Using Categories to Define Financial Goals

Categories to define financial goals

Written by Chris Draughon

I want to see you achieve your financial goals so I spend my time making the complicated things simple. As the Director of Financial Planning I help our clients identify their most important financial goals and develop paths to get them there on time with room to spare.

February 18, 2022

Using just a few categories to track your spending can help define your financial goals.

As a financial planner, I help clients achieve their retirement goals. Seeing the joy they experience when they realize their dreams is one of the reasons I do what I do. Putting numbers to paper and defining a financial goal can be challenging for many people. The inability to do this prolongs the anxiety of not knowing if they’ll achieve their desired retirement.  

I have found that this first step, defining goals, is where most people stumble. They either don’t know where to begin, or they allow themselves to get overwhelmed by the details. They get frustrated and give up. I want to share some ideas that will hopefully alleviate this block and help move people toward achieving their goals.

Use a single category to define your lifestyle goal

You probably daydream about many things when you think about retirement. If you’re normal, high on the list is making sure you don’t run out of money before you run out of time. The cost of your lifestyle is a significant factor in determining whether this will happen or not. So it’s essential to know how much your lifestyle costs.

The most fundamental of retirement goals is your Lifestyle Expense. The goal defines your standard of living and includes things like food, shelter, and other everyday expenses. How much will it cost you to live in retirement?

For those of you that are still working, I have found the easiest way to identify your cost of living is to take your net paycheck and subtract any savings you set aside each month. What remains generally gets spent on supporting your lifestyle. Therefore, the most straightforward category is to lump everything together and call it Lifestyle.

This doesn’t need to be complicated. You now have an excellent starting point for defining your lifestyle goal.

There are a couple of caveats, however. First, this method does not account for any spending beyond your take-home pay that might be pilling up on credit cards. If that’s the case, you’ll need to add that spending into the mix. Second, you might be paying for healthcare on a pre-tax basis, and if so, you’ll need to add the cost of health insurance premiums back into your spending.

What if you are retired? One way that I have found to identify your spending is to take your checking account statement and average the total monthly debits over the past twelve months. There’s usually a section on the first page of the bank statement that summarizes the withdrawals for the month. This doesn’t require much effort if you only use one checking account.

In my experience, this is an easy way to capture almost all of your spending, even if you use a credit card to pay for things. If you paid your credit card bill in full from your checking account, then the total amount of that spending has been captured.

I consider both of these methods of determining your Lifestyle goal a top-down approach. As opposed to a bottom-up approach, which we’ll look at now.

Too many categories make things difficult

The thing I see that causes the second most difficulty for people is categorizing their spending to the Nth degree. That could work well for detail-oriented people, but that’s not most people. Focusing on three to five categories can make things much more manageable.

Here’s what I mean. Everyone has basic everyday living expenses, and these often consist of things like housing, food, clothing, gas, and utilities. All of the costs that you say are part of your basic living expenses should fall into a category called Basic Living Expense. The best way to figure out how much this category costs is to take your most recent bank statement, put a “B” next to each of these items, and then add them up.

If you use a credit card to pay for things, use that statement too. If you use more than one, do this with each and combine the values for a total.

After basic living expenses, there are probably a couple of other things you spend a significant amount of money on each month. That could be education for kids, healthcare costs, or travel. Like before, go through the statement(s) and mark each of these with an “E” for education, “H” for healthcare, etc.

Once you’ve gotten this far, you will have two to four categories that capture most of your monthly spending. Finally, everything else that’s not accounted for can be labeled as “O” for other. This category will catch all the one-offs that always pop up.

Once you’ve done this, you’ll want to do it for each of the next few months so you can get an average monthly cost for each of the categories. With a few months under your belt, the average monthly spending per category will be an excellent starting point for defining your financial goals.

Keeping the category count down to just a few will make tracking them much more manageable. I find this generally leads to more informed judgments about how your money is being spent.

Getting help with tracking your categories

Now that you’ve identified the categories you will use for developing your financial goals, you need a way to make tracking them easy.

Keeping track of your spending manually is a tedious, time-consuming process that rarely gets the follow-through required. As a result, there are various tools at your disposal to make tracking and categorizing your spending very easy. (Editor’s note: we are not affiliated with these tools, and in no way do we warranty the information they provide.)

Several online tools like Mint.com will monitor your transactions and categorize them for you in real-time. These tools work by linking with your bank and credit card accounts to monitor your transactions. As you spend money, the expense is categorized, and you can view totals for your categories with the push of a button. Most of these apps are free to use, but you’ll be served advertisements.

If an online tool is not your thing, there is a desktop app called Quicken. You might have heard of it. The software has been around for a few decades. Quicken is more robust than its online counterparts, but that doesn’t mean you have to be overwhelmed by all of its features. The tool allows you to manually enter your transactions or download them directly from your financial institutions. Once entered, the software categorizes them for you.

In either case – online or desktop, you’ll need to edit the categories, as I mentioned before. Once done, you’ll have a host of reports at your fingertips summarizing your spending for you.

Wrapping things up

In closing, defining financial goals does not have to be complicated, and you don’t have to make the process more complex than it needs to be. Start by identifying how much you spend each month by subtracting your monthly savings from your take-home pay. This is an excellent place to start and gives you one category to track – your Lifestyle cost. If you’re looking to separate significant spending items, use the fewest number of categories as possible to keep things simple yet informative.

Are you ready to start defining your financial goals? We have some online, self-guided tools that can help you through the process. And we’d be happy to talk with you if you’d like some personal attention. Just let us know.