There is an old meme floating around the internet that draws attention to the fact that public school systems are quick to teach you that the mitochondria are the powerhouse of the cell. But they fail to teach you more practical information that you actually need in your daily life – like which budget categories you need to plan out your money.

Making a financial plan can be intimidating, especially if you do not know all of the essential budget categories you should include. To help account for at least one absence of the public school system, we put together this article that breaks down how to budget and what to budget for as an adult.

What Is A Budget?

While it might seem obvious, a budget can mean different things to different people depending on how financially literate they are. Someone who owns a small business thinks of a budget differently from someone who works a 9-to-5 job.

Both previous examples will have a different idea of a budget than someone who has to work multiple part-time jobs a week just to make ends meet. That said, the primary feature of a monthly budget is a detailed catalog for tracking net income (after-tax income) and expenses.

Why Do I Need A Budget?

Even if you keep track of your income and fixed expenses, a budget is still an important thing to have for a couple of reasons. The most obvious reason to make a budget is so you are never caught off-guard with more bills than money throughout the month – especially towards the end of the month or right before you get paid.

However, even if you already do an excellent job of not overspending during the month, keeping a budget can still provide long term data regarding your spending habits as well as a snapshot of your priorities. Not only can this help you plan for even longer-term purposes like retirement, but it can inform you of what expenditures truly make you happy and which ones you might be able to leave by the wayside.

How Do I Make A Budget?

This question may seem simple on its surface, but once you sit down to plan a budget, it can quickly spiral out of control, leaving you confused and overwhelmed. If you do not approach it correctly, planning a budget can feel futile once you see all of your income, expenses, debt, and financial goals laid out in front of you.

Considering the budget categories we present in this article, one budgeting method we suggest is that you download my monthly budget spreadsheet or use a budgeting app like Mint or another high-end competitor.

Granted, there are plenty to choose from, so you should likely do as much research on the budgetary app as you do on making your budget. Especially since not all of the apps work the same and different apps best serve different budgetary needs.

K.I.S.S.: Keep It Simple, Silly

One mistake that people often make when first planning a budget is to consider each and every budget item that they tend to purchase over a given time and try to fit it into an itemized list. While that is undoubtedly a thorough (arguably exhaustive) way of going about it, if you think in such granular terms, there is a good chance you do not need any help making a budget in the first place.

A better approach is to group all of your purchases into categories. Breaking them down makes them easier to understand and manage your day-to-day. By thinking about your expenses and money from a birds-eye-view, it can help determine whether or not a given purchase fits within your pre-established spending plan rather than trying to find a justification for buying something you don’t need.

How Much Do I Budget For Each Category?

While there is no hard and fast answer for this, each budgeting category will vary. We attempted to prioritize and list by percentage what may be the most important to you for this list. Keep in mind, this is not a complete list, and these categories are guidelines, and your financial picture may dictate different amounts. Expense categories will vary based on what you value in life.

That said, the largest chunks of cash will likely be towards the things you need to survive or those necessary to keep making money. Essential expenses that center on your shelter, nutrition, transportation, and health are vital to maintaining a stable life and should take up a significant portion of your budget.

Top 12 Budget Categories

Before you start your next month’s budget, be sure to include these budget categories.

1. Housing Expenses

This is a pretty easy category to place in the highest priority as it impacts so many aspects of your life, with your health and safety being one of the most important. Of course, you also need a stable housing situation to perform well at work, which is necessary for maintaining shelter, creating a circular dependency.

However, it is worth noting that a stable home is also vital for general purposes as you often require residence for most life events, like obtaining a license. This being the case, it should also not shock anyone to determine that housing costs account for the biggest expense in most people’s budgets.

While there is no strict maximum for the housing category, you should expect to pay anywhere from 25% to 35% of your income for housing, which can include a mortgage payment or rent. Keep in mind, anyone spending more than 35% of their monthly income on being a homeowner should reevaluate if they have too much house and need to downsize.

