How a budget works

Since it's impossible to keep mental track of all of your expenses over the course of a week or two — let alone a year — it's important to have a budget. Making a budget doesn't have to be painful. A budget is really just a plan for how you're going to spend the money you have coming in for the expenses you have going out.

The nuts and bolts

A budget is a plan that allows you to set spending goals and track your actual cash flow to make sure you're staying within the boundaries you've set for yourself. Usually, it's a month-to-month projection of the amounts you allocate to each of your expenses based on the income you have. When you make a purchase or pay a bill, write it down and subtract it from the total you planned for that expense.

For example, if you budget $500 a month for food, you'd keep track of everything you spent at the grocery store, any restaurant meals, and your morning coffee. If, after several months, $500 is unrealistically low you can either cut back where you can or you revise your budget to allocate more money to food and less to something else.

You're probably wondering: How is it possible to project expenses for the future? Part of the budgeting process is using the receipts, credit card bills and checkbook register you have from last year as a reference. Another approach is to track your spending for a month or two — writing down every penny you spend. That should give you a sense of where your money is going and what you can expect to spend in the future. It may also provide a valuable clue about where you could cut back on your spending.

Is a budget worth it?

Although it will take some start-up time and effort on your part, charting and sticking to a budget will give you a thorough picture of your spending habits, and can help you make better choices in the future.

A budget enables you to plan how you will spend your money before you reach for your wallet, checkbook or credit card. That way, you're less likely to make impulsive and perhaps unnecessary purchases, and you can fully understand where your money goes.