Why not just track all of your spending as a single category?

I believe that everyone can optimize their spending habits, and without much in the way of sacrifice.

I didn’t say “zero sacrifice”. We can’t all jet off to Hawaii whenever we want it. (Not without consequence, anyway.)

But I also don’t think that there needs to be a heavy sacrifice either. I believe that most of us aren’t optimizing our spending.

And what you don’t know about, you can’t fix.

But it’s not important just to track your spending, such that you don’t spend more than you’ve made.

You also need to divide your expenses into categories. Categories like “Groceries” “Transportation”, “Clothing”, normal spending habits in your months. And then track each of those categories.

But what happens if you don’t do that? What if you just know how much you have to spend in a given month, and want to leave it at that? Why make it more complicated?

One big category

So here’s the scenario: you know what your income is, and you know what your bills are. Everything that remains is your expenses.

For example: at the beginning of the month you have a certain amount of money (often, unfortunately, at or near zero). You track that number throughout the month such that you never get below that amount.

That’s basically the same thing as treating expenses as a single category.

I believe that this is a common scenario. A lot of people do this.

This is often because they have to. If you don’t have enough float in your account, then you’re going to run out of money unless you track your expenses in some way.

The advantage of expenses-as-single-category is in its simplicity. What does it matter what category I spend all my expenses on? Does it matter if I got out to eat a lot or buy a big TV? It’s all coming out of the same pile of money, isn’t it?

It is, but there are a few big drawbacks and risks.

The benefits of smaller piles

The sectioning off of money into smaller piles lets you track your progress in a more granular way. This gives you more clarity on where you are. It also means that you can be “all spent out” in one area, while another area still has money. This prevents you from wiping out your money all in one category.

Say that I have $1,000 to spend in a month. Three weeks into the month, and I’ve spent $850 of that $1,000. That leaves a miserly $150 to spend.

What did I spend that money on? Did I mean to allocate it to something else? If I needed to buy clothes that month, but had spent all that money on restaurants and gas and pet toys (or even that big TV), then there may be no money left for other things you want or need.

The categories help prevent this. Categories act as softer barriers to spending, unlike the hard barrier of the total expenses.

Plus, categories allow you to prioritize. If you don’t allocate $300 to groceries in a given month, then that money might not be there. But allocating $300 to groceries in advance means that it’s not allocated to anything else. And let’s be honest, you need your groceries. Putting that number down and sticking to it shows that you put a priority on that kind of spending.

How might you divide up $1,000, given all of your competing needs? Well, as former Vice President Joe Biden is fond of saying, “show me your budget, and I’ll tell you what you value”:

Don’t you want to set down what you value, as opposed to having it be done unthinkingly?

Spending while thinking

I’m sure I would spend differently if I wasn’t thinking about it. But there’s a reason why we do think about these things: it allows us to steer our path to where we might want to go. It appeals to our higher instincts.

So if you think that the categories to your spending aren’t important, think again. They are just as crucial as tracking in the first place. Now you show me what you value.

But enough about me. How do you create your spending categories?