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Personal & Household Budgeting Categories – 17 Expenses to Include

At a recent dinner with another couple, it came out that they have an exact wine budget each month. Which goes to show that everyone has their own level of precision, when planning their budget.

It also raised an inevitable question: How much was their wine budget, and how did they come up with that number? And ultimately, how does anyone portion out their budget?

Whether you’re creating your first budget or looking to improve an existing one, here are the most common budget categories — and how to bridge the gap between your current spending and your ideal target budget.

Common Household Budget Categories: Mandatory Expenses

While not everyone follows a strict budget, everyone needs some kind of system for making sure they set aside enough money each month toward their savings and investments. You have long-term financial goals after all, such as retiring, buying a home, or helping your kids with their college costs. That money comes from your savings rate.

You could use a budgeting alternative to achieve your savings goals. But there’s a reason why so many people create traditional spreadsheet budgets: they work. At least for people who put in the work to create them thoughtfully and track their spending each month.

As you evaluate your current budget and create your ideal target budget (more on that shortly), include the following budget categories.

1. Savings and Investments

Always start with your target savings rate — the percent of your income you plan to save — when you create a budget.

This savings creates your financial safety net, enables you to achieve your long-term goals, and ultimately creates your wealth. That starts with an emergency fund to ensure your family never faces eviction, foreclosure, or hunger.

But it certainly doesn’t end there. Your savings enable you to pay off your debts and stop wasting money on lender interest. It enables you to buy a home, to help your kids with college, and one day retire. You might even be able to retire young if you set aside a high enough savings rate.

This is why you budget in the first place, so start with your target savings rate, not your expenses.

2. Housing

Housing costs make up the largest single expense for most people.

For renters, housing expenses end at rent and renters insurance. Homeowners have to budget for not just their monthly mortgage payment, but also homeowners insurance, property taxes, repairs and maintenance, and possibly homeowners or condo association fees.

Pay particular attention to budgeting for home maintenance and repairs as irregular but inevitable expenses. Last year it was a new furnace; this year it’s major plumbing repairs; next year it might be a new roof. These costs aren’t exceptions or abnormalities — they’re the rule.

3. Transportation

Transportation marks the second highest expense for the average American household, according to the Bureau of Labor Statistics (BLS).

As with housing, the costs don’t end at your car payment. Additional costs include auto insurance, gas, maintenance and repairs, parking, registration and DMV fees, and possibly a car warranty.

And they add up quickly. According to AAA, the average American spends $9,282 per car, per year.

4. Groceries

Food makes up the third largest expense for the average American. However, “food” and “groceries” are not the same line item.

Groceries constitute a mandatory expense. Meals at restaurants, delivery, or take-out do not (more on them later).

Personal grooming products don’t belong in your grocery budget either, even if you buy them at the grocery store.

Your grocery budget should include only food and basic hygiene products you buy at the grocery store. Nothing else.

5. Utilities

Mandatory utility bills include gas and electricity, water and sewer, and Internet. Depending on your location, you may also get charged for trash collection.

Cable TV, landline phone, and video streaming services do not count as mandatory utilities. You don’t need them to survive, which makes them discretionary.

6. Health Care

There are a few types of insurance that everyone needs, and health insurance is one of them.

Which doesn’t mean you necessarily need top-of-the-line, comprehensive, low-deductible health insurance. But you do need a policy, so choose the best health insurance policy for your unique needs.

Note that if you keep a high-deductible health plan, you must also budget money for the deductible and other health-related expenses not covered by your insurance. Consider using a health savings account (HSA) for a tax-advantaged way to save for these costs.

7. Life Insurance and Disability Insurance

Not everyone needs life insurance and disability insurance. But if you do, it belongs under the mandatory expense umbrella.

The people who need these insurance policies include families heavily dependent on one earner to survive. If your family would find themselves in major financial trouble if you died, you probably need life insurance. Similarly, you might consider disability insurance if an interruption in your income from work would put your family in a serious bind.

8. Childcare

Likewise, not everyone needs childcare, but for those who do, it makes up a mandatory expense.

Budget accordingly.