Items that fall in housing expenses:

Rent

Mortgage Payment

Appliances

Household Repairs

2. Utilities

While a shelter is arguably the most essential expense you might have, utilities are not far down the list and often seen as a housing-related expense. There are a couple of reasons for this, but the ability to live comfortably in your home is just as crucial for your health as actually having a home.

On top of that, many residential buildings in some urban areas have ordinances that require certain utilities, like water and electricity, to be considered safe living. Without these utilities, some cities may fine the occupants, send Child Protective Services, or even temporarily condemn the building depending on its condition.

Thankfully, utilities rarely come close to the top of the list of expenses in terms of cost, and you can reduce their cost with proper management. Depending on usage and breadth, you should expect to spend around 5% to 10% on monthly utilities.

Items that fall in utilities:

Electricity

Water

Telephone

Natural Gas

Sewer

Trash

Heating

Air Conditioning

3. Transportation Costs

This might be the next most important expense after housing, given how American population centers are designed and structured. While some areas may allow you to get away without having your own vehicle, rarely can you get away without having some form of transportation.

If you live in a larger, urban area, you may be able to rely on public transit like the subway or bus for a fraction of the cost of a car payment – but the reliability will differ depending on where you live. Keep in mind, the cost of owning a car includes the tags, licenses, and maintenance on top of the car payment.

Unsurprisingly, transportation expenses may be one of your largest categories, even if you take public transportation. Depending on your method, transportation or travel expenses will likely cost you anywhere from 10% to 15% per month.

Items that fall in transportation costs:

Gasoline

Car Payment

Registration Fees

Vehicle Repairs and Maintenance Costs

New Tires

4. Food

This is likely one of the last categories that we consider necessary for survival, though it is far from the last one we consider essential. Other categories below are arguably equally important, but you can often get by without them – for a time – before they eventually become a necessity.

However, food (groceries, not restaurants) and water are survival needs, not merely societal needs. Because of this, your grocery and water bills will often occupy a significant chunk of your income. Granted, this category is arguably the one where you have the most control in terms of how much you spend, but you still will have to devote a substantial amount.

Cooking dinner at home with groceries can help save money, but that “truism” is becoming less and less as fast food establishments sell meals for $5 or less. Granted, if you’re eating fast food every day, your medical bills will probably skyrocket. You should probably expect to spend anywhere between 10% and 15% of your monthly income on food expenses.

Items that fall in the food category:

Grocery Budget

School Lunch

5. Insurance

This is one of those categories that we referred to prior where you do not need it for your physical survival, but it is still a societal necessity and should be considered a high-priority. This broader category covers numerous sub-categories that may or may not apply to you.

For example, if you live in a large, urban area with well-run public transportation, you may not have to worry about car insurance, and those who own a home do not need to worry about renters insurance. On the other hand, if you live in America, you definitely need to get health insurance and dental insurance as those living expenses can hit anyone, anytime. It is also one of the primary reasons Americans go bankrupt.

It is worth noting that insurance may be classified under different categories depending on who you ask, but we group them on our list. Depending on what type of insurance you need and your insurance premiums, you can look to spend anywhere between 10% to 25% of your income on this category.

Items that fall in the insurance category:

Life Insurance

Auto Insurance

Renters Insurance

Homeowners Insurance

Health Insurance

Vision Insurance

Disability Insurance

Dental Insurance

Vision Insurance

Pet Insurance

6. Healthcare

Depending on your situation, this category will be higher or lower on the list – primarily dependent on your overall health and any chronic conditions. As such, younger healthy people generally do not have to allocate as much of their take-home income to this expense as older people.

However, older people who properly managed their money in their youth should have fewer and lower expenses, which allows them to spend more on general healthcare. Keep in mind, health care costs can cover everything from annual checkups, clinic visits, prescription medications to general medicine like pain relievers.

