You need proper categories for your budget and you need to stop using “misc”, “cash” or “no category” for your line items. As I experienced in my own budget the ‘misc’ category will grow as you just toss excess spending into it and you defeat the purpose of categorizing your spending.
So, you need a definitive list of categories in order to not have to use ‘misc’ and I have come up with that list for you.
It’s not just misc, as a budgeter myself I have encountered the different ‘black hole’ categories, these can be “cash” or specific stores like Walmart or Target – it’s pretty bad, at the end of the month you need to categorize your spending and you cannot remember what you wandered out of Target with.
This is a direct threat to your budget and could put your off track with your F.I. plan.
So, to figure out what the options are and to see which budgeting cloud-based options use I logged into the main five budgeting and planning tools that I am familiar with and looked over their ‘default’ categories. Default categories are important because most people change these very little.
NOTE: On the left in this table is a ‘category’ and then there is an ‘X’ in each cell if that corresponding budgeting program has that by default. The idea is to sort of average up what personal finance companies think are the most important categories.
I have taken a lot of liberties here because there is no general consensus for how to name a category or which category is a sub-category. If I were to list them all on the left and mark in the boxes which have each this table would be pages long and each category would apply to exactly one planner.
|Auto & transport||X||X||X||X||X|
|Bills & Utilities||X||X||X||X||X|
|Fees & charges||X||X||X|
|Food & dining||X||X||X||X||X|
|Gifts & donations||X||X||X|
|Health & fitness||X||X||X|
|Cash & ATM||X||X||X|
we need to break this down
So what you can see here is that there is a lot of confusion about what a category should be and what a useful category set should contain.
After digging through all five of these I think we need to go very high level and work our way in. So, to start what are we categorizing?
Organizing transactions of money so we can plan is what budgeting is all about, nothing more and nothing less, we know the types of monetary transactions we have, any child knows these.
- Selling - income, inflow of money, paychecks and sales or other.
- Buying - expenses, purchases and otherwise spending money.
- Transfers - moving money from one location to another.
The problem with “misc” is that you get subcategories that masquerade as top level categories and so you don’t want to create an entire new category for this spending and you just end up with a slush-pile category. We need to make sure our high level categories can contain our subcategories correctly and be categories themselves.
Lets try to get some high-level categories that are useful and not distracting or potentially considered a “subcategory on the category level”.
First, let’s look at “income” and our very basic income categories.
Paychecks are for any kind of work you might do and deposits you make related to those. Assets are any kind of passive income you might get from investments or distributions from holdings, even a personal loan repayment should go here. I have seen categories for ‘returned items’ which should be simply a ‘transfer’ type which nullifies an expense. Lets keep this simple and just have those two, you can add subcategories if you really need later.
Now, our primary expense categories.
- Fees & taxes
You will determine your own subcategories, these are only the primary categories.
So, first up, the ‘big three’, “home, auto and food”; these are typically your largest expenses, and where as a budgeter, you would spend the most energy and time to lower costs. ‘Eating out’ goes into food, gas goes into auto and mortgage/rent, home repairs and tools will go into Home. These are expenses that don’t need to be broken out into endless subcategories when we need a quick glance at what is going on.
Secondarily we have utilities,family and services; utilities are your phone, electricity and cable, family is any money you spend on your kids, on your clothes, on education, on ‘entertainment’ and even ‘fun money’ would go here. Services are things like Netflix/Hulu, insurance and doctor visits, haircuts, gym memberships and other personal care.
Finally fees and taxes need their own area so you can isolate them so they stand out – so you notice that they are there. There are options you can take to help lower taxes. (which will be an entire post on it’s own) However, fees are something you can take care of when you see them. They might be small, but they add up and can eat your budget alive and so you need to see them out on their own.
Transfers are special because a credit card payment is technically a transfer, you are not paying anything, you are ‘paying back’ money already spent. I use credit cards for just about everything and pay them off except in rare instances. A transfer can be to an investment savings account like Vanguard or it can be to pay off a card.
The main rule with Transfer types is that they don’t show as an expense or as an income, they are technically ignored because it is just money moving around.
This high-level breakdown will regain the focus on the core areas where you spend money.
But what about?
There are some areas like “charity” where it is difficult to see where it might go, but you can break these categories into subcategories as needed and charity would go under services, as would travel and shipping a package through UPS.
Cash is another issue where we start to use ‘misc’ so this is where it pays to keep receipts and to keep a receipt drawer for receipts not categorized. I keep all my receipts and then organize them by month/year in brown 10x15 clasp envelopes.
For me personally, I try to use a card for everything and very seldom use cash because it is far easier to use a card and have your expense automatically categorized. Also, there are benefits to using certain cards for travel points which can be very valuable, though that is another topic.
It’s also worth noting that your budgeting software needs to be able to break apart a line item into different categories. For instance, you go to Costco and buy some lawn furniture and some food to grill. You need to be able to split that one expense charge into Home and Food.
So, now we have our primary categories and it will be simple and clean to add subcategories to these and we will be far more organized. The subcategories are for you to decide.
If you use one of the online planners like Mint it will automatically use the new categories you set and will learn as you categorize your finances.