If you want to simplify the process of managing your finances, you might want to take a look at your current budget categories. These are the groups of expenses that you are spending on. Sometimes, people find it tedious to manage their finances successfully. All the spending details are too overwhelming to keep track of. If you have a full-time job, it can be difficult to keep up with everything. Fortunately for you, budgeting does not have to be tedious nor should it be difficult. You can make it simple so you will not fail in your budgeting efforts. When you fail to budget, that can lead you to make a lot of mistakes while making important financial decisions.
According to reports, a lot of people are feeling financially secure but 1 out of 4 had to skip needed medical care or retirement contribution because they cannot afford it. If you have found yourself unable to pay for necessities, you might want to reconsider your financial management strategies. If you are skipping on much-needed expenses because you cannot afford it, something has to change. You can start by looking at your budget plan. There is a high chance that you are not following or using it properly.
In case you find that your budget plan is hard to follow, you might want to simplify it. That will make it easier to stick to.
5 budget categories that make financial management simple
The best way to simplify your budgeting efforts is to lower the number of expenses on it. The idea is to identify the 5 budget categories that will group your multiple expenses. Every financial transaction, big or small, will belong to one of these categories. This will make it easier for you to track your spending and ensure that you will not overspend on anything.
Statistics reveal that 2 out of 5 American adults are keeping a close eye on food, housing, and entertainment. Of all the budgeting categories, housing is the one that you will spend a lot of money on. The other two are expenses that you can manipulate to fit your budget. This is probably why a lot of people are focusing on these expenses.
But what are the other budget categories that you need to focus on? Here are the 5 that can group all the other expenses that you have to pay for.
Whether it is renting or your mortgage payments, this is an expense that will consume the most out of your paycheck. While that may be true, you need to know the limit. To ensure that you will have enough left of your paycheck to live comfortably, you should keep this expense at 35% of your net income. So if your net income is $3,000, you should only pay a total of $1,050 for shelter expenses. This expense is not just your rent or mortgage payments. It includes utilities, insurance, homeowner’s expenses, and even taxes. That means if you cannot afford to rent on your own, you have to get a roommate.
Statistics reveal that the average credit card balance of Americans is $4,293. If your take-home pay is $3,000, that means you cannot pay all of these off at once. Ideally, your debt payments should only be 15% of your income. That means the most that you can pay towards your credit cards is $450 a month. That is assuming that you do not have any other debt. If so, then your credit card payments will be lower. With the high-interest rate on this card, you might end up wasting a lot of money. Among the other budget categories, this is the one that you cannot ignore because it can quickly ruin your finances. If you cannot afford to pay it off, find a debt relief program that will make your debt payments fit the 15% limit.
The safest amount that you can allocate for your savings is 10%. That means $300 of your $3,000 net income should be saved. Most people will struggle to meet this compared to other budget categories. They will be tempted to use this to pay for present expenses. To motivate yourself, you might want to identify the specific goals that you are saving for. This could be your retirement savings, emergency fund, investments, and even a vacation fund. If you know what you are saving for, it will be easier to treat it like a bill.
Your transportation costs will depend on whether you own a car or take public transportation. Ideally, this should take no more than 15% of your net income. If you borrowed money to buy your car, this should be included in it. Or if you want to apply for a loan to buy a car, then you need to use this as your basis for the amount you will borrow and the monthly payments. Take note that this budget also includes the money you will spend on repairs, gas, toll fees, etc.
The last of the budget categories are discretionary expenses. These are the expenses that are not billed and you can control how much you want to spend on each – depending on what is important to you. This category includes your food and grocery budget, clothing allowance, entertainment expenses, etc. The total amount that you can spend on this is 25% of your net income. You are not allowed to go beyond this. If you no longer have enough, you need to cut back on other expenses in this category.
If you think that budgeting takes too much effort, focus on these 5 budget categories to make things simple.
Basic budgeting tips to make it successful
Now that you know the categories that will simplify your budgeting effort, it is time to find out how to make it successful. No matter how simple the budget plan is, it will still require the right money habits to make it work.
Here are tips that can help make this effort effective and worthwhile.
Be realistic with your categories
The 5 budget categories are just a suggestion. It will still depend on your specific spending habits and lifestyle preferences. Make sure to consider what you really spend on so your budget can be realistic. If you think that transportation is not as important as food and groceries, then include transportation with the other discretionary expenses. Or you can create a different category for food and groceries – making the categories up to 6.
Pattern it on your lifestyle
It is tempting to look at what your peers are spending on. But that will quickly lead you to overspend or be unhappy with how your budget is restricting your life. Be true to what you really want to spend on. This is why your budgeting efforts should only be based on how you want to live your life. Do not look at what the people around you are spending on. If your friends are traveling and you cannot afford it, then do not force to spend on it. If your neighbor has a new car, you do not have to buy one. Focus on what you really need and it will be easier to avoid overspending.
Talk about your budget with someone
This can be your spouse or your partner. It can be your roommate. It can be anyone that you trust. The bottom line is you have to talk to someone about how you manage your house payments. Between couples that live together, this should be a regular conversation. This will help both of you get a clear understanding of what you spend on at home. If there is a need to spend less or save more, you can discuss it when you talk about your budget categories.