What goes into a budget

Once you understand the importance of a budget, it's time to figure out how to build one for yourself. Since you have so many different expenses, from rent to car payments to your morning coffee, it's best to sort them into helpful categories. When you have done that, you'll find it much easier to see where you spend the most — and where to spend less. It is helpful to put your expenses through two sets of filters.

Filter 1: Fixed vs. variable expenses

A fixed expense is one that does not vary in amount from payment to payment. Your mortgage payments, college loan payments, insurance premiums and gym membership are all examples of fixed expenses. If you use utility company budget (or payment) plans or have a cell phone contract, those expenses may be fixed as well.

Variable expenses are those that may change in amount from one monthly payment to the next, like groceries, utility bills, entertainment, dry cleaning, cable television and transportation expenses, including the cost of gas.

Filter 2: Essential vs. desirable expenses

An essential expense is one that it is impossible, quite literally, to do without. Even though a diet might be the way to drop a few pounds and save a dollar or two, you can't do without food altogether, so food is an essential expense. The only way to reduce these expenses is to exercise self-restraint when you can — maybe you don't need to order the surf'n'turf every time you go out to dinner, or you can go out less frequently.

A desirable expense is one that you can do without but would rather not, like a new pair of shoes or a plasma screen TV. This is the category where, with disciplined decision-making, you can cut your spending or postpone a big purchase until you've saved enough to pay for it.