Setting Category Budgets

Setting the right budget amounts for each category is crucial for success. Too restrictive and you’ll constantly go over. Too loose and you won’t make progress on your financial goals. This guide will help you find the sweet spot.

Understanding Budget Amounts

In Balance, budget amounts represent monthly allocations for each category:

• Income categories: How much money you expect to receive
• Expense categories: How much you plan to spend

Your goal is to allocate 100% of your income across your expense categories and savings goals.

Starting Point: Look at Reality

The best budgets are based on reality, not wishful thinking.

Step 1: Review Your Spending History

Before setting budgets, look at 2-3 months of past spending:

1. Go to Transactions tab
2. Filter by category (or look at statements)
3. Calculate average monthly spending
4. Use this as your starting point

Example:

Groceries:
- October: $520
- November: $580
- December: $650 (holidays)
Average: $583

Starting Budget: $600 (slightly above average)

Step 2: Be Honest with Yourself

Common Mistake: “We spend $600 on groceries, but we’ll cut back to $400.”

Reality: Cutting spending by 33% overnight is unrealistic.

Better Approach: “We spend $600. Let’s budget $600 and try to come in under budget.”

Step 3: Start Conservative, Adjust Later

It’s better to:

• Set realistic (higher) amounts initially
• Come in under budget
• Reduce amounts gradually

Than to:

• Set overly ambitious (low) amounts
• Constantly go over budget
• Feel like you’re failing

How to Decide Budget Amounts

Fixed Expenses

These are easy - use the actual amount you pay:

Example:

Rent: $1,500 (exactly what you pay)
Car Payment: $425 (loan statement)
Car Insurance: $125 (annual $1,500 ÷ 12)
Netflix: $15 (subscription fee)

Variable Expenses

These require estimation based on history:

Groceries:

• Review 3 months of spending
• Calculate average
• Add 10% buffer
• Round up

Example:

Past 3 months: $520, $580, $630
Average: $577
+ 10% buffer: $635
Round to: $650

Gas:

• Calculate weekly spend
• Multiply by 4.33 weeks
• Account for seasonal variation

Example:

Weekly gas: $50
Monthly: $50 × 4.33 = $216.50
Round to: $220
Summer travel months: $300

Dining Out:

• Count how many times you eat out per month
• Multiply by average cost
• Be honest about actual frequency

Example:

Frequency: 8 times/month
Average meal cost: $35
Total: $35 × 8 = $280
Round to: $300

Irregular Expenses

These don’t happen every month, but you should budget for them monthly:

Method: Annual cost ÷ 12 months

Examples:

Car Registration: $120/year

• Monthly budget: $120 ÷ 12 = $10

Holiday Gifts: $600/year

• Monthly budget: $600 ÷ 12 = $50

Car Maintenance: $800/year (estimate)

• Monthly budget: $800 ÷ 12 = $67

Vacations: $2,400/year

• Monthly budget: $2,400 ÷ 12 = $200

This way, when the expense hits, the money is already set aside.

Savings Categories

Savings categories are expense categories in your budget (money you’re allocating out of income).

How to Determine Amount:

Method 1: Pay Yourself First (Recommended)

Total Income: $6,000
Savings Goal: 20%
Savings Amount: $6,000 × 0.20 = $1,200

Method 2: What’s Left Over

Total Income: $6,000
Total Expenses: $5,400
Savings Amount: $600

Method 3: Specific Goals

Goal: $10,000 emergency fund in 12 months
Monthly Savings: $10,000 ÷ 12 = $834

Income Categories

Income amounts are what you expect to receive:

Salary (Regular):

• Use net (after-tax) monthly income
• If paid bi-weekly: Paycheck × 2.17
• If paid weekly: Paycheck × 4.33

Example:

Bi-weekly paycheck: $2,000 (after taxes)
Monthly income: $2,000 × 2.17 = $4,340

Variable Income (Freelance, Commission):

• Use conservative estimate (lowest typical month)
• Or use 3-month rolling average
• Don’t budget based on best-case scenario

Example:

Last 6 months: $2k, $3.5k, $1.8k, $2.8k, $3.2k, $2.5k
Lowest: $1,800
Average: $2,633

