K.I.S.S. Your Categories

It can be tempting to go overboard when creating YNAB budget categories. After all, the impetus behind a budget is usually a desire to rein in spending. Or at least figure out where all of our money is going, right?

Who wouldn’t be curious to know how much is being spent each month on shampoo or pet chew toys?

I encourage my clients to resist the temptation to get too granular with their categories. The time and effort required to break receipts into multiple categories can be a distraction, at best. At worst, it gets in the way of entering transactions as they happen — the #1 most effective habit of successful YNAB budgeters.

How to tell if your categories are too detailed:

• You have to “split” transactions between multiple categories more than once a week.
• You habitually ask yourself, “Is this an X or is it a Y?”
• You have to look up how you categorized this type of purchase last time in order to decide what category it goes in this time.
• You have to scroll (and scroll, and scroll) to see your entire list of categories.

That said, there are times when category granularity can enhance budgeting efforts.

For example, if you’re trying to curtail a habit or particular type of purchase, creating a separate category can be very helpful. Let’s say you’re really trying to cut back on your impulse iTunes purchases. By creating a category specifically for iTunes you are laying bare your actions; there’s nowhere for an overspend to hide with such a narrowly defined category. I’ve been tempted to create a category simply for “Chocolate” but for now I prefer to not know.

A second good reason for going granular is for the purpose of evaluation. Sometimes there’s a category or two in your budget that makes you feel a little uncomfortable or guilty. Or maybe there’s disagreement in your household about the value of that particular expense.

Separating expenses out as their own line-item serves as a reminder to evaluate the value you derive from the purchase and consider the opportunity cost of that expense. For me, this is my phone bill. All of my other monthly “utility” bills are lumped into a single category but I keep the phone bill separate. Every so often I revisit that category. I go through the pros and cons of staying with our carrier and keeping the services we have; I investigate other options; and I go through the internal process of asking, “Is this how I choose to spend my money?”

The third valid reason for a specific category would be a specific savings goal. I have two such categories:  one for our extra house payment and one for my annual IRA contribution.

I used to budget an extra 1/12^th each month to my mortgage category but now I keep my monthly payment and my annual extra payment separate. I know my monthly minimum allocation but if I can contribute more then I’m that much closer to having a full extra principal payment. Having the visual feedback of individual category balances gives me quick and easy visual cue: one goes to $0 every month and the other builds until full. The same applies to my IRA category — I have a monthly minimum but if I can reach my maximum contribution early then I can make the transfer and shift my budgeting efforts elsewhere.

If you’re saving up for a specific purchase or airline ticket or even a concert ticket, sometimes it’s best to give it a category of its own. Don’t forget, categories can be recycled simply by renaming them for your next savings goal or hidden when the job is done.

As a general rule, granularity for the sake of tracking where money is going is a waste of time and effort.  But having a few narrowly defined categories to help stay within budget can be an effective accountability tool.  My advice — start big and general. Then create smaller, specialized categories only when there is a clear advantage to enhanced granularity.

If you find yourself with too many categories, don’t panic! It’s simple to merge them.

*For non-native English speakers or those not familiar with the acronym, K.I.S.S. stands for Keep It Simple, Silly (or Stupid)