We organize our expenses into categories, and we organize our categories into what we call collections. Collections are just a group of categories. Why do we do this? By organizing our categories into groups and breaking down our expenses into categories, it helps us prioritize budgeting our expenses. When we budget, we are just writing down our priorities, and by organizing them this way, it helps us stick to our priorities.
Why Do We Need To Group Our Categories?
We break down our expenses and organize our categories to make sure we cover our necessities before anything else. We all only have a finite amount of money, so it helps to know which categories have to be funded and which ones would be nice to get funded. Do we have to organize them this way? No, but it makes the process of budgeting faster and easier when things are organized.
Why Do We Need Budget Categories?
Why not just organize our expenses into the 4 different types of expenses: fixed expenses, living expenses, long-term expenses, and discretionary? Some may use the 4 different types of expenses for their collections to help group their categories, but I would not recommend using only 4 categories for your budget. Here are four of the biggest advantages to creating categories for your expenses.
- Know where your money is going each month, so you can identify areas where you are overspending.
- Discover habits and trends about your spending to help you better plan for the future.
- Make more informed decisions about how to spend less and save more.
- You actually know what your money is allocated for.
How Many Budget Categories Do I Need?
Everyone’s budget will look different. While I don’t recommend only having four categories, I won’t go so far as to tell you how many you should have. It is completely your decision to do what you believe will work best for you. Some people are self-proclaimed budget nerds and love lots of granularity in their budget, while others might find that tedious. The only advice I usually give is don’t have so few that your true expenses are hidden in overarching categories, and don’t have so many that when you look at your budget, you get overwhelmed. Don’t overthink it; you can always adjust your categories to add more or remove categories in the future.
Check out: How Many Categories Should You Have In Your Budget
Plan For The Unexpected
As the month goes on, the time may come that we need to move money from one category to another for whatever reason. It may be that our priorities have changed or that an emergency has arisen. By organizing and breaking down our expenses into different categories, it makes it clear to us which categories we can actually pull money from versus the categories we can’t. Moving money between categories is not a bad thing and should not be viewed as a sign that you failed or planned poorly. Taking control of your finances is about knowledge. Knowing what is going on with your money and making well-informed decisions about how you spend it
We budget to take control of our finances and make well-informed decisions about how to live the life of our priorities.
