Setting up personal budget categories is the best way to improve your financial situation, whether managing daily or monthly living expenses, saving money for a big purchase, or making debt payments.

Let's explore the spending categories you should establish today to manage your finances better and move closer to your financial goals.

Budget Category 1: Fixed Necessities

Fixed expenses are the necessary costs you must pay each month, and they should be your top priority when creating your spending plan.

These recurring charges are easy to plan for since there are no surprises. Even better, you can "set and forget" your fixed expenses by automating your payments.

Some examples of fixed expenses include:

• Car payment - Fixed monthly payments for auto loans, leases, or insurance premiums.
• Housing costs - Monthly rent or mortgage payment
• Insurance - Life, disability, and health insurance premiums
• Loan payments -  Personal or student loans that have a fixed monthly payment
• Pet care - Fixed monthly expenses for pet food, grooming, and vet visits
• Personal care - Expenses for haircuts and gym memberships
• Child care - Fixed monthly costs for childcare or after-school programs

Budget Category 2: Variable Necessities

Flexible expenses are the costs that vary from month to month and may be adjusted. These categories require careful financial planning, as they can easily spiral out of control if not managed correctly.

A helpful approach is to have a dedicated account for your variable expenses. Keep a balance slightly higher than your expected spending to ensure a buffer if you exceed your budget.

Reassess your monthly spending habits in these categories to stay on track with your budget. Some examples of flexible expenses are:

• Groceries - Food and household items can be quite unpredictable. Consider using coupons, meal planning, or buying bulk to save money.
• Utilities - Gas, electricity, water, internet service, and phone bills
• Gas - Gas expenses may vary, so allocate slightly more than usual.
• Memberships and subscriptions - Gym memberships, streaming services, and magazine subscriptions
• Interests on credit cards - If you have credit card debt, budget for monthly interest charges. Avoid paying only the minimum whenever possible to prevent debt from piling up.
• Out-of-pocket healthcare - Even with insurance, co-pays or other out-of-pocket medical expenses can be unpredictable.
• Public transit and parking - Monthly passes, tolls, or parking fees can add up quickly.

Budget Category 3: Negotiable Expenses

Negotiable expenses or non-monthly expenses are often overlooked when creating budget categories. These are regular costs that occur monthly, quarterly, bi-annually, or annually and can quickly throw off your monthly budget.

To avoid being caught off guard by these expenses, consider setting aside a portion of each paycheck to a separate account designated for non-monthly expenses. Some examples include:

• Home and car maintenance - Repairs and upgrades can be costly. To avoid financial strain, plan by setting aside money in a separate account.
• Taxis and ride shares - If you use these services regularly, they can add up. Consider alternatives such as public transportation or carpooling to save money.
• Entertainment - Dining out, movie tickets, and hobbies are all variable expenses that can add up quickly.
• Taxes - Whether it's property taxes or taxes on investments, they are inevitable expenses that should be accounted for.
• Shopping - Impulse buys, clothing, and home goods are all potential budget-busters.
• Gifts and celebrations - Birthdays, holidays, and special occasions often come with additional expenses.
• Vacation - Whether it's a yearly trip or an unexpected getaway, setting aside money for vacations can help you avoid debt.

5 steps to budgeting your net income

Creating a budget can seem overwhelming, but breaking it down into simple steps can make it more manageable. Here are five steps to help you get started with your budgeting plan:

Step 1: List your income

Make a list of all your sources of income, including salary, bonuses, investments, and any side hustles. This will give you an accurate picture of how much money you have to work with.

If you have variable income, check your earnings from the past few months. Consider the lowest amount and use it as your planned income budget for this month.

Step 2: Write your expenses

Gather all your bills, bank statements, and receipts from the past few months to get an accurate picture of your expenses. Categorize them into fixed, variable, and negotiable categories.

Pro tip: When creating a budget, allocate funds for giving before listing your monthly expenses. Consider setting aside 10% of your income for this purpose. It's a wonderful way to begin your budget with a generous mindset!

Step 3: Deduct your expenses from income

Subtract your expenses from your income. If you have a positive balance, that's good news! You can put the extra money towards your retirement account, investment, or debt repayment.

However, if it's negative, don't panic. This is just step one in creating a budget to help manage your finances better.

Step 4: Track your transactions

Start tracking your expenses by recording each transaction in a budget spreadsheet, budgeting apps, or a simple notebook. This will help you monitor overspending and adjust your budget accordingly.

Step 5: Reassess and adjust as needed

Review your budget regularly, at least once a month. Look for areas where you can cut back or save more. Make necessary adjustments to ensure that your budget aligns with your savings goals.

Pro tip: You can set a budget rule, like the 50/30/20 rule, to help you allocate your income efficiently. This popular budgeting method suggests that:

• 50% of your after-tax income goes to fixed expenses
• 30% for variable expenses
• 20% towards savings, debt repayment, and discretionary spending

Balancing your needs and wants

Creating and managing budget categories is not about depriving yourself of things you enjoy but finding a balance between your needs and wants.

Here are a few tips to help you maintain that balance:

• Know your values - Be cautious with your spending choices, and make sure they match your values and priorities.
• Pay yourself first - Set aside a portion of your monthly income for savings and investments before allocating money to your budget categories.
• Be realistic - Don't set unrealistic budgets for yourself. Be honest and include all necessary expenses while allowing room for flexibility.
• Don't deny your wants - Treating yourself occasionally is okay; just make sure it fits within your budget.
• Make room for giving - Consider setting aside a portion of your budget for charitable donations or giving back to your community. It's fulfilling and helps create a sense of balance in life.
• Consider your long-term goals - Keeping your eye on the bigger picture can help you make smarter financial decisions and prioritize your spending.
• Review and adjust regularly - Life changes, and so do our financial needs. Make sure to review and adjust your budget categories regularly as necessary.
• Set up emergency funds - Unexpected costs happen. Build a safety net by saving part of your monthly income into an emergency fund that covers three to six months of expenses. It's recommended that these funds be separate from your savings account.

Need more guidance on how to budget?

If you're having trouble with your finances, remember you're not alone. Try trimming down non-essential spending or finding new ways to increase your income.

If that still doesn't help, Doing Well has created a free guide that breaks down expenses into Fixed Necessities, Variable Necessities, and Negotiable Expenses and shows the percentages of your income you should target for each.

Use this guide to understand better and manage your budget categories. Get the free guide here.