Expense categories that are actually useful

Use about 10 categories, each one a question you would act on. Home, Bills, Groceries, Eating out, Transport, Health, Clothes, Fun, Gifts, and Other cover most households.

Past about 15, every entry takes longer to file, the lines between categories blur, and each category holds too little money to show you anything.

A category is a question you will ask#

At the end of a month, each category gives you one number. A category earns its place when a different number would change what you do next month.

You would act on Groceries rising from 310 to 420. You would not act on how the 145 in Eating out divides between coffee and lunch. If you cannot imagine changing anything because of a category's number, it is not a category. It is a label.

There is a second test, and it happens when you enter a purchase. You should be able to file it without stopping to think. If the same sandwich could go in 2 places, those 2 categories overlap, and over a month the sandwiches will end up in both.

So each category has to pass both:

• The decision test: a different number here would change what you do.
• The filing test: you know at once where a purchase goes.

A worked set of 10#

Here is a set that passes both tests for most households, with a month of spending for one person:

Category	What goes in it	Last month
Home	Rent or mortgage	850
Bills	Energy, water, internet, phone	165
Groceries	Food shops and markets	310
Eating out	Meals out, takeaways, coffee	145
Transport	Fares, fuel, parking	120
Health	Pharmacy, dentist, the gym	45
Clothes	Clothes and shoes	95
Fun	Cinema, hobbies, streaming	60
Gifts	Birthdays and celebrations	30
Other	Anything that fits nowhere else	20
Total		1,840

Other holds 20, about 1 percent of the month. That is the sign the list is working. If Other ever passes a tenth of the total, here 184, a category is missing. Look at what is in Other and give the biggest group a name.

Your own set will differ. Add Kids, Pets, or Car if they are a real share of your month. Leave out Gifts if it is 30 a year. What matters is that every line passes the 2 tests.

Fixed costs and the ones you steer#

Home and most Bills are set by a contract or a tariff, and little you do this month changes them. Groceries, Eating out, Clothes, and Fun move week by week, and they are where this month's choices show.

Keep the 2 kinds in separate categories, so the ones you can steer read clearly. In the month above, Home and Bills are 1,015 of the 1,840, 55 percent. The other 825 is where the decisions are.

Past 15, the list stops telling you anything#

More categories feel more precise. Past about 15, they make the record less useful, for 4 reasons.

1. Filing slows down. With 10 categories, the whole list fits on one screen and you pick by sight. With 25, you scroll and read every time you enter a purchase.
2. Thin categories are noise. Spread 1,840 over 25 categories and the average is about 74. Many will hold 1 or 2 purchases a month, so a single purchase doubles or halves them. A number that swings that much on one receipt shows no trend.
3. The boundaries multiply. Every extra category adds another line a purchase can fall on either side of. The sandwich goes in Lunch one week and Snacks the next, and neither number means the same thing from month to month.
4. The answer does not change. Of the 825 you steer, Groceries alone holds 310. Cutting the small categories finer does not change which line you would look at first.

The 15 is a soft line. A household with a car, children, and a dog may need 13 or 14, and that is fine. Past that, look for 2 categories you would always act on together, and merge them.

Detail goes one level down#

Sometimes you do want the detail. Eating out jumps from 145 to 230, and you want to know whether it was coffee, lunches at work, or dinners. That is what subcategories are for: Coffee, Lunch at work, and Restaurants under Eating out.

The parent still answers the month's question, and the detail waits until you need it. Keep it to one level. A subcategory inside a subcategory is a list nobody reads.

Skarb starts each workspace with 9 expense categories close to the set above, and you can rename them, nest subcategories one level deep, and merge 2 into one.

When to rename, merge, or split#

• Rename before you add. If a category is almost right, change its name rather than starting a new one next to it.
• Merge when you hesitate. Any 2 categories you mix up more than once a week are really one.
• Split when a category hides a decision. If Fun is 300 and half of it is one hobby you would treat differently from nights out, give the hobby its own line.
• Change them at the start of a period, on the 1st or on payday. A category added in the middle of a period makes it impossible to compare with the next.

What to do on Monday#

1. Count your categories. If there are more than 15, list the ones you did not look at last month.
2. Merge each of those into its nearest neighbour, and rename any category that is almost right instead of adding a new one.
3. Move any detail you want to keep into subcategories under a parent.
4. At the end of the month, check that Other holds less than a tenth of the total.