There is no good estimate of how much you should expect to spend on healthcare per month because some months you may spend a lot, and in other months you may spend nothing. That said, even when you do not have to spend money on healthcare, it is a good idea to sock away a little cash for a rainy day.

Items that fall in healthcare:

Anticipated Co-Pays

Prescription Medications

Orthodontic Work (Braces)

Prescription Eyeglasses

Primary Care Visits

Dental Care Visits

7. Savings

Given some of the statistics we have seen, this category might need to be placed a little higher on the list, but the fact that it is technically “additional” expenses situates it in the middle. That said, everyone, regardless of their age, needs some kind of emergency fund to cover those unforeseen expenses.

When you are young, it may seem like you have all the time in the world to save money, but that kind of thinking lulls you into a false sense of security. Older people likely understand the value of savings and should already be well on their way, though some may still need to play catch-up from decisions made in their youth.

There is no hardline about what amount you should save, but a safe bet is between 5% to 10% of your monthly income. Saving this amount will all but guarantee you can handle the unexpected emergency expense while providing you a nest egg for a future big purchase.

Items that fall in the savings category:

Emergency Fund

Health Savings Accounts

Fun Money

Three to Six Months of Expenses

Saving for a Specific Purchase (vehicle, college savings, vacation, etc.)

8. Retirement

While you could argue that retirement is a type of savings, we refer to savings as money that can be used for any expense without penalty. On the other hand, retirement is money that you save but cannot use until you reach a certain age in your golden years. If you plan on taking money out of your retirement account before the age of 59 ½ (unless you have a 457B account), you will incur a 10% tax penalty.

While this might seem like an onerous restriction, it has the added benefit of preventing you from spending money that will be needed to carry you through the end of life. On top of that, most of the accounts that manage retirement savings have various tax loopholes that allow you to either deduct the contributions from your taxes or reduce your taxable income until withdrawal.

Much like savings, this is another category without a hardline amount that you should contribute but should see at least 5% of your income (15% is much better). Keep in mind, this is the money that you will live off of when you are no longer able to work.

Items that fall in retirement:

Employer-Sponsored Retirement Plan

401K

403B

Roth IRA

457B

9. Debt

While this category may not apply to everyone, it applies to around 80% of the US population, so we figured it was a safe bet to put on our list – especially if you have a student loan, credit card debt, or personal loans. Granted, if you are one of the lucky 1 in 5 people who do not have debt, then you do not need to worry about this expense, but then what are you doing learning how to make a personal budget in the first place?

For the rest of us, debt is easily one of the more important expenses to consider. Still, it often sits a bit lower in our practical priorities explicitly because we can pay it off over time. That said, it is equally important to make sure you do not fall behind on your payments as the penalties and fees can balloon into a compounding runaway train.

Because everyone’s situation is different, we cannot recommend a given amount of your monthly income you should dedicate to debt payments. On the other hand, we recommend that you pay more than the monthly minimum – something close to 1/3 of Americans do.

Items that fall in the debt category:

High-Interest Credit Cards

Vehicle Loan

Student Loans

Personal Loans

Medical Bills

10. Personal Care And Personal Hygiene Items

This category can also be called “lifestyle” and refers to both wants and needs. Want, like new clothes that you do not strictly need, various cosmetic expenses, and anything else you buy for yourself that does not fill a strict need falls lower down the list.

Toilet paper and toothpaste should definitely be considered a “need.” Depending on your situation, some of these personal expenses might actually rank higher than expected.

The overwhelming majority of these expenses tend to fall outside of the purview of “necessities,” which places them lower on our list. If you need a new suit or dress for work or a cell phone, that is different, but few people need to go to a tanning salon and use the expensive beds multiple times a week.

Because most personal expenses are lower priority, there is no expected amount you should budget for this category, but it should remain relatively low on your list of priorities. Ensure that everything else above it on this list is covered first, then look to see what you can spare to maintain the lifestyle you want.

