Categorizing Spending in your Budget

I know - budgeting. Everyone just threw up in their mouth a little. But seriously, you need to reframe your mindset when it comes to budgeting. This is not telling you that you can't spend money - it is just making sure that you're spending your hard earned money where you want to spend it! 

In this episode I talk about three different categories of spending & how it will help make sure you are spending money on what you actually value. 

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Transcript

00:05 All right. Thanks for listening to the Confident Dollar podcast. Today we're going to talk about budgeting and I know I've had a previous episode in which I kind of break down my recommendation of how to budget and how to kind of get that organized and going.

00:22 Today I just have a few different tips to kind of help you categorize your spending a little bit more as you're analyzing your budget.

00:34 That's another good episode to listen to just to give you kind of like my breakdown of how I recommend you just start budgeting and start figuring out your finances when it comes to setting your budget.

00:45 But like I said, I'm gonna just a few other tips on just how to kind of think and categorize your money as you're budgeting.

00:50 You're going through that process. And I always want to preface this by saying budgeting, whenever it's talked about so often, it's like no one likes it.

01:01 Like no one wants to think about a budget because they, their thought and their you know, how they've been conditioned to think about budgeting is like, I don't want to do that because then I can't spend any money where I want to spend money.

01:14 And that is never the goal of budgeting. The goal of budgeting is just to understand how you're spending your money.

01:22 And if you're actually spending your money where you want to be and just knowing where it's going because I guarantee you that if you don't have a budget, you know exactly what I mean by if you don't know where your money's going, it's suddenly 
gone and you just don't know what happened to it or really

01:36 what you bought because you know, time goes by and you're not really paying that close attention. So a budget instead of being this constricting thing that is making your life harder, it actually is helping you because it's giving you that free pass of like, you've already budgeted for this so you know

01:56 actually you can spend your money on that. That's what you've been planning on. So it actually gives you more, a lot more freedom and just helps alleviate just that like guilt or just stress that may come with your finances because you know where you're spending your money rather than you know, impulse

02:12 spending and not knowing where it's going. So. As you're figuring out your, your, your expenses or, or your budgeting there are three different categories that I want you to think of when it comes to your money.

02:26 So your first category of spending is your, your basis. Your needs kind of like your first bucket is just what it takes for you to live.

02:36 So your bills, utilities, you know, gas food, rent, mortgage, that's going to be in that main bucket. That's just your living expenses, like what it takes for you to survive with wherever you live.

02:48 Okay, bucket number two, your second category is you're spending as, or really you're saving as just what money you are putting aside every month for your long-term goals.

03:00 So for retirement or maybe buying a house or maybe emergency fund and that bucket is going to depend on where you are in the process of trying to get your finances organized, like what step you're on.

03:13 So that's gonna, that's gonna change depending on what step you're on. If you're in the step of like paying off debt, then you're, you know, a lot of that is going towards your debt payoff or if you're in the step of saving your emergency.

03:26 So that's gonna shift over time depending on what kind of step you're working through. But that's kind of your second category of spending.

03:33 And then your third category of spending is your fund money. Like what you actually have left over every month after those first two.

03:39 To do, you know, the things that you'd like to do. And that's going to be based on really your values that you have and where you enjoy spending your time and spending your money.

03:49 So there's some value evaluations that you need to do to figure those values out for those categories. But I want you to understand those three categories.

03:58 So if you go back to the other podcast episode and you're analyzing your spending it's helpful to put it in these, these three categories.

04:07 So you know, like, okay, this is my bare bones budget of what I spend. Every month to survive. Okay. And that's your bucket one.

04:16 So this is all of those things. And maybe that's $4,000 a month. Okay. When I talk about your emergency fund, this is kind of like a side note.

04:25 When we talk about your emergency fund, do we want your emergency fund to be based off of that bucket number one?

04:31 Because if you lose your job or you know, different things come up in your life, you can eliminate the other two buckets, right?

04:37 You can put those on pause. You don't have to spend fund money and you don't have to spend or saving for your goals for that period of time.

04:44 Unless it's like minimums on debt, but that's kind of a, a side note, but you do have to have enough money to continue to live.

04:51 So that's the amount you probably need to be basing your emergency fund on and put at least three to six months aside based off that bucket one.

04:58 But as you're going through your spending, categorize this so you know, you're, you're just trying to analyze where you spend your money.

05:04 Go through your, your spending and look at what your bills and utilities are, all of that, and, and put this in this bucket one category.

05:11 Okay. And total that up. And that's what, you know, you spend every month in that category. Okay. And then for bucket number two, like, like I said, this is depending on where you're at.

05:22 So you do need to figure out what step you're on in order for, you know, how much or what, where this money is going.

05:30 Okay. This is also, I know I said it's bucket number two, but I do believe that this is a lot of like, this is the pay yourself first category.

05:37 So if this is for investing, this is for staying for your home, or this is for any of those goals, then it really needs to happen at the beginning of the month.

05:46 And it's not like leftover after everything else is done. That's why it definitely is before that fund money. So you have what you need, you know.

05:54 You know, you need this amount to live off of. And then you need to make sure you're paying yourself first in saving for your, you know, taking care of your long-term self basically, and getting your finances in order by, you know, figuring out what that 
bucket number two amount is going to be.

06:10 It's kind of also can be thought of as like your savings rate. And maybe this bucket number two isn't a lot to start out with when you first start budgeting and that's okay.

06:21 Maybe this is just 5% of your income or even maybe 10% of your income. But what you can do as you make more money.

06:28 One, but two, but really get better at your budgeting is you can also challenge yourself by just upping this every year, a certain amount of percent.