9. Personal Debts

Debts such as credit card debt, personal loans, and student loans also constitute mandatory expenses — albeit ones that not everyone has, and that you should avoid if possible.

You should pay these debts off as quickly as possible by funneling your savings into eliminating them. For a formula to prioritize your debts and other savings goals, try Dave Ramsey’s Baby Steps.

Discretionary Budget Categories

Everyone needs to eat, but there’s a difference between buying vegetables at the grocery store and buying steaks at a restaurant.

That doesn’t mean you should never spend money on discretionary expenses. It simply means you shouldn’t fool yourself by mislabeling your expenses. Don’t justify overspending by labelling that restaurant meal “food” under a mandatory budget category.

Keep your budget honest, and allot as much or as little money as you like to each of the following discretionary budget categories.

10. Clothing, Apparel, and Accessories

People love to justify overspending on clothes by calling it a mandatory expense.

Yes, you need a shirt on your back. Which you can buy for $2 at Goodwill if you so choose.

I once went an entire year without buying a single piece of clothing to prove this point to my wife. (I don’t think she appreciated my point.)

Call a spade a spade: you can spend as much or as little as you like on clothing. That makes it a discretionary expense. If dressing in the latest fashion trends every season is important to you, then by all means, make it a priority in your budget.

Just don’t lie to yourself about it being a necessary expense. Budget for it as discretionary.

11. Gym Memberships

People similarly delude themselves into thinking they need a gym membership — that it’s a mandatory expense. It isn’t.

Although exercise is essential for healthy living, you can create your own home workout routine for free. Try these 10 home workouts that require no equipment if you need ideas.

Don’t get me wrong, I pay for a gym membership and thoroughly enjoy using it. But it’s a discretionary expense in my budget because it’s a “want” rather than a “need.”

12. Grooming and Personal Products

Haircuts, manicures, pedicures, and other salon services? All wonderful. All discretionary.

The same goes for makeup, moisturizers, skin care products, and hair care products. People justify these expenses: “I have dry skin! I need this $50 face moisturizer!”

No, you don’t. The $5 generic moisturizer will treat your dry skin, from a purely medical perspective.

Along similar lines, just because you need your haircut doesn’t mean you need to spend $75 on it. I actually haven’t paid for a haircut since the coronavirus pandemic began, even after hair salons reopened. My wife cuts my hair.

But even if that’s a step too far for you, you can still spend $15 to $20 on a haircut rather than $75 to $100. Spending money at the salon is discretionary — spend whatever you like, but don’t delude yourself that it’s mandatory for your survival.

13. Entertainment

A broad category, entertainment includes everything from meals out to happy hours, babysitters to movie theater tickets, Netflix to Spotify subscriptions, coffee shops to concerts.

Alcohol also falls under this category. Like my friend, I too have a wine budget, which has admittedly grown as I’ve gotten older and my tastes have changed.

We all need entertainment and some R&R. Budget for it, and stay within that budget.

14. Gadgets and Electronics

Yes, you need a working smartphone in today’s world. No, you don’t need the latest Apple or Samsung flagship cell phone.

You can buy a used (or even new) smartphone for $50 that will do everything you need a smartphone to do. Most Americans choose not to because they want the latest and greatest tech.

Read: discretionary.

15. Gifts

Far too many people get “surprised” by how much they spend on gifts every year.

Holiday gifts, birthday gifts, wedding gifts, baby shower gifts, anniversary gifts. They aren’t aberrations. You know you’re going to get hit with gift costs every single year, so budget for them like a grownup.

Most people fail to budget for gifts because they’re not regular recurring expenses, month in and month out. Which means you have to make them “regular” by budgeting the same amount every month toward your gift budget or irregular expense budget.

Try these tips if you struggle with holiday budgeting, but remember to budget for all gifts throughout the year, not just holiday gifts.

16. Donations

Everyone should give back, whether materially or through volunteering their time. Or better yet, both.

If you choose to give materially, that could mean giving cash to nonprofits and charities that fit your beliefs. But it can also mean giving away possessions you no longer need or use. That includes clothes, electronics, furniture, even cars.

