By Brad Hoffer
How many categories should you use when you budget? 10? 20? 40? When I first started tracking our spending, I probably had 40 categories. Today, I use 10 spending categories. So why did I change and which way is better?
I really think it is personal preference, however, I would like to share my experience. When I had so many categories I found budgeting to be overwhelming. I also found that when I created a budget for so many small categories, often things in our life would change and I was spending lots of time adjusting budgets, moving budgeted dollars from one category to another. I stepped back one day and said, 'why am I doing this?'. My main goal is to spend less than I make. If one month we needed to spend more on food and less on home improvement, what difference did it make? My main concern was making sure that in total, we didn't overspend. What I landed on was to focus on fewer, but larger categories. I ended up with 5 variable and 5 fixed expense categories. This made it a lot easier to remember what category items fall into. It also reduced the number of times I had to adjust where my budget dollars belong.
I will be honest, the detail-oriented part of me still struggles to group so many things together into one group. But if I am even more honest, I really believe we are doing better today with sticking to our budget than ever before. By reducing the number of categories, you give yourself the flexibility you need to adjust to the needs of the month and still control your overall spending.
If you are familiar with xlyourfinances, you realize that the number of categories doesn't really matter because the spreadsheet will automatically categorize and summarize them against your budget. So there is little to no extra work regardless of the number of categories you have. However, I still believe that when you sit down and look at your budget vs. actual, you are better off with less categories. Each week you are more likely to be focused on your goals and more determined to reduce your spending if you can see the one or two areas you need to improve vs. 15 areas because you have 40 categories you are trying to analyze. This is why I say, "less is more".
This brings me to my concluding thought. There are many products available to choose for personal finance. I don't claim that xlyourfinances is for everyone. But I do believe that for the majority of individuals and families across almost any income level, it will be an invaluable tool in keeping track of and improving your understanding of your finances. Xlyourfinances will help you set goals, reduce your stress and improve your financial situation by giving you the information you need to make informed financial decisions. Whether you decide to use 400 categories or 10, it is your choice and there really is no wrong answer, as long as it works for you!
I have been an Auditor, Analyst, Accounting Manager, Business Systems Manager, Controller, School Board Vice President, Director of Finance, CFO and Senior VP of Operations over the past 2 decades of work experience. In my free time I developed the XLYourFinances spreadsheet and website I enjoy golf and spending time with my family. We attend church at LCBC.