06:36 So you know, don't let this bucket overwhelm you. Like, I don't know what I should be saving for that in the long run.

06:44 Whatever that goal is that you're working on, but just set an amount and then like try to just like slowly up that every once in a while, just to kind of you know, work towards a larger amount that you're putting towards your long-term goals.

06:57 Okay. And then, so you're categorizing all your, your spending. You got those two down. Where's your discretionary spending going? Basically your fund money.

07:07 And then this is where you can really make a lot of difference in your budget. One, by not only maybe saving money in areas that you just don't need to be spending on, but two, actually making sure that you're spending money on things that you enjoy.

07:19 Always spending money on. So if you kind of go through your values and the things that you want to do in life, like let's say, you know, your kind of top three values maybe are you love to travel.

07:37 You love fashion and you love to get your nails done. So those are things that really are important to you that that's where you like to spend your money.

07:48 Then that should be where your discretionary spending kind of looks like. Or maybe it's you like it's entertainment. And concerts or those types of things, but really whatever your kind of top few values are, should be reflected in how you're spending your money for your fund money, for your discretionary

08:03 spending. So go through as you're going through your budget again. So you're categorizing this, you're looking at your discretionary spending and you're like, ah, I actually it's I'm, I'm not spending my money in those categories.

08:14 I'm spending in other places. So there's really one of two issues. Either those really truly aren't your values. You do value other things.

08:21 More than that, like maybe you think those are your values, but you spend all your money eating out. So maybe that is something you value is eating.

08:27 Out more often. Or you it doesn't, that's not your value, but out of convenience or out of impulse, you spend your money other places than you'd actually really want to spend your money.

08:40 So that's why this is kind of like an important step to go through and figure out as you're tracking. Your spending is this aligning with where you want to be spending your money.

08:49 The other thing I would say as a side note for this section two is that, you know, if something like travel is a high value of yours, it doesn't necessarily mean you're spending money every month on travel because that would be a lot of trips, but maybe every month you're putting a certain amount of 

09:04 money aside in a sinking fund for travel so that it is there and ready for when you do take that trip because that's something you want to do.

09:13 And we all know it's a lot more relaxing to take that trip when the money set aside and it doesn't come with credit card debt after.

09:20 So for the, those bigger things that you may like to do, that's how I would say to handle that to still work it in monthly.

09:27 And so you're going to see that as like a value or discretionary, indiscretionary spending every month, but it's just saving for those other things that you do like to do that.

09:35 Or bigger ticket items. So as you're tracking, like I said, you're tracking this every month and you're looking at, okay, I am spending where I don't even like to spend.

09:47 And this doesn't mean that also as a sign out, it doesn't mean that because those are you do value those three, those things, those top three things, you're never going to spend your money in the other categories.

09:56 You are because you still are going to need some clothes sometimes, even if that's not something that you value, that's going to hit your budget every once in a while.

10:04 But it just should be more aligned with where you like to spend your money because this is your hard earned money.

10:09 And it does deserve to have some thought behind how it's being spent and making sure you're spending it to a way that you enjoy because you, you work hard for, for your money.

10:22 So I want you to understand those three categories, think about your budget. What are you doing in those ways? As you're trying to, let's say you overspend and you 
know you overspend, what are ways you can fix, okay?

10:34 Top two, obviously, discretionary spending. That's the biggest one. So that's fun money. Maybe you have, you do have to limit that for a period of time, but not overly likely.

10:43 Like still work in some things that help you kind of get through a time of a tighter budget, but you still get to enjoy yourself because otherwise if it's too tight and it's too restrictive a lot of people have, you know, it's like that emotional like all of a sudden you freak out and you just go buy

11:00 something. So don't make it overly restrictive, still work in a little bit of amount. So I wouldn't say fully cut that category.

11:07 I would say maybe you do need to dial it back a little bit. You can't afford it if you like to travel.

11:11 Sure. But you can't afford the trip to Europe. You have to figure out a different trip for now. As you're getting your other finances in order, especially if you're in that debt payoff.

11:21 But you still work that in there. So that's a place you can kind of cut back. And then obviously for bills and utilities and just necessities, a lot of times things get worked into necessities that aren't actual necessities.

11:37 And there could be some cutting you can do there. I would say you can call, you know, kind of that reminder of like every once in a while you do need to call insurance companies and make sure you have, you're spending the right amount there.

11:47 Maybe you can get a better quote and save, you know, $75 there. Or maybe you need to rein in, you do need to eat out less and rein in your groceries just a little bit.

11:58 Cause there's a lot of money that you can save on that capacity as well. So those are kind of the two that I would say start with first to see where you can weed out and in a healthy way for you.

12:08 For now and then that bucket number two, because you're working towards specific goals, you do need to keep that as intact as possible.

12:17 But obviously within reason, you can't be putting half your income there and not have, you know, enough for a necessity.

12:22 So start with those bucket number one and bucket number three as you're trying to really, if you need to dial in spending because of overspending.

12:30 So hopefully that helps kind of think through how you can categorize your spending as you're going through your budget. And just always remember that budgeting is a process.

12:41 And it's not something you're going to have dialed in after one month of working on it. You're, it's going to take some time and that's okay.

12:49 And there's going to be some trial and error and that's okay. But as you slowly work through it and you, and you keep categorizing and you keep starting to track.

12:59 At least where their money's going, you're, you'll be able to make better decisions and you'll, you'll eventually become more of an expert in your own cashflow and understand how you spend and you'll be able to dial it in even more and more.

13:11 So try to change that thinking of having budgeting, being something that just sounds so overbearing and realizing that it really can bring so much freedom to your spending and to your finances.

13:25 So thank you for tuning in to this episode and look forward to the next one.