Conservative budget: $2,000
Or use: $2,500 (slightly below average)

Budget Amount Strategies

The 50/30/20 Rule

A popular framework for allocation:

• 50% - Needs (rent, utilities, groceries, insurance)
• 30% - Wants (dining out, entertainment, hobbies)
• 20% - Savings & Debt Repayment

Example with $5,000 income:

Needs: $2,500
Wants: $1,500
Savings: $1,000

Adjust for your situation:

• High cost of living area: 60/25/15
• Aggressive saver: 50/20/30
• Paying off debt: 60/10/30

Zero-Based Budgeting

Every dollar gets assigned a job.

Total Income: $6,000

Expenses:
- Rent: $1,800
- Groceries: $600
- Utilities: $200
- Gas: $150
- Insurance: $300
- Entertainment: $200
- Dining Out: $250
- Subscriptions: $100
- Personal Spending: $300
- Car Payment: $400
- Student Loans: $500
- Emergency Fund: $500
- Vacation Fund: $200
- Buffer: $500

Total: $6,000 (100% allocated)

Nothing left unassigned.

Envelope Method (Digital)

Treat each budget category like an envelope of cash:

• Groceries: $600 “envelope”
• Once spent, the envelope is empty
• Can’t borrow from other envelopes without explicit decision

This is essentially how Balance works - each category has its own budget amount.

Adjusting Throughout the Month

Should You Adjust Mid-Month?

Generally NO, unless:

• Genuine emergency requires reallocation
• You made a major error in the original budget
• Income or expenses dramatically changed

Why wait until month-end:

• Gives you real data to analyze
• Avoids constant tinkering
• Helps you learn actual spending patterns
• Builds discipline

When to Adjust Immediately

Legitimate reasons:

Income Change:

• Lost job
• Got raise
• Partner started/stopped working

Major Life Change:

• Had a baby
• Moved to new city
• Major medical event
• Car broke down

Math Error:

• Accidentally budgeted $1,500 instead of $150
• Forgot a major category
• Budget is 150% of income

Planning for Budget Increases

Some expenses increase over time. Plan ahead:

Annual Inflation

Many costs increase ~3% per year:

Current groceries: $600
Next year: $600 × 1.03 = $618

Update budgets annually to account for inflation.

Known Increases

Rent increase:

Current: $1,500
Lease renewal notice: $1,600 (increase of $100)

Actions:
1. Update Rent category to $1,600 (when increase happens)
2. Reduce other categories by $100 to compensate
3. Or increase income to cover

Insurance premium increase:

• Update when renewal notice arrives
• Budget exact new amount

Subscription price increases:

• Netflix goes from $15 to $18
• Update budget amount immediately
• Decide if still worth it at new price

Growing Family

Budget needs change with life:

Before baby:

- Healthcare: $200
- Shopping: $300

After baby:

- Healthcare: $300 (+$100)
- Childcare: $1,200 (new!)
- Baby Supplies: $200 (new!)
- Shopping: $150 (-$150, less discretionary)
Total increase: $1,250

Plan for these changes before they happen.

Category-Specific Guidance

Housing (25-35% of income)

Includes:

• Rent/Mortgage
• Property taxes
• HOA fees
• Home insurance
• Utilities

Budget:

• Exact amounts for fixed costs
• 3-month average for utilities

Transportation (10-20% of income)

Includes:

• Car payment
• Insurance
• Gas
• Maintenance
• Public transit

Budget:

• Fixed: Exact payment amounts
• Variable: Average monthly use + 10%

Food (10-15% of income)

Split into:

• Groceries: Necessity spending
• Dining Out: Discretionary spending

Budget:

• Track 1 month carefully
• Use that as baseline
• Distinguish between groceries and restaurants

Personal & Entertainment (5-10% of income)

Includes:

• Clothing
• Entertainment
• Hobbies
• Personal care
• Gym

Budget:

• Based on priorities
• Highly variable by person
• Most flexible category

Debt Repayment (Varies)

Minimum:

• At least minimum payments
• Exact amounts from statements

Aggressive:

• Add extra above minimum
• Use debt avalanche or snowball method

Savings (15-20% of income)

Types:

• Emergency Fund (first priority)
• Retirement
• House Down Payment
• Vacation
• Other goals

Budget:

• Emergency: $500-1,000/month until $3-6 months expenses saved
• Retirement: 15% of income
• Goals: Whatever’s left after essentials

Couple-Specific Considerations

Individual Spending Money

Consider giving each partner discretionary spending:

Budget:
- Personal Spending - You: $200
- Personal Spending - Partner: $200

No questions asked, no reporting required. Reduces friction.

