They help you to decide how to spend your money, plan for your future, pay off existing debt, and save a few pennies each month by reducing wasteful and impulsive purchases.
When you begin setting up a monthly budget, start with big categories before breaking down your budget into smaller expense categories. A good list of basic budget categories to begin with includes the following:
Housing: Mortgage/rent, repairs, property taxes, cleaning supplies, homeowner’s/renter’s insurance, utilities, furnishings, décor.
Food: Groceries, meals out, pizza delivery, snacks and beverages at work
Transportation: Car payments, insurance, gas, oil, parking, repairs/maintenance, public transportation fees
Medical: Insurance, out-of-pocket expenses such as deductibles and non-insurance-covered medical services, pharmacy, eye care, dental
Clothing: New purchases, dry cleaning, repair
Personal: Cosmetics, haircuts, cleansers
Insurance: Life insurance and any other insurance not covered under home, transportation, or medical expenses
Education: Tuition, dues/fees, school pictures, yearbooks, school supplies, books
Credit accounts: Payments on major credit cards, department store cards, lines of credit through your bank or other lender, or on any other outstanding debt
Gifts: Holidays, birthdays, graduations, weddings, showers
Recreation: holidays, movies, books, magazines, newspapers, cable TV, restaurants, sporting events, sports equipment
Savings: Long-term and short-term goals, as well as retirement
Donations: Charities, churches
Within each general budget category, note that some items are essential (the mortgage or rent payment, the electric bill, and groceries), but other items are extra (new furniture, gifts, and pizza delivery). From your first list of general budget items, develop two separate budget lists, one for essentials and the other for extras. (We can’t dictate what’s essential and what’s extra for other people, so we don’t divide up the lists for you.
Some people may have to eat out regularly because of work-related issues and so dining out is an essential item in their life rather than an extra. Others may consider charitable giving an extra, whereas their friends down the street consider it non-negotiable because of religious convictions.)
Extra and flexible budget items are the main places to focus your frugal living tactics. You’re always going to have to pay your water bill, but cable television may be an extra utility that can be done away with for awhile if money’s needed in a more-essential budget category.
You can’t control what you don’t know. Go through your checkbook and any other receipts or records you’ve kept over the past few months so that you can track how much you actually spend on essentials. Then for one month, keep a detailed diary of all your extra purchases, even for cheap things like newspapers or coffee from the vending machine at work.
Little expenses quickly add up to big money when they’re made on a daily basis, and these smaller, out-of-pocket purchases that are frequently made with cash usually won’t show up in your check register, so writing them all down helps make you aware of where the cash is dribbling out of your life.
After you’ve discovered exactly where your money goes throughout the month, you may need to re-evaluate your written budget lists if you find your actual spending differed from your anticipated spending.