Decide for yourself how much cash — if any — you want to donate each month, and include it in your budget. If you opt not to donate cash but still want to support a good cause, consider donating other belongings or your time instead.

17. Travel

The world is a wondrous place. My family and I typically travel to up to a dozen countries each year, and travel makes up a large part of our discretionary spending.

Travel enriches you as a person, exposes you to people and places and customs that you would never have otherwise encountered. Sadly, a 2019 poll reported by The Hill found that 40% of Americans have never left the U.S., and 11% have never even left their home state.

If you rarely travel, consider shuffling some money from elsewhere in your discretionary budget toward your travel budget.

A Tale of Two Budgets: Your Current and Your Ideal Budgets

The fact that you’ve bothered to research budgeting indicates that you probably aren’t thrilled with your current budget. You know you can do better, can achieve a higher savings rate, can meet your long-term goals faster.

Most people approach this problem backward. They start by mapping out their current spending as their baseline budget. Although that matters, and you do need to do it, don’t start there.

Start by drafting your ideal budget. And within that, start by setting your target savings rate.

Don’t worry that it doesn’t reflect your current spending! You’re setting a goal — a finish line — knowing that it will take progress to reach it.

How Much to Budget for Each Category

There’s no right or wrong monthly budget percentages for each spending category. Budgeting is a zero-sum game: you can spend more in one category, but every dollar spent there means a dollar less you can spend in others.

In other words, it’s a matter of prioritization. Many New Yorkers spend half or more of their income on rent but don’t own a car. They don’t need a car to get around in Manhattan, and part of what they pay for with their premium rents is access to an extensive and convenient public transportation system.

Consider your own priorities as you draft your target budget. In particular, start thinking in terms of lifestyle design: designing your perfect life even as you design the budget that comes with it. Involve your spouse in this conversation if you’re married, and plan on continuing this conversation every month until you reach your ideal lifestyle and budget.

As you budget based on your priorities, on how your perfect life looks, get aggressive in reducing your target spending. Set ambitious targets first, then you can go about finding ways to reach them.

After designing your ideal budget, map out your current spending habits. You now have a Point A and a Point B, and the question simply becomes how to get from one to the other.

How to Bridge the Gap Between Your Current and Target Budgets

Start by talking to your most frugal and financially savvy friends about how they achieve their budgets. Ask them about their savings rate, and about their tricks and tips for spending less without sacrificing their quality of life.

Experiment with new ideas in your budget. For example, after cutting your restaurant and meal delivery budget in half, you might discover that you don’t miss those extra meals as much as you thought you would.

Track your spending by category each month in your budget spreadsheet. Where are you meeting your targets? Where are you overspending?

To get you started, try out these practical ideas to bridge the gap between your current budget and your ideal target budget.

1. Earn More Money

It sounds simple, and it is: boost your monthly income to widen your savings rate.

Of course, most people don’t actually save more money when they earn more. They simply spend more in a phenomenon known as lifestyle inflation.

Which won’t actually help you build wealth or reach your goals faster at all. A person who earns $500,000 a year and spends $490,000 of it builds less wealth than a person who earns $60,000 and spends $40,000.

By all means, negotiate a raise or pursue a higher-paying job. Start a side hustle. Start a business even!

But know that earning more money is only half the battle. To make it actually mean anything to your net worth and financial goals, you need to put your higher earnings toward your savings rate.

2. Spend Less on Housing

As the largest expense for most people, housing offers the most room for savings.

Granted, changing your housing isn’t trivial. But when it comes to saving money, meek tweaks yield meek results.

Imagine for a moment just how quickly you could save money and build wealth if you had no housing payment. Sound like a fantasy? It’s not. Plenty of people live without a housing payment, myself included.

For ideas, start with these strategies to live for free. Even if you “only” cut your housing payment in half, that still means hundreds or thousands of extra dollars every month to put towards savings.

3. Slash Your Transportation Costs

You need to get around. But to do so, you don’t need a new car, a luxury car, a huge car, a sexy car, or potentially any car at all.

