Your budget is an important financial tool that can save you significant amounts of money and help you build your wealth. However, many young people cringe at at the mere utterance of the word, automatically conjuring up images in their minds of a crippled social life devoid of some of the activities they enjoy doing most.

In this post, we’ll go over the basics of budgeting, show you how you can go about creating a budget for yourself, and teach you about some things you can do to make budgeting less painful and more rewarding.

Budgeting Basics
A budget is a disciplined approach you take to managing your expenses. In the traditional sense, it involves:

1) Figuring out how much you spend every month
2) Figuring out what you spend it on
3) Figuring out what you can spend less on and how
4) Actually doing what you’ve planned

For step 1, you’ll need to look at your spending transactions for the last few months to get this information. You can find this on your bank and credit card statements. If you have online accounts with these institutions, you should be able to get this data relatively easily.

Next, you’ll need to get a general idea of where your money is going. In other words, you’ll need to come up with some spending categories and use the transactions from step 1 to arrive at an estimate of how much you spend on each category.

When you’re done, your spending categories should look like something like this:

Rent/Mortgage $X
Insurance $X
Utilities $X
Entertainment $X
Dining $X
Groceries $X
Gasoline $X
Auto $X
Travel $X
Retail $X
Other $X

Once you have your current expenses categorized like this, it’s time to determine which expenses you can cut back on and how you can do this. When you’ve figured this out, you should replace the current dollar value you have allocated for that spending category to the new, lower dollar amount.

If you have an account with us, you can do steps 2 and 3 right here on the site and run different scenarios to see how your financial situation would change based on different levels of expenses.

After you’ve determined how much you’re going to spend each month and what you’re going to spend it on, you would then move on to step 4, which is actually doing what you’ve planned.

We think step 4 is the most crucial step in budgeting, because if you aren’t able to execute your plan, then you’ve wasted the time you spent putting that plan together.

Two Other Important Components of Your Budget
There are two other components of a budget that must be present in order for you to be able to successfully implement your budget and save yourself some money.

One of these is that the numbers you come up with must be realistic.

If you think you are going to spend more on a particular spending category than what you allocated for that category in your budget, then put down the actual amount you think you’ll spend and try to find ways to cut back on another category.

The other thing that needs to be present when budgeting is discipline.

A budget is only good if you stick to it. If you don’t have the discipline to spend only the amount you’ve set for yourself each month, then it won’t do you any good to have a budget.

Making Budgeting Less Painful
Aside from the standard way to budget described above, there are a couple of ways to change the process to make it less of a hassle.

The first change you can make is to make your spending categories more vague.

For example, instead of budgeting for dining, entertainment, and travel separately; you can group them into a spending category you may want to call “fun expenses.” You can also group other spending categories into one “purchases” category, which would include groceries, retail purchases, and other.

This would narrow down the number of spending categories you have to budget for, which would make budgeting much easier.

This next change you can make will help with the discipline aspect of your budget. It is commonly referred to as the Envelope System, and this is how it works.

You would create an envelope for each of your spending categories (if they were vague, you would only need a few envelopes). You would write the name of that category outside the envelope, and put as much cash in the envelope as you budgeted for that expense category. Then keep these envelopes in a safe place.

The idea behind the Envelope System of budgeting is that you can only use the amount of cash that is in the envelope for a certain spending category. Once there is no more cash, you aren’t allowed to spend any more.

This system is effective for a couple of reasons. First, it lets you visualize the money. As humans, we’re visual creatures, so when you see $500 in cash, it looks like a lot of money.

That $500 in cash is going to be harder for you to spend because you’ll physically see it being depleted as opposed to when you charge $500 on a credit or debit card. Spending is easy when you don’t see the money, so using the Envelope System helps with this.

Another reason the Envelope System is effective is that because the money is physically there, it makes it easier to break down the cash allocated toward each spending category over a period of time. For example, if you have $400 cash in your “fun expenses” envelope for the month, it’s easy to give yourself $100 a week and see when each $100 is gone.

Compare this with saying you’re going to spend $100 a week and then trying to keep track of what everything you charge totals up to. The simplicity of the money either being there or not being there that comes with the Envelope System makes it both very easy and very effective.

Reasons for Budgeting
The reasons for budgeting are plenty, but some of the most important ones are that being on a budget can teach you financial responsibility, help you develop good spending habits, and help you save money and build your wealth.

By creating a budget and sticking to it, you are learning a few very valuable lessons about responsibility.

The first of these is sticking by your word and doing what you say you’re going to do. By being accountable, you’re proving to yourself that you can be relied upon to carry out a financial plan you’ve set for yourself.

Another lesson you’ll learn from budgeting is goal-setting. By creating a budget, you are setting spending goals for yourself. Achieving these spending goals proves that you have what it takes to actually execute a financial plan.

Budgeting also helps you develop good financial habits, such as controlling your expense and saving your money. If you expect to achieve financial success, getting your spending under control and saving money are going to be critical.

Finally, budgeting allows you to cut down your expenses, which will increase the amount of money you have left at the end of every month. You can put this money to work for you by either saving it, investing it, or using it to pay down debt.

All three of these contribute positively to your net worth and help you build wealth, which is the ultimate purpose of effectively managing your finances.

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