A Penny Saved is a Penny Earned

The first couple months of budgeting, I absolutely failed.  I would always go over budget in multiple budget categories.  Many times, I would only go over a budget category by a few dollars.  I would be at a store, knowing I had $xx left in my budget category.  An item I wanted would be $xx, so I bought it.  With tax, I would go over budget though.  At the time, I thought that this was not a big deal.  But it started happening in every budget category, every month.  And it started to add up.  I was living outside my means.  I realized it is important to remember that your budget is the absolute most you can spend that month.  You should pretty much NEVER go over your budget.  If you do go over budget, you are living outside your means.  So obviously, the goal is to be under budget in as many categories as possible as many months as possible.  But what do you do with the extra money each month?

Specific Budget Categories vs. General Budget Categories - What Works for Me

When I first started setting a budget for myself, my budget was very specific.  For example, instead of setting a budget for Gifts, I set budgets for Gifts for Friends, Gifts for Mom, Gifts for Dad, Charity Donations, etc.  Instead of setting a budget for Entertainment, I set budgets for Music, Movies, Concerts, and Sports Games.  Very soon, I switched from having a very specific budget to having a more general budget for the following reasons:

• Because I had so many budget categories, each budget category had little money that could be allocated to it.  Even with a few small purchases, I would go over budget for a category.
• I never had an expense from every category in a month.  Also, each month the categories I had expenses in changed.  For example, I never had to buy gifts for friends, my mom, my dad, my siblings, and give to charity in the same month.  So categories would switch from being a budget category to more like a "savings" category from month to month.  This made it hard to stay on budget.  I would think I had a certain amount to spend in a month on Gifts for Mom, for example, when all that money in that category should have really been saved for the month.
• With so many budget categories and so many exceptions for going over or under budget for a given category each month, it was hard to measure how much I really had left to spend that month.  I ended up going over my total budget several times.
• Some purchases can fit in multiple budget categories.  A good example of this is running shoes.  This could be categorized under Health & Fitness - Sports or under Shopping - Clothing.  When an item can fit in multiple budget categories, you find yourself categorizing that item differently each time you purchase it depending on how much you have left in each budget category it can fit in.

I moved to a more general budget after experiencing these issues with my very specific budget.  Now I simply have the following budget categories: Shopping, Home Supplies, Auto & Transport, Internet, Rent, Student Loan, Entertainment, Electricity, Health & Fitness, Personal Care, Furnishings, Food & Dining, and Everything Else.  I decided on these categories because they are the categories I tend to spend the most money in.  My Everything Else category covers expenses that come up only once in a while for me, like Lawn & Garden expenses.

Even though I now have a general budgeting system, I can still categorize each expense as something more specific.  For example, if I buy a new shirt, I categorize it as Shopping - Clothing.  It shows up as an expense in my Shopping budget.  But having it categorized as something more specific lets me use other features of +Mint.com, like their Trends tab.  In the trends tab, I can explore my spending habits in more detail when I classify expenses as specifically as possible.

Obviously, I am a proponent of having less specific budget categories.  I am sure there are people with budgets even less specific than mine though.  And I am sure there are people that have had budgets with specific categories work for them.  What categories do you use for budgeting?  How does it work for you?

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