How to build a budget by category and stay inside it

Why a budget “for everything” does not work

The classic advice is to write out all of the month’s spending by category and put a limit on each. It sounds sensible, but in practice it produces twenty figures that have to be watched every day. Twenty figures are twenty chances to slip and twenty reasons to decide that “this month did not work out”. By the third week nobody is looking at the budget any more.

A budget works when it can be held in your head. Three to five categories with limits, plus one overall ceiling for the month — that is what a person genuinely remembers while standing at the till. Everything else needs no limit: it is either fixed (rent) or too small to decide anything.

So the first question is not “how much should the limit be” but “what should have a limit at all”. And the answer is: only the things where you have a choice.

Where to get the figures

1. 1For a month or two, simply record your spending without any limits. A budget made up “from your head” is almost always too low: people remember the big purchases and forget the small ones, and it is the small ones that make up half the total. The figures have to come from what really happened.
2. 2For each category take a typical month, not the average. If for three months you spent a thousand on clothes and once eight thousand on a winter coat, the average shows almost three thousand, and that is untrue: an ordinary month costs a thousand. The coat is a separate story, covered below.
3. 3Round up. Nobody remembers a limit of “2,340 hryvnia”; “2,500” is easy. A margin of a few per cent will not spoil the budget, but a limit you go over by a little every single time will spoil the habit.
4. 4Add up the limits and compare them with your income. If the total is larger than what you bring in, the budget is not “too generous” — it has simply shown you, honestly, a problem that was there before it. Cut where there is a choice, not evenly across every line.

Which categories to limit, and which not

A limit makes sense only where there is a decision. Groceries, cafés, entertainment, clothes, taxis — here you choose every time, and a limit helps you choose. Rent, utilities, nursery, the loan payment — here there is no choice, and a limit on them is just a figure that happens to equal the expense. Such costs need to be known, but they do not need to be “controlled”: they are either there or they are not.

The working rule is three categories plus a ceiling. Pick the three largest categories where you have a choice and put a limit on each. For everything else — one overall limit for the month, with no detail. That way you watch four figures, and that is enough to keep the month from getting out of hand.

If after two months “everything else” has visibly swollen, split that one and find what is growing in there. But do not do it in advance: most people never reach the point where that split is needed.

The 50/30/20 rule — and why to bend it to fit you

There is a well-known formula: half of your income for the essentials (housing, food, transport, payments), a third for the wants (cafés, entertainment, travel), a fifth for savings and debts. It is handy because it gives you somewhere to start when you have no figures of your own yet.

But it is exactly that — a starting point, not a law. In a big city with expensive rent, the essentials can take sixty per cent, and no formula will change that. A family with a child and a person living alone have completely different “wants”. So the right way is this: take the formula, compare it with your real figures over two months — and keep what actually works for you, not what the book says.

The one part of the formula worth holding on to is the last. If nothing is left for savings, month after month, that is not “how it turned out” — it is a signal that something in the essentials or the wants needs looking at.

What to do when the limit ran out on the twentieth

• Do not cut everything at once. The first reaction — “we buy nothing until the end of the month” — lasts two days and ends in a binge. Better to see whether money can be moved from a category that still has some left: did not spend on entertainment — part of it can go to groceries. That is not breaking the budget; that is what a budget is.
• An overrun is information. If a category goes over its limit three months in a row, the figure is wrong, not you. Raise the limit to the real level and lower something else. A budget that “fails” in the same place every month teaches nothing — it only spoils the mood.
• Carry the remainder over in both directions. Did not spend two thousand this month — next month’s limit is two thousand larger. Overspent by a thousand — next month’s is a thousand smaller. Carrying over only “on the plus side” turns a budget into a piggy bank you can draw on endlessly.
• One big slip does not cancel the month. Bought something unplanned — record it, see which category it comes out of, and carry on. A month spoiled on the fifteenth is still half a month that can be lived to plan.

Costs that belong to no month

Insurance once a year, the car’s service, winter boots, presents for the holidays, the dentist, a trip to relatives. In an ordinary month they are absent, so nobody puts them in the budget — and every time they look like an unpleasant surprise, even though they repeat every year for roughly the same amount.

The cure is simple arithmetic. Write down everything that happens once a year or less often, add it up and divide by twelve. That figure is a separate line of the budget that you “spend” every month, even if the money physically goes nowhere. In most families it comes to ten to twenty per cent of all spending — exactly the part that the monthly budget is always short of.

The simplest way is to keep that amount apart: in another account, or at least as its own category that you draw on when the time comes. Then December with its presents and January with its insurance stop being catastrophes: the money for them is already there.

Example: a budget of four figures

A family with an income of fifty-five thousand a month recorded its spending for two months and saw this: rent and utilities — eighteen thousand, groceries — thirteen, cafés and delivery — six, transport and taxis — four, the rest — scattered. Savings — zero, and a feeling that “the money just disappears”.

Rent and utilities they did not limit — that is a fact, not a decision. They put limits on the three categories where there is a choice: groceries — twelve thousand, cafés and delivery — four, transport — three. Everything else — an overall ceiling of eight thousand, with no detail. Together with the rent that came to forty-five thousand, and ten thousand was left for savings and for the yearly costs, which they counted separately: insurance, presents, a holiday — about forty thousand a year in all, that is, three and a half thousand a month.

In the first month cafés went over by a thousand, but transport came in eight hundred under — they moved it across. In the second month they raised groceries to thirteen, because twelve had not worked three times running, and lowered “other”. Six months on they watch the same four figures, and for the first time the savings account holds more than a month’s income.

How to tell the budget is working

• You know what is left in the main category without looking anywhere. If at the till you roughly remember how much can still go on groceries this month — the budget is alive. If you have to open the table every time — there are too many categories.
• At the end of the month no figure surprises you. Surprise means you lived the month blind and found out afterwards — which is precisely what the budget was meant to protect you from.
• The limits have changed at least once. A budget that has stood unchanged for five months is either perfect or nobody is looking at it. Usually the second.
• Something is left for savings, and the amount is no smaller than last year. That is the only result the whole thing was for; the rest is tools.
• In FinLad a month’s budget is built from what you have already spent: the app suggests a limit for each category from your previous months, last month’s budget is copied with one tap, and when a category reaches eighty per cent of its limit, the phone reminds you. The remainder carries over in both directions, as described above. All of this is in the free plan.