Last week, you picked a preferred method of tracking your finances. Today is the perfect time to choose which categories you should create to learn about your spending habits in more detail. This will help you understand not just how much you’re spending but where and on what you’re spending your hard-earned money. It will enable you to see where you have gaps that you can close afterward and reach your goals.
If you’re only starting out, I recommend you don’t go crazy and make it too complex, as that would only discourage you from tracking. You’d finish sooner than you started. Speaking out of my own experience! Too many categories immobilized me from further actions. Once I decided to remove the majority of the categories and keep it simple, I finally started tracking properly and kept on doing it.
Actually, I am still keeping track of all my expenses to this day. It keeps me on top of my expenses even though I could do without it now. I am very well aware of where all my money goes these days. But tracking my expenses still gives me a sense of accountability for my spending. It’s not necessary for you to keep doing it forever, but you should do it at least in the beginning.
SPENDING CATEGORIES
I suggest you split your expenses into two categories – Fixed expenses and Variable expenses. The difference is kind of obvious, isn’t it?
You might remember from my previous post that I divided the categories into Essential and Non-Essential spending. However, we’re not there yet. You might have your fixed expenses that could be both Essential as Non-Essential. First, we need to figure out what you spend your money on before we can decide what to keep (essential) and what could be removed from your spending (non-essential). For example, you might be paying for a cable. This is your fixed expense now as you pay your bills regularly. However, it’s non-essential. So let’s find out your fixed and variable expenses first.
FIXED EXPENSES
This category should cover only your fixed expenses you are bound to pay regularly, such as your rent, mortgage, utilities, and insurance. However, I suggest you still split it into a couple of subcategories. Later, we’ll learn you can lower some of these payments even though you wouldn’t think it’s possible now. Therefore, it’s helpful to keep them separate so you know how much you’re paying for which item.
1. RENT/MORTGAGE
This category is very easy – you only add your rent or mortgage payments here. Simple.
2. UTILITIES
Here, you should cover all your utility bills, from electricity and water to cable. All bills related to your house/flat or rental you pay regularly, be it weekly, bi-weekly, monthly, or quarterly.
3. INSURANCE
Add all your mandatory insurance costs here, such as rent or home insurance, health insurance, car insurance, etc.
4. DEBT REPAYMENTS
If you have incurred any debt (credit card, car loan, student loan, a loan from your, etc.), please add it to this subcategory. It’s important you know what’s your minimum payment on all your loans and what you have to pay each month without a doubt. If you don’t know it, make a list. NOW!
VARIABLE EXPENSES
Variable expenses are going to be a bit more complex as there are many expenses you have to cover. I recommend you start with the following categories to keep it simple yet defined enough for you to make conclusions at the end of the month or quarter.
5. FOOD
I believe it’s vital to split this category into two different subcategories, and you’ll understand why shortly.
6. GROCERIES
Include your grocery shopping here. All food you buy for cooking at home, together with any alcohol for your home entertainment.
7. EATING OUT
The second subcategory should cover all your expenses related to eating out. Brunches with friends, fancy dinners with your loved one, takeaways, or the random fast food trip you occasionally make. You don’t have to pretend it doesn’t happen because I know it does. We’re all human, and sometimes it’s convenient. Nothing to be ashamed of. The only thing I ask of you is to track it in the Eating out subcategory.
8. MEDICAL
This category should be pretty straightforward. You should include all your medical bills, prescriptions, or surgery costs. Yes, your contraception pills fall into this category too.
9. ENTERTAINMENT
All your hobbies and related expenses, tickets to theatres, exhibitions or movies, magazine (both printed and online) subscriptions, drinks out with friends, or anything you spend on holiday should be categorized under Entertainment.
10. DEPARTMENTAL (clothing, hairdresser, taxi, homeware, drugstore, etc.)
Based on my experience, this is going to be a widely used category. Every time you buy cleaning products and pillows for your sofa to create this cozy feeling at your home, the latest make-up items or services you use, like getting a haircut, taxi, or cleaning, should be added to this category.
11. AUTO & TRANSPORT
Petrol, highway toll, public transportation, and trains should all be in this category. No need to add your holiday transportation costs as that is already covered under Entertainment.
12. SAVINGS
If you’re reading this blog, it’s quite likely you don’t prioritize savings just yet. Don’t worry, we’ll get there together! Anything you save should be added to this separate category no matter what your plans with the saved money are at this point. We’ll discuss savings many times in the future, but hopefully, you already have something to add to this category.
13. INVESTMENTS (pension scheme, stocks, etc.)
Do you save for your retirement? Do you invest in the stock market or buy bitcoins? Add all your monthly additions to Investments.
14. MISCELLANEOUS (gifts, bank fees, etc.)
Use this category to track everything else that doesn’t fit into any of the categories above. From bank fees and gifts to costs for business trips, your company will reimburse you for later, for example.
Feel free to readjust the categories to your personal situation based on the items you spend your money on. If you feel there are still too many, streamline them even more. However, I do believe the split above is a good place to start. You need some level of detail to be able to work with it and change your spending habits in the future.
Why is tracking spending important?
Now that you have your categories and subcategories divided, it’s time to start tracking. Every time you make a purchase, log into your app and add this expense marking it with a relevant category. This will help you to differentiate different types of expenses at the end of the month (quarter) when you review your spending.
How do you track your spending?
Do you have fewer or more categories? Am I missing something you need or expected to be there? Let me know in the comments section, and help others to create the best categories for tracking their spending. Everyone has different needs, and what works for me might not necessarily work for you. We can all benefit from sharing our experiences.