The first time I sat down to plan a budget with my wife, we didn’t know where to start. There were literally dozens of expense categories popping into our head at once. The whole process seemed a bit overwhelming.
At some point it dawned on us that we needed some clarity about the process. We needed to narrow the field and focus on certain priorities in the budget. By doing that, it became obvious what areas of the budget we needed to focus on first.
What we found was that there are five fundamental expenditures to focus on when you plan a budget. Without them, any person would have a difficult time surviving. Coincidentally, these categories will also be some of the most expensive budget items each month. Those two reasons alone – basic survival and cost – should justify why it’s important to start with them when you plan a budget each month.
Five Basic Categories When You Plan a Budget
When you plan a budget each month, start with these five categories:
There is no doubt about it, our bodies need fuel. Without it, we become physically weak and mentally drained. We would be unable to function without the daily allotment of calories our body requires.
This budget category contains all monies spent on groceries each month. We also include money used to eat out, whether that is a dinner date with the family or paying for kid lunches at school. Those trips to your favorite coffee house count in here as well.
The percentage of money spent in this category can vary greatly depending upon the size of your family. A single person could spend very little while a family of six (like mine) could break the bank some months. You can look for ways to cut back here by using coupons, buying and cooking in bulk (then freezing) and eating at home more instead of your favorite restaurant.
Suggested budget percentage: 5-15% of total expenses
Will Smith brilliantly portrayed the one-year homeless life of Chris Gardner in the movie The Pursuit of Happyness. But who really wants to go the homeless route with their life? I would much rather come home to my own bed every night than spend it in homeless shelters or a subway bathroom.
This budget category covers the mortgage payment or the rent check. Some people might include home maintenance expenses and homeowner’s insurance in this category. However, we have chosen to have separate expense categories for those things.
Suggested budget percentage: 25-35% of total expenses
There happens to be many items that fall under this category, some necessary and some optional. The necessities would include electricity, water, heating and cooling and phone service (including the cell phone). Trash most likely is another necessity, although I know some who can haul it to the dump or dispose of it at work for free.
Optional utility items would include cable television service, Internet access (although that’s almost a necessity) and a security system. I call these optional because a person could do without them if they needed to cut expenditures from their budget.
Suggested budget percentage: 5-10% of total expenses
This is pretty self-explanatory: you have to cover your body with clothes in public or you will get hauled off to jail.
Clothing budgets can vary greatly. And it’s really easy to go beyond what is considered “necessary” and buy more clothes than we really need. This one, along with the food category, are the ones of the five main expense categories we are most likely to overspend in each month.
Suggested budget percentage: 2-7% of total expenses
Reliable transportation is a necessity. Our ability to earn a living would be severely compromised if we couldn’t get to work each day.
This doesn’t necessarily mean a person has to own a car though. Public transportation such as a busing system, subway or train service and taxis are widely available. My dad biked to work many summer mornings, as his office was only five blocks from our house.
The transportation category will include the car payment, gasoline and vehicle maintenance. You should also put car insurance here. Some states even have an advelorum tax on vehicles that comes once a year. Budget a little for that each month so you are not surprised when the bill arrives.
Suggested budget percentage: 10-15% of total expenses
Your budget will have many other expenses categories related to items such as kids, healthcare, student loans, entertainment and charitable giving. Those categories can be sorted out though once you have the five big items squared away. They are necessities that, when secured, make living life a bit easier.
An Epilogue on the Percentages
I gave you some percentages in each budget category to shoot for. Don’t get too wrapped up in those that it frustrates your budget plan. They are only meant to serve as a guide and are completely adjustable based on your circumstances and income.
With that in mind though understand, it certainly wouldn’t be the wisest move for someone making $500,000 a year spending 15% of his or her income on food. That’s a bit much.
If you are spending less in those categories that’s great! If you are spending a little more, that might be OK as well. With a family of six who is always on the go, we occasionally go over in food and transportation (due to eating out and the need for gas). Some months we miss to the upside on clothing, especially around the beginning of school. But every month we are way under the low end of 25% on housing because we have no mortgage debt to plan for.
So don’t panic if your budget comes in 2% over in a category at the end of the month. Analyze it and find out what happened. Make adjustments where necessary. The goal should be putting the percentages together in a way that works for your situation.
If you’d like to see all our expense categories or want a budget template to use, you can access that on my resources page.
Questions for Discussion: What experiences have you had when you attempted to plan a budget? What percentage of your monthly income goes to the BIG 5? What expense category in the budget do you most frequently exceed?