4 Tips for Choosing Your Budget Categories

Automated or manual, paper or digital, every money tracking system depends on budget categories.

Indeed, the earliest writing was used to track different categories of transactions, like purchases of grain or precious metals.

Today, of course, we’re more likely to use a computer than a clay tablet for tracking our financial transactions.

But even after all those millennia, the importance of precise, meaningful budget categories for tracking money hasn’t changed.

Choosing categories is one of the first steps of making your budget

Budget categories allow you to classify your spending, income, and transfers into logical groups so you can precisely understand how you use your money. They help you:

• See where your money is really going
• Build your budget based on real spending habits
• See where you can save money and spend less
• Find opportunities for paying off debt
• Keep your savings goals are on course
• More easily prepare your taxes and track deductions

Your transaction categories are one of the most important parts of any system you use to track your money. 

They’re how you discover a subscription charge you didn’t expect. Or see that you’re overspending on groceries, but not saving enough for vacation. Or how you find an extra $100 you might put toward your credit card bill. 

How to choose your budget categories

Choosing meaningful budget categories is the first step to understanding your financial situation.

Most personal finance software aims to simplify this step by using default categories, which sometimes can’t be deleted.

However, you probably prefer to use categories that are meaningful to you. And it’s likely these preferences will change over time.

Because your choice of categories can be important for reaching your goals, and because they’re based on personal preferences, it’s no wonder people have strong opinions about naming them.

For example, browse this lively discussion in the Tiller Community. And read why Tiller emphasizes giving you control of your budget categories in this post.

A list of suggested budget categories to get you started

As mentioned above, nearly all personal finance apps include a list of suggested budget categories.

Many apps allow you to add new categories, but some (like Mint) don’t allow you to delete or rename top-level categories. Likewise, some limit the total number of categories you can use. (Personal Capitol allows just 30 custom categories)./

Tiller takes a different approach. We believe you should have complete control of the names of your categories, category groups, and tags.

For example, every Foundation Template from Tiller includes twenty suggested categories to get you started. But you can always edit, rename, delete, and hide these categories as needed. Whatever works best for you.

Here is a list of suggested budget categories found in the Foundation Template:

Phone

Utilities

Restaurants

Gear & Clothing

Home Improvements

Subscriptions

Travel

Classes

Stuff

Auto & Gas

Charity

Groceries

Misc

Mortgage

Repairs

Freelance

Paycheck

Transfer

Parking

Reimbursable

Suggestions for choosing your own budget categories

The following recommendations for thinking of your budget categories come from our experience at Tiller, and our approach to letting our customers manage their money their way.

However, these ideas can be adapted to other personal finance tools and apps.

1 – Keep it simple

Don’t worry about separate categories for dog food, veterinary bills, and dog toys. Unless you’re a professional dog trainer, that’s too much complexity.

For many people, just five categories is a great place to start:

1. Bills
2. Living expenses
3. Discretionary expenses
4. Charity
5. Reimbursable expenses

2 – Think about what goes where

The electric bill and cell phone bill go under “Bills”. These are expenses worth checking a few times a year, but generally, they aren’t expenses you can impact with your daily behavior.

Gas and groceries go under “Living”. You make these decisions every day. While you need groceries and gas, you can also manage these expenses as needed by being mindful.

Your “Discretionary” expenses are elective. If cash is tight, you can go without the latte or the movie.

Finally, gifts to “Charity” should be flagged for tax purposes, and work or other “Reimbursable” expenses should also be flagged so you make sure you actually get reimbursed.

3 – You can always add more categories, or change them later

If you find that you really want to pay attention to additional categories, just add them. Want to know what you’re spending on school for your kids, outdoor gear, or driving? Add more categories, but add them as you need them, and start simple. (You can also consider using tags or subcategories as mentioned below.)

Also, you probably don’t need to worry about cleaning up the past. If you add a new category today to track outdoor gear, you don’t need to go back in time to flag all your expenses in the past that were previously “Discretionary” that are now “Gear”.

Instead, use this new category for new expenses going forward. Focus on today, tomorrow, this week, and this month.

4 – Goals make great categories too

Are you saving for that vacation next year? Make that a category. And if you’re making transfers to a savings account for that goal, you can mark those transfers as “Vacation” as you build up your savings.

Then when it’s time to take that vacation, you’ll mark those expenses as “Vacation” too.

Subcategories, Groups, Tags, Reports, and Autocategorization

While your transaction categories are the foundation of financial tracking, you can use subcategories, groups, and tags for greater organization and reporting. Learn more about these here.

How do you think of choosing budget categories?

Share your thoughts and join the discussion in the Tiller Community!