Unequal Incomes

If you earn different amounts:

Proportional contributions:

You earn: $4,000 (60%)
Partner earns: $2,667 (40%)
Total: $6,667

Expenses: $6,000
You contribute: $3,600 (60% of $6,000)
Partner contributes: $2,400 (40%)

Or:

Equal contributions:

Expenses: $6,000
You each contribute: $3,000
Remaining income is personal spending

Discuss and agree on what feels fair.

Joint vs. Separate Categories

Joint categories (shared expenses):

• Rent
• Groceries
• Utilities
• Date Nights

Separate categories (personal):

• Your Clothing
• Partner’s Clothing
• Your Hobbies
• Partner’s Hobbies

Budget according to what you’re tracking together vs. separately.

Common Mistakes to Avoid

1. Forgetting Irregular Expenses

Mistake: Only budgeting for monthly bills

Missing:

• Annual insurance payments
• Car registration
• Holiday gifts
• Vacations

Solution: Divide annual costs by 12 and budget monthly.

2. Underestimating Variable Expenses

Mistake: Budgeting $300 for groceries when you really spend $500

Solution: Track actual spending first, then budget realistically.

3. No Buffer Category

Mistake: Budgeting to exact $0 left over

Solution: Add “Miscellaneous” or “Buffer” category for unexpected small expenses.

4. Too Many Tiny Categories

Mistake:

• Coffee: $25
• Tea: $15
• Energy Drinks: $10

Solution: Combine to “Beverages: $50” or include in Dining Out.

5. Forgetting Tax Changes

Mistake: Not updating income when tax withholding changes

Solution: Review budget when:

• You get a raise
• Tax laws change
• Withholding adjusts

Review and Adjust

Monthly Review Process

At the end of each month:

1. Compare Budget to Actual:

Category    | Budgeted | Spent  | Difference
-----------|----------|--------|------------
Groceries  | $600     | $650   | -$50 (over)
Gas        | $200     | $180   | +$20 (under)
Entertainment | $300  | $280   | +$20 (under)

2. Identify Patterns:

• Which categories consistently over?
• Which categories consistently under?
• Were there one-time expenses or patterns?

3. Adjust Next Month:

• Increase categories you consistently exceed
• Decrease categories you consistently underspend
• Reallocate based on priorities

4. Discuss with Partner:

• What worked?
• What didn’t?
• What needs to change?

Quarterly Review

Every 3 months, deeper review:

• Are category amounts still realistic?
• Has life changed requiring new categories?
• Are we making progress on savings goals?
• Do we need to rebalance income vs. expenses?

Troubleshooting

“I don’t know how much to budget”

Solution:

1. Track spending for 1 month without a budget
2. Use that month’s actual spending as starting point
3. Adjust from there

“Every category goes over budget”

Solution:

• Your budget amounts are unrealistic
• Increase budget amounts to match reality
• Then work on reducing actual spending over time

“We have too much left over”

Solution:

• Great problem to have!
• Add to savings categories
• Increase retirement contributions
• Create new goal-based categories (vacation, home improvement)

“Our income varies every month”

Solution:

• Budget based on lowest typical income
• When you earn more, allocate extra to savings
• Build buffer for low-income months

Next Steps

Now that you understand budget amounts:

1. Monthly Budget Reset - How budgets work month-to-month
2. Budget Progress Tracking - Monitor your spending
3. Managing Your Budget - Advanced management tools
4. Category Recommendations - Suggested categories and amounts

Need help? Contact our support team - we’re here to assist!