important to have a category like this because, despite paying your bills and pursuing your objectives, you still want to enjoy your money occasionally. This category encourages you and gives you a chance to treat yourself for your hard work. It could include things like going to the cinema, dining out, buying birthday presents for friends, and other similar activities.

When creating your budget categories, use percentages. Once your list of budget categories and subcategories is clear, assigning a percentage to each group is a smart idea. It’s unlikely that you’ll allocate the same amount of money to each group, as your income will be distributed differently across the groups.

Conversely, understanding roughly what percentage of your income goes into each category is essential for managing your money well and can assist you in developing better spending habits. 

Below are some rough guidelines for how your money can be allocated to each of the four primary areas described above. However, the percentages may vary for you depending on your unique spending patterns and objectives.

• Financial planning for the future: 20 percent or more
• Essentials: 50 percent
• Life goals: 15 percent
• Everything else: 15 percent

Remember that you can adjust these budget category percentages based on your deadlines and objectives. Your budget should be tailored to fit you individually and serve as your guide for managing your finances so you can accumulate wealth. Be sure to look at our budget example.

If your budget categories change, that’s perfectly fine. Selecting the categories for your budget is an ongoing process. Budgets are dynamic and may need to be adjusted to suit your needs at any time.

The four primary budgeting categories will almost certainly always need to be included, although you might need to modify the subcategories. Therefore, develop the habit of regularly reviewing your expenditure to ensure that it aligns with your goals, objectives, and list of budget categories. 

If Your Primary Goal is Debt Repayment, How Do You Organise Your Budget’s Categories? 

Instead of making the minimum payment each month, you should aim to pay down as much of your debt as possible. Paying off debt may therefore require you to make smaller contributions to your various budget categories.

For instance, you might need to cut back on expenses for entertainment and travel and use the money saved to pay off your debt as quickly as possible. As with all financial matters, discipline is necessary to follow through on your plan. 

It is highly recommended to have an accountability partner if you are initially struggling with your strategy. Speak with a friend to get help; everyone needs a boost once in a while.

How Many Budget Categories Should I Include? 

The number of categories in your budget will vary based on your spending, objectives, and indulgences. Nevertheless, it makes sense to create categories for:

• Long-term debt repayment and savings goals for your future
• Your necessities and requirements
• Other aspirations, non-essentials like holidays, indulgences, or leisure funds

These primary categories can then be divided into more manageable subcategories. While there is no ideal number of categories, it is advisable to begin with these four primary ones.

Which Four Categories Make Up a Budget? 

A budget is divided into four primary categories: future-self funds, necessities, life goals, and everything else. The concept behind each category remains the same, even if you refer to them differently, such as “discretionary spending” or “retirement and savings.” 

While the subcategories you select under each main category will vary based on your costs, goals, and lifestyle, you will likely need all four of these categories to create a balanced budget. For example, you may have subcategories for your emergency savings, student debt repayment, and 401(k)/IRA under your primary category, “Finances for your future self.”