Budgeting is more than a method. Budgeting is a philosophy.

My experience discussing budgets and budgeting with friends and colleagues tells me that while many understand the method, few really get what budgeting is about. If you don't really understand how to use a budget effectively, you cannot manage your personal financial growth.

Fundamentally, your budget is the best tool at your disposal for understanding where your money goes. Your personal financial budget keeps track of money flowing in at the top and all your various expenses flowing out as you go down the list of budget categories. Your paycheck or net receipts - anything that is your income - are the fuel for your personal financial engine. The budget categories are the cylinders of that engine where your income is consumed in the process of running all aspects of your life.

The categories are your logical groupings for where your money goes. You might have budget categories for groceries, fast food and fine dining. Or you might choose to have a single broader category called "food" where groceries, fast food and fine dining are all lumped together. How you choose to divide up your budget into categories is up to you.

Broad categories are simpler because they are easier to keep track of. But they may not give you the detailed information you need to truly understand your spending if they are too broad. Conversely, having many detailed categories, while providing plenty of data, can be complex and difficult to track. Will you remember at the end of the week how you spent every dollar of the cash you have in your pocket right now? Does it really matter to you to keep track to that level of detail? Choose your budget categories so that you have sufficient visibility to your spending while minimizing your overhead in maintaining your budget.

In my next article about better budgeting, I'll lay out the categories I use to manage my own personal finances. Then I'll show you how I use them to achieve my own household's financial goals.