My wife and I live without a car. We walk, bike, and Uber as necessary to get where we need to go. Beyond saving us many thousands of dollars every year, it also keeps us fit. To paraphrase a meme, biking saves you money and runs on fat; driving runs on money and makes you fat.

If that’s too extreme for you, consider opting for the cheapest possible car that meets your needs, rather than the most expensive car you can afford, the way most people do.

As the second largest expense for most people, vehicle expenses too offer enormous opportunity for savings.

4. Cook 99% of Your Own Meals

The easiest way to save money on food is to stop consuming meals or drinks prepared by a commercial business. That includes restaurants, delivery, take-out, coffee shops, your $5 daily latte, and anything else you didn’t make yourself.

Learn to cook. It’s the most practical hobby you’ll ever have.

My wife and I aim to cook enough for each dinner for us both to have leftovers for lunch the next day. No extra work required.

As an added bonus, home cooking tends to be healthier than restaurant-prepared food. If common sense alone isn’t enough to convince you, see this study published in the International Journal of Behavioral Nutrition and Physical Activity about how eating home-cooked meals is associated with better diet and health.

That doesn’t mean you can never enjoy an evening out at a restaurant. But you can save huge sums by making it a rare treat rather than a common occurrence.

5. Explore Affordable Health Insurance Options

If you and your family are fundamentally healthy and fit, consider switching to a high-deductible health insurance plan and opening an HSA.

The money you save on the monthly insurance premium can go straight into your HSA. It goes from being spent money to invested money because you can invest your HSA balance in stocks, bonds, and other investments once you park it in the account.

In fact, HSAs offer the best tax benefits of any tax-advantaged account in the U.S. The contributions are tax-free, the money grows and compounds tax-free, and the withdrawals are tax-free.

You can also explore these other health insurance options if it doesn’t come with your job.

6. Keep Separate Checking Accounts

One way to make sure you don’t overspend on discretionary expenses is to keep the funds for them in a separate account.

You therefore keep two checking accounts: one for your mandatory monthly operating expenses, and one for discretionary spending. If you blow all your discretionary money by the 20th of the month, too bad. You don’t get to spend another cent on discretionary expenses for the remainder of the month.

Think of it as a simplified version of the old envelope budgeting system.

And no, bank accounts don’t have to cost you money. Open free checking accounts with one of the many banks that offer them.

7. Keep Separate Savings Accounts

I like keeping a separate savings account for irregular discretionary expenses like gifts.

Every month, you put your allotted budget toward it. As birthdays, weddings, holidays, and other occasions come up, you tap this account to cover your gift costs or other irregular expenses.

Same deal as with your more regular discretionary expenses: if you run out, you run out. No cheating. You can plan better next time.

This should be a separate savings account from your emergency fund, which exists for a very different reason. Never tap into your emergency savings for discretionary expenses like gifts.

8. Move Somewhere Cheaper

As a final thought, you can save a massive amount of money by moving somewhere cheaper.

That could mean moving to a city with lower housing costs. It literally costs over 17 times as much to buy a home in San Francisco (Zillow home value index: $1,400,444) as it does in Cleveland (Zillow home value index: $80,812). I don’t know about you, but I can think of a hundred other ways I’d rather spend the $1,319,632 difference in those home prices.

Moving somewhere cheaper can also mean moving to a state with lower taxes. High-tax states charge several times the tax percentage as their lower-tax alternatives.

For that matter, you could move abroad for a lower cost of living in general. My family and I live in Brazil, where we enjoy year-round warm weather, cheap steak dinners, low cost of living, and endless travel opportunities. Consider these countries where $2,000 per month buys a comfortable lifestyle.

Final Word

There’s no magical personal finance formula for budgeting percentages in each spending category. It depends on your priorities — and your creativity in using tricks like house hacking to reduce or eliminate certain costs with no downgrade in quality of life.

Think of your budget as a puzzle, and start experimenting with different ways to put the pieces together to meet your target savings rate.

G. Brian Davis is a real estate investor, personal finance writer, and travel addict mildly obsessed with FIRE. He spends nine months of the year in Abu Dhabi, and splits the rest of the year between his hometown of Baltimore and traveling the world.