Once you’ve begun tracking your money on a daily basis it’s time to give some thoughts to setting up categories of spending and earning. If you’re using Quickbooks or one of the other computer programs aimed at helping you manage your money, you probably set up some categories.
Categories are simply a way to group classify your expenses so it’s easier to understand where your income comes from and how you spend it.
Some categories are obvious like housing costs, utilities, and groceries. Of course, freelancers will also want to distinguish between personal expenses and business income and expenses.
Obviously you’ll want more categorizes, but be careful not to create too many. It’s far easier to add new groups than reduce the number.
For example I have several income categories including writing, blogging, affiliate and royalty. In the U.S. royalty income is taxed more favorably than regular income, or so my accountant tells me.
On the expense side, I want to know how much I spend on my websites and other internet activity, so I have an Internet category. Since computer expenses seek to come up with fair regularity, I have a separate category for computers. I also have a category in my business expenses for books/newspapers/magazines on the advice of my account.
The other categories that weren’t fairly intuitive for me are savings. I’ve got savings accounts and therefore categories for taxes, business savings, real estate, prudent reserve (the account I use to smooth out income), my cat (which is great when she needs vet care), gifts and a few more.
As you begin to sort particularly your expenses into categories you’ll begin to get a clearer picture of how you really spend the money you earn because you’ll be able to see it. No more guess that you spend “about” $x eating out or $x on marketing. You’ll know and with that knowledge comes better decision making.
Do you keep track of your money with categories?
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