Budgeting is straightforward, easy to do with a spreadsheet, and more an exercise of persistence than anything else. In a nutshell, budgeting means that investors don't spend more than they make. It is also known as "living below one's means" and seems to be a concept lost on many Americans who live in society that largely encourages indebtedness.
Credit card debt, for instance, is rampant in the United States, and many investors unfortunately don't budget at all. This is a big mistake that could cost you years of your life.
Following through with a stringent budgeting process is essential in order to take control of your finances.
That being said, let's jump right into what's required for you to take charge of your financial destiny.
1. Make a commitment to budget
It is way too easy to use your monthly paycheck and pay as you go. Using a strict budget approach helps you clarify what it really is you are spending your money on, and how much it really costs you.
As soon as you commit to controlling and monitoring your finances, you will likely experience a boost of motivation.
2. Determine what your spending and savings goals are
You need to have both savings and spending goals. In an ideal world, you would utilize an automatic savings plan, which can help you tremendously in avoiding unnecessary spending.
Saving money automatically every month -- say, 10% of your income -- doesn't even feel like saving since the money is deducted from your checking account on a regular basis.
In addition, having money automatically deposited in a savings or investment account keeps you from being tempted to spend it on things you don't really need.
3. Put a price on your goals
After you have decided which savings and consumption goals you have, put a price on them. Come up with a plan on how to achieve those goals via regular savings, investment returns, and spending controls.
Once you gain clarity about what it takes to achieve your goals, you will feel much more in charge of your financial situation. This can be quite empowering.
4. Track your expenses
Tracking your expenses is key, and it's probably the best tool you have at hand to control your spending. After you have determined what your goals are and how to achieve them, make sure you have a tight grip on the expense side of your life. In other words: Track your expenses vigorously.
Do you really need the $5 Starbucks coffee you buy every morning before you go to work? That can easily cost you a $100 a month or more, which can be better put into a savings or investment account or be used to pay down credit card debt.
5. Reward yourself
Budgeting can quickly become a habit once you see where your money really goes and how much you spend on unnecessary things like Starbucks coffees, taxi rides, apps, etc.
However, it is equally important that you reward yourself if you accomplish your savings goals.
The Foolish bottom line
Don't underestimate the power of consistent savings of small dollar amounts. They accumulate quickly, and you are likely to lead a much healthier lifestyle as a result of your savings efforts.
Starting to budget, if you don't already, is key for achieving financial independence. Budgeting not only allows you to gain a proper picture of your current financial situation, but it also helps identify unhealthy spending patterns that keep you down, like so many other Americans.
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