Items that fall in personal care and hygiene:

Shampoo

Deodorant

Toothbrush / Toothpaste

Gym Memberships

Shoes

Dry Cleaning

Toiletries

Laundry Detergent

Cleaning Supplies

Diapers

Hair Care

11. Entertainment

This category sits at the bottom of our list for a good reason, but it is still essential to include. The line from The Shining, “all work and no play makes Jack a dull boy,” can hit pretty close to home for people who do not have the discretionary income to spend on entertainment.

Of course, a creative individual can find extremely inexpensive hobbies to entertain themselves, but good mental health requires some form of entertainment. That said, if you find yourself in a budget-crunch, this is easily one of the first categories you should reduce until you can pull yourself out of that financial hole.

Sporting events, vacations, or streaming services like Netflix fall into this category. Given its otherwise low priority, there is no set amount you should spend on entertainment, and extra money can shift from month to month.

Items that fall in entertainment:

Books

Electronics

Restaurant Dining

Concert Tickets

Events

Vacations

Movies

Starbucks

12. Other

Given that it sits on the bottom of our list, this is a low priority item that covers pretty much anything else not already discussed. Granted, that can include property taxes that are a high priority in most circumstances, but you can often work with the IRS to get a debt repayment plan, in which case it becomes part of your “debt.”

Outside of taxes, various “other expenses” might also include donations, whether tax-deductible or not, but should also include expenses like parking fees, child support, and school supplies. Outside of these other expenses, things like gifts for those close to you also fall into this category.

As with other items lower on our list, your particular circumstances will heavily dictate how much income you devote to this broad category. Of course, some of these expenses are significantly more important than others, but things like a home improvement can be considered a kind of investment.

Items that fall in the other budget category:

Miscellaneous Expenses

Child Care

Holiday Decor

Special Occasions

Alimony

Anniversary Presents

Tutoring

Private School

Surprising Budget Statistics

As of 2018, the US’s average income was just under $71,659 a year, but that includes the wages of billionaires like Jeff Bezos, so the more realistic number is closer to $65,000. It seems this article is sorely needed as a recent Gallup poll shows that only 1/3 of Americans keep any kind of formal budget.

The numbers are far worse for budgets extending beyond the standard month-to-month format and tend to favor those who make more than the average income.

Of course, this article is needed for more than just a lack of budgeting as around ¼ of US Millennials demonstrate basic financial literacy (though they likely know all about the “powerhouse of the cell”).

Increasing Tuition Costs

Given how few people keep a budget and how few young people even know how to, it should also not surprise anyone to find out that a little over ¼ of US Millennials regularly overdraft their bank account. Granted, the Millennial generation came of age when the US economy was in shambles and right when higher education began inflating their tuition to pay for bloated administration costs.

However, it is not just the youth that seems to be struggling as even the older generations getting ready to retire find themselves in precarious financial situations. Sadly enough, some of this comes due to the exploding costs of higher education as parents generally have to cosign student loans.

Older Americans Continue To Struggle

Unfortunately, it gets worse as most Americans between the ages of 55 to 65 only have enough retirement savings to provide an average of $310 per month without taking from the principle.

While that might seem scary, it is worth noting that according to Forbes, 63% percent of the population cannot cover an unexpected $500 expense without going into debt.

The numbers are similarly dire in terms of savings as just under 1/3 of Americans have as little as $500 in savings. As such, it should be unsurprising that close to half of all US households live paycheck to paycheck.

Conclusion

While your priorities may differ depending on your circumstances, it is vital to keep in mind that some categories are inherently more important than others as they have a more significant impact on your earning potential. If you need a category to make money, that category should hold a higher priority.

That said, this does not mean you should outright avoid a category unless absolutely necessary, as the absence of something like entertainment or personal discretionary spending can cause issues. Hopefully, you understand why a budget is essential, how to make one, and how many categories to consider.

This post originally appeared on Arrest Your Debt.