CATEGORIZE YOUR EXPENSES

Organizing you spend a fundamental part of the path to financial security. Whether you’re looking to save for a future goal, repay debts, or to just get a grip on your financial situation, knowing where your money is going is one of the most important things. Without an idea of how you spend your money, it’s hard to establish a realistic budget, let alone make progress toward better financial health.

In this post, we'll explain why it's important to categorize your expenses, tell you how to make (and effectively structure) that list of categories, and offer a handy-dandy guide to help you manage your personal finances better.

Why Categorize Your Expenses?

Even the basic idea of categorizing expenses is, really, kind of a work of genius. This is about grouping your expenses into categories that make sense. This has several benefits:

• Track Spending Patterns: Categorizing your expenses makes it easier to see how much you’re spending in various parts of your life. Has dining out become a budget-buster? Are your fixed costs more than you thought? This information can help you make intelligent financial decisions.
• Focus on Financial Goals: Knowing where your money is going empowers you to make choices that of your spending choices around the life you want, whether that’s saving for a trip, investing, or setting aside an emergency fund.
• Develop a Realistic Budget: When you know how much you’re currently spending in each category, you have a better idea of how to budget to match your real expenses rather than unreasonable limits.
• Control Impulse Spending: If you are allocating categories, you can look at where you might end up overspending the most OR are the most "spend happy" and rein in that discretionary spending at its source.
• Plan: Whether it’s retirement or education or purchasing a home, bucketing expenses can help to direct money toward your long-term goals.

So now that we’ve talked about why categorizing expenses is so important, let’s see how you can apply this to your finances!!

Categorize Your Expenses: A Step-by-Step Guide

      Step 1: Track Your Expenses: Before you can organize your spending into categories, you need a record of where you’re spending your money. Begin by recording every single one of your expenses. You can do it the old-fashioned way with a pen and paper, a spreadsheet or an app that connects to your bank accounts and credit cards.

To help you do this, there are myriad budgeting apps you can consider, like Mint, You Need A Budget (YNAB) and Pocket Guard. These apps automate this process by pulling transactions from your accounts and organizing those transactions into categories.

Be sure to watch your spending for at least a month to capture an overall sense of your habits.

     Step 2: Identify Principal Categories: Determine which feature to use: The next decision that needs to be made: which category to us. Although everyone is in a slightly different place financially, the following categories can be a great place to start when it comes to organizing your spending:

• Housing: Rent or mortgage, property taxes, home insurance, utilities (electricity, water, heat, etc.), maintenance and repair costs.
• Transportation: Car payments, insurance, gas, public transportation costs, parking, maintenance and repairs, and ridesharing with services like Uber or Lyft.
• Food: Groceries, restaurants, coffee shops and meal delivery services.
• Health and Wellness: Health insurance, gym memberships, drugs, visits to the doctor and dentist, therapy and other medical costs.
• Debt payments: Credit card, student loans, personal loans, and any other money you spend on debt.
• Savings and Investing: Contributions to emergency funds, contributions to retirement accounts, funds held for future goals (such as travel or large purchases), and contributions to investment accounts.
• Recreation and Leisure: Hobbies, subscriptions, concerts, streaming services, holidays, some kind of non-essential activity.
• Grooming: Haircuts, lotions and potions, clothes, toiletries, and grooming services.
• Miscellaneous: You could use this category for one-time payments, unexpected costs, gifts and anything else that doesn’t fit neatly into one of the other categories.

   Step 3: Categorize Every Expense: After you make your list of categories, examine your expenses from the month and place each into its proper category. For instance, you may put $150 into groceries and $40 in eating out in the “Food” category together, sure you want to subdivide that into “Groceries” and “Dining Out.”

A lot of budgeting apps can do this for you on autopilot, but if you’re doing it manually, you’ll want to be consistent. After you’ve categorized expenses for one month, do the same for several additional months to provide a more complete view of your spending patterns.

