Creating a personal budget can be a frustrating experience when you don’t know where to start. What spending categories should you use? How much should you budget for each category?
When I created my first budget, I decided which categories I thought I should spend my money on. Then I wrote down how much I thought was reasonable to spend in each category. No surprise – I quickly realized my actual spending habits were nothing like the fantasy budget I created. I had to scrap the whole thing and start from scratch. This time, I relied on my past purchase history.
If your budget aligns with your normal purchasing habits (even if you’re cutting back in some areas), you’re much more likely to stick with it. Follow the steps below to use your past purchase history to create a budget you’ll actually keep.
1. Download your past purchases
If you use a debit card or credit card to pay for your purchases, the bank or credit card company has a history of your purchases online. The bank will track any electronic payments you make directly from your account, too – like mortgage or rent payments.
If you have multiple debit and credit cards or bank accounts, you’ll need to download your purchase history from all your accounts. Most companies make it pretty easy to download your purchases, so this hopefully won’t take you too long.
Log into your bank or credit card account. Once you’ve logged into your account, look for the option to download transactions. This can be a little hard to find. Your best bet is to go to the page that lists your recent transactions. Somewhere on this page, there’s usually an icon to download your purchases.
You want to download something called a “Comma Separated Values” or “.csv” file with your past purchases. You might see this called a “Comma Delimited” file.
I recommend downloading a list of your purchases for the last 12 months. Some companies don’t go back this far, though, so you can download transactions as far back as the account will allow.
2. Sort your past purchases into categories
After you download the .csv file for all your bank and credit card accounts, you can open it up in Microsoft Excel or Apple Numbers.
If you’re lucky, the bank or credit card company already categorized your transactions for you. If that’s the case for you, you can glance through the categories to make sure purchases were assigned consistently. Sometimes purchases are assigned to strange categories (for no rhyme or reason). The dress you purchased might be categorized as “groceries,” but the groceries you purchased are categorized as “clothing.”
After you’ve corrected any category issues, take a look at the categories and decide if you want to keep those categories or change them. These categories will be the spending categories in your budget. Maybe your bank categorized all food purchases as “food” – but you’re thinking you’d like to track food under the more detailed categories of fast food, dine-in restaurants, and groceries. The opposite could be true – maybe the bank was very detailed in its categorizations of food purchases, but you just want to track food under a single food category.
If the bank or credit card company didn’t categorize your transactions for you (or you don’t like the categories that were used), there are lots of great budgeting apps and websites that include lists of common categories. I use the categories from Mint.com in my personal budget.
Once you’ve decided on your categories, go back through your purchase history and update the categories to match the ones you chose.
3. Calculate your average spending for each category
Now that you’ve placed each of your past purchases into categories, you can calculate the average amount you spend per month in each category. This average will be the starting point for how much you’ll budget in each spending category.
First, sum all the purchases in each category to get a total amount per category.
Next, divide the total amount per category by the number of months for which you downloaded purchases.
For example – you were able to download 6 months of past purchases. You have a “clothing” category. In that category, you purchased $600 worth of items in the last 6 months. Take the $600 total and divide by 6 months. That gives you an average spending amount of $100 per month in the clothing category.
4. Start Budgeting!
By performing the steps above you already did two things that are essential for creating a reasonable budget.
The first is you picked categories based on your actual purchases. That lowers the chance of you forgetting a key category to include in your budget. Missing categories can seriously jeopardize your ability to stick to a budget.
The second essential thing you just did was that you determined the average amount you spend in each category per month. With this information, you can make a reasonable estimate of how much to budget for that category each month.
While you still might choose to cut back on your average spending in a category, you can use the average amount to pick a reasonable budget amount that aligns with your normal spending habits. A budget that differs too much from your regular spending habits might be too hard to keep.