Classification of expenses

When you start managing a household budget, you will fall into one of these groups:

1. Control Fanatics – Before they even start tracking their expenses, they download the largest Excel spreadsheet they can find online and then expand it with even more subcategories. This results in over 300 items to track. On the surface, it seems like great, precise control, right? Wrong. After just two weeks, you’ll realize that such a budget is an overgrown mess, and you aren't even using half of it. You’ll also notice that some subcategories only account for one or two payments throughout the entire year. Get rid of the excess. Every year, I personally remove unnecessary items from my budget that are just taking up space in the spreadsheet.
2. Typical Laid-back Types – They immediately start recording costs into categories that are far too general, like "home" or "bills." They create 5 to 8 spending groups that tell them absolutely nothing. At the end of the month, the "bills" category shows 980 PLN, but how much of that went to electricity, water, rent, gas, or cable TV? No one knows. And no one will know until better organization is implemented.
3. Budget Masters – They immediately know which costs they need to control and create categories along with appropriate subcategories. You aren't in this group, but don't worry. No one is. Every beginner has to go through one of the previous groups, and it can take years. Remember your old photos? You thought you looked like a million bucks back then, but now you’re embarrassed to even look at them yourself. It will be exactly the same with your budget.

Methods for categorizing expenses

Remember that a household budget is a tool that should primarily meet your needs while effectively doing its job. When creating categories, you aren't just separating potential expenses; you are also planning where your money should go and in what amounts.

Category hierarchy

This is the simplest part of building a budget. Ask yourself which expenses are most important to you and in what order.

Fundamentally, your family needs to eat, have a place to live, stay healthy, commute to work to earn money for all of this, and so on. Step by step, you build the framework of your household budget. Stick to the bare essentials and create only a few categories.

1. Food
2. Home
3. Transport
4. Healthcare and hygiene
5. Loans and credit
6. Savings
7. Clothing
8. Entertainment

This order may look different for everyone.

Simple expense categorization

You have your main expense categories, but they still don't tell you much. When you look at the Home section and see an amount of 980 PLN, you have no idea how it breaks down. How much did you pay for electricity, water, rent, or was that the new lamp? No... Was that last month? Despite your best intentions, there is still chaos.

So, start expanding your categories with related subcategories:

1. Food – home, city, work;
2. Home – rent, electricity, water, gas, furniture;
3. Transport – fuel, tickets, liability insurance, repairs, technical inspections;
4. Healthcare and hygiene – check-ups, doctor visits, medication, vitamins and supplements, hairdresser, beautician;
5. Loans and credit – mortgage, installments;
6. Savings – IKE, IKZE, emergency fund;
7. Clothing – casual, sportswear, shoes;
8. Entertainment – games, books, cinema.

At this point, you have 30 subcategories that will work perfectly as a first household budget. Of course, only create the ones where you actually have expenses. If you don't have a car, you can remove insurance and inspections, but you might need to add taxi fares. You might not have gas at home, but you might pay for waste collection separately. Tailor this to your needs and keep it moderate. For starters, this list is more than enough. If the need arises, you can expand it with necessary items.

Complex expense categorization

Online, you will find plenty of spreadsheets expanded to incredible sizes, which in my opinion, alongside not keeping a budget at all, are at the other extreme. For most of us, they will simply be too complex.

See this in the example of the Food section:

1. Home – bread, vegetables, fruit, meat, dairy, sweets, alcohol
2. City – fast food, restaurant, snacks, coffee
3. Work – lunch, catering, vending machine, sandwich delivery

As you can see, 15 subcategories have been created, and that’s just the first of the main expense groups. A household budget in this version is very precise, but also not very practical. In reality, the only reason for such accuracy is to track a specific expense that you really want to control.

Alternatively, you can use this method to track expenses in the same category for different household members. In that case, you would use a split like "books him" and "books her."

Plan your savings

In addition to classic expense categories, I recommend introducing a Savings category. These are, of course, not funds to be spent. It’s about determining a specific amount you want to set aside and verifying that goal.

Of course, you keep a budget in order to save, but without specifics, the chances of success are slim. Cash left in your pocket tends to disappear under mysterious circumstances – which is why you should get comfortable with the rule of paying yourself first. Transfer a set amount of savings to a separate account or sub-account as soon as you receive your paycheck or at the beginning of the month. This leaves you with a specific amount to cover your remaining expenses, which helps you manage it better.

And what if you set your savings goal too high, your actual expenses don't match your plans, and you need to fix it? Absolutely nothing. You just do it. It’s a normal part of the process of learning how to manage a budget and confronting your expectations with financial reality.