Category:
The category field is for entering a budget category and, if you are tracking them, business related expenses or to classify a transaction as tax related (charitable contributions, for example). It's important that this field be accurate so your budget reports reflect actual spending vs. planned spending. If you aren't careful with tax related categories, you could either over- or under-report deductions on your tax return. Inaccurate classifying of business expenses can also impact your taxes or profit and loss reporting.
Income and expense categories can be further defined by subcategories.
Your software will come with some predefined budget categories which you will be able to select from when you categorize a transaction, and the categories should be editable in case you want to change them. You should also be able to create new categories in the software and delete any that aren't meaningful for your personal financial reports.
Your software will probably "remember" that a particular category should be affiliated with a payee. This is helpful if, for example, you make a payment to ABC Apartments for monthly rent. When you enter ABC Apartments as the payee, the Rent category will automatically appear. This memorized transaction feature can be a real time saver, but you will need to change the category that the software "remembers" for some payees. For example, if you purchase prescription medication at a Walgreens store, the software might memorize a category of Medical or Medical: Prescriptions. If you buy greeting cards the next time you visit Walgreens, the software will still categorize the transaction as Medical, and you will have change the category to something like Gifts.
Split categories:
Often you will buy items from multiple categories from a single store or online retailer. personal finance software uses a feature called split transactions to allow you to assign multiple categories to one transaction. You should see a "split" button somewhere on the register or transaction entry window. If you don't, check your software's help documentation. If the software you're using doesn't have a feature for transaction splits or tags (defined below), you will need to choose other software because you will often need to split transactions between multiple categories.
Tags:
Not all personal finance software uses tags, but if yours does, they are used for further defining a category. One tag is typically used with several categories and are more versatile to use compared to creating subcategories, which can only be used with one category. Here are some examples:
- If you have a vacation home or time share, you buy groceries while you are at that home and your primary residence. You would probably use the category "Groceries" for all of these purchases regardless of where you are living at the moment. You can use a tag like "Vacation" or "Time share" to differentiate grocery purchases made away from your primary residence. You can also use these tags for entertainment, restaurants, household items -- for anything you buy while living at either location.
- You have three dogs, and when you take any of them to the veterinarian, you use the spending category "Vet". Create a tag for each dog, then use the tags when you go to the vet. If one animal needs special medical attention, you will have a way to determine how much of the vet bill is allocated to that pet.
- You have a few hobbies, say go cart racing, playing tennis and basket weaving. When you buy supplies and equipment for these hobbies or attend a special event to learn more about your pursuits, the expenses might be categorized under "Hobbies". Use tags like "racing", "tennis" and "crafts", and you'll know how much each hobby is costing you.
- You do some consulting on the side for a few hours each week, occasionally travel short distances to sell the baskets you weave at craft shows, and you teach guitar lessons. You can use tags like "consulting", "crafts" and "guitar" to classify expenses related to these ventures and to classify the income that comes in.
Sometimes, it's useful have some documentation with a purchase, like a copy of the receipt, check or warranty. More and more personal finance software offers a way to keep this documentation with a transaction, typically called attaching the documentation to the transaction. Attachments are handy because you can easily use your software to search for transactions, so you can quickly have warranty or other information associated with a transaction at your fingertips when you need it.
Obviously, the documentation needs to be in digital form, so paper receipts and other documentation will need to be scanned or photographed and saved on your computer before it is attached to the document. Items are typically attached by filling in transaction details in the register and then clicking on a button or icon to open the attachment window. Use that window to select the attachment, and depending on your software, add comments, then click Save or OK.
Flags
Flags are typically used to call your attention to a transaction you need to verify. For example, if you download transactions and aren't sure what a transaction was for, tag that transaction to remind yourself to review it later. Flags can also be used in tax software to help you to remember to return to parts of the tax return to add more information or to double check information. Flags typically look like a little flag next to a transaction, and usually appear on the main window or dashboard of the personal finance software as a reminder.
