What are budget categories?
Budget categories are areas of income and expense.
Nearly everyone spends in most of the basic groups: housing, food, transportation, etc. When I set up my budget, I will have all of those sections covered.
Let’s suppose, though, that I want to drill down a bit further. Maybe I want to determine how much I’m spending for groceries and how much for restaurants. Or, if my husband and I each have a vehicle, I want to know how much each costs to drive and maintain. Suppose I want to figure out if public transportation is cheaper than driving to work?
There are a couple of different ways to set up this comparison.
One way is to set up a separate expense category for each of the areas I want to compare. If I’m tracking expenses on paper, I would just make a separate sheet for each category. Then when the expense is entered, if I bought groceries at Albertson’s, I would enter the data on the Food:Groceries expense page. When we eat at Applebee’s for date night, I post the expense on Food:Restaurants.
Alternatively, I can add a note to each entry on the Food page indicating whether I bought groceries or went out to eat and then add up the matching notes at the end of the month.
How do I classify income?
All personal income, regardless of source, is income. Interest from the credit union, income from a garage sale, a weekly paycheck, or tips, are all income.
If I have a small business, my company writes me a personal paycheck at least once a month. That money is then my personal income. I spend it as I wish.
I cannot, however, by law, use business funds for personal spending. IRS may consider that to be embezzlement or misappropriation, and both are crimes. Keep business funds separate from personal funds. I write myself paychecks from business checking and deposit to personal checking, simplifying the accounting.
How do I categorize deductions from my paycheck?
Paycheck deductions are expenses, at least some of them are. If I have a Health Savings Account, the money withheld is mine. Someone else, usually a bank, is just holding it for me until I have a qualifying expense. I can track my HSA as part of my budget or I can consider it an off-budget account. Personally, I choose to track it on-budget. I like to know just how much I have set aside for medical bills or supplies and how much of it I’ve spent. Payroll deductions, such as a 401k, an IRA, or donations can be tracked the same way as any other expense.
The only exception is payroll-deducted tax expenses. This includes Federal and State income taxes, Social Security or FICA, Medicare taxes and any locality income tax. When I add paychecks to my income page, I subtract taxes and tithe from the Gross Income. (We’ll talk about tithe in another post.) I can’t spend what has already been taken from my paycheck, so this result is my Net Spendable Income.
All other budget calculations are made in relation to the Net Spendable Income, so this is a pretty important piece of information.
Have questions about categories? Or anything else budget-related? Ask questions in the comment section or send me an email.
Have a great day!