Creating Great Expense Categories

Although those categories I mentioned above are a good start, you might find that breaking a few of them up or consolidating a few of them a bit works best for you based on your own situation. Here are some things to keep in mind:

      1- Utilize Subcategories for Greater Detail: And broad categorizations can make it hard to know exactly what sort of things you’re spending your money on. For example, you can lump all your health expenses into the same category, or you can develop subcategories like “Gym Membership,” “Medications,” and “Doctor Visits” to more closely track your habits in each area.

     2- Don’t Overcomplicate It: Specifics are great, but too many categories can also lead to confusion. When choosing your categories, work between general and specific. You want enough detail to understand your spending but not so much that you’re spending too much time managing your budget.

     3- Create flexible categories for special cases: A temporary yardstick related to life events such as a move, family additions, or a significant home remodel could also be needed. For instance, if you’re getting ready to move into a new house, you could make a “Moving Expenses” category and use that to track all money spent during a move.

    4- Review and Modify Your Categories Often: You should also expect your categories to evolve as your financial life changes. A young professional could use categories for student loan repayment, while someone closer to retirement might benefit from more specialized categories for healthcare and savings for retirement.

Be sure you check in on your expense categories every few months, updating them as necessary for any big life or financial shifts.

Analyzing Your Spending

After your expenses are classified, it’s time to interpret them. Look through each category and ask:

• Are You Staying in Your Spending Mix? And compare your spending, within each category, to your income or budget. Do you live among a budget, or do you overspend in certain areas?
• Where Can You Cut Back? If you are looking to save more, fruitless categories like “Entertainment” or “Dining Out.” Even a little restraint from these areas can leave you more money to save or pay down debt.
• Designing a Business that is Goal Focused distal are You Focusing on Your Goals? Ensure your spending is on par with your financial goals. If you are trying to save for a house or an emergency fund, are you setting aside enough to your savings? If that’s not the case, some spending may need to be cut elsewhere.
• Are Your Fixed Costs Too High? Some fixed expenses, such as rent, utilities and car payments, are hard to change in the short run. But if your fixed expenses are gobbling up too much of your budget (generally over 50%), you might need to consider longer-term strategies, such as finding a cheaper apartment or refinancing debt.

Budgeting: The Next Step

Your first step to taking charge of managing your finances is identifying where your money goes. And then budget off of that. Budgeting provides you with a spending plan, so you know not to overspend in any one area and that you are budgeting enough for savings and debt repayment.

Here is how to create a bare bone budget using your expense categories:

• Calculate Your Income: Add up all your monthly income from wages, side hustles, or anything else.
• Determine How Much to Spend in Each Category: Make realistic estimates on how much you’re going to spend on each category, now that you have your data at hand. Tuck some aside each month for occasional or annual costs whether that’s a premium on insurance or holiday presents.
• Set Aside Money for Saving: Include savings as part of your budget and give it a priority. Assign a certain percentage of every dollar you make to savings and investing.
• Track and Adjust: Keep track of your spending in each category throughout the month. If you overspend on one, try to shave back purchases from another so you don’t bust your retaillg,000 budget.

Software to Assist in Expense Categorization and Tracking

There are many tools available to help you assign your expenses that can also help you track your expenses when your receipt only says, “Food.”

• Budgeting Apps: Apps like Mint, YNAB and Personal Capital crunch the numbers for you by automatically categorizing your expenses so you can get a better sense of where your money is going.
• Spreadsheets: If you like to take matters into your own hands and plan out your own personal budget then you can easily use spreadsheets.  You can print this out worksheet that I made for a free budget planner and expense tracking.
• Envelope or Cash-Based Systems: It may help some people to use physical money in certain categories (like groceries or entertainment) to help stay on budget. All you do is take cash for each budget category you use for the current month, and when the cash is gone, you stop spending.

Classifying your spending is one of the most powerful ways to get a handle on your finances. Analyzing your spending into relevant categories helps reveal patterns, allowing you to make more thoughtful financial decisions, and attain your financial goals sooner. If you want to pay off debt, save more money or just have a better overall handle on your finances, categorize your expenses in the first step toward good money management.