If you are starting to keep a household budget, you will fall into one of the following groups:
Control fanatics – even before writing down their expenses, they download the largest Excel spreadsheet on the Internet and then expand it with more subcategories. In effect, this creates over 300 items to track. On the face of it, it’s a great and thorough check, right? Wrong. After only two weeks, you’ll notice that such a budget is just rubbish, and you’re not even using half of it. You will also notice that some subcategories come down to 1 or 2 payments throughout the year. Get rid of excess. I myself throw out unnecessary items from the budget every year that just take up space on the spreadsheet.
Typical slackers – they immediately start assigning costs to such general categories as home or bills. They create a breakdown into 5 to 8 expense groups that tell them absolutely nothing. Under bills at the end of the month there is 980 zlotys, but how much of that went to electricity, water, rent, gas or cable TV? No one knows that. And no one will know until better organization is put in place.
Budget champions – they immediately know what costs they need to control and create categories with corresponding subcategories. You’re not in that group, but don’t worry. No one is. Every beginner has to get through one of the previous groups and this can take years. Do you remember your old photos? You thought you looked like a million bucks then, and now you’re ashamed of them even before yourself. It will be exactly the same with the budget.
Ways of classifying expenses
Remember that a household budget is a tool that is meant to meet your needs first and foremost, but at the same time, it’s meant to serve a purpose. At the stage of creating categories, you not only allocate potential expenses, but also plan where your money should go and in what amount.
Hierarchy of categories
This is the easiest part of building a budget. Answer the question of which expenses are most important to you and in what order.
Basically, your family needs to eat, have a place to live, stay healthy, commute to work to earn money for it all, etc. Step by step, you create the framework of a household budget. Keep it to the bare minimum and create only a few categories.
- Food
- Home
- Transport
- Healthcare and hygiene
- Loans and borrowings
- Savings
- Clothing
- Entertainment
This order may look different for each person.
Simple classification of expenses
You already have the main expense categories, but they still don’t tell you anything specific. When you look at the Home section and see the amount of 980 zlotys, you have no idea how it breaks down. How much did you pay for electricity, water, rent, or maybe it was that new lamp? No... I think it was last month? Despite good intentions, there is chaos.
So start expanding your categories with related subcategories:
- Food – home, city, work;
- Home – rent, electricity, water, gas, furniture;
- Transport – fuel, tickets, third party insurance, repairs, technical inspections;
- Healthcare and hygiene – examinations, medical appointments, medications, vitamins and supplements, hairdresser, beautician;
- Loans and borrowings – mortgage, installments;
- Savings – retirement savings, financial cushion;
- Clothing – casual, athletic, shoes;
- Entertainment – games, books, cinema.
At this point, you have 30 subcategories that are perfect for your first household budget. Of course, only create ones where you have expenses. If you don’t have a car, you skip the liability insurance and technical inspection, but you may need to add taxi. You may not have gas in your home, but pay separately for garbage collection. Adjust it accordingly and keep it in moderation. To begin with, such a list will do just fine. If needed, you will expand it with the necessary items.
Complex classification of expenses
You’ll find plenty of spreadsheets on the web expanded to incredible proportions, which in my opinion, along with not keeping a budget, are at the other extreme. They will simply be too complex for most of us.
See this for an example of the Food section:
- Home – bread, vegetables, fruits, meat, dairy, sweets, alcohol
- City – fast food, restaurant, snacks, coffee
- Work – lunch, catering, vending machines
As you can see, 15 subcategories were created, and this is just the first of the major expense groups. A household budget in this version is very accurate, but also not very practical. Realistically, the only reason for such accuracy is to track a specific expense that you care deeply about controlling.
Alternatively, you can track expenses in the same category among different household members this way. You then apply the division into, for example, “his books” and “her books”.
Plan your savings
In addition to the classic expense categories, I recommend you enter the Savings category. They do not, of course, represent a pool of money to spend. It’s about identifying the specific amount you want to save and verifying that assumption.
Of course, you’re budgeting to save money, but without specifics, there’s not much chance of that happening. The cash that stays in your pocket tends to be spent like water in unexplained circumstances – so make friends with the principle of paying yourself first. Transfer the specified amount of savings to a separate account or sub-account as soon as you receive your salary or at the beginning of the month. This leaves you with an amount that you plan to cover the rest of your expenses, so you manage it better.
What if you set your savings level too high and your actual spending diverges from your plans and needs to be straightened out somehow? Absolutely nothing. You’ll just do it. It’s a normal process of learning to keep a budget and confronting our perceptions with financial reality.
