Now that we have the envelope analogy in our minds, let’s substitute the word envelope for “categories”. Let’s face it, we live in a digital age, and we will most likely not be paid in cash and neither will we be stuffing that cash in envelopes stashed underneath our beds. We will still treat these categories as metaphorical envelopes, and these categories will act as the foundation that allows any budget to hold meaning. Categories, essentially, are what you would title your envelopes when you designate your hard-earned dollars towards a purpose.

The importance of your categories lies in the fact that they will be the only indication of how you spend your money. As you receive your paycheck, you will be essentially setting aside money for different things. As you spend your money, you will be categorizing them appropriately. As you look back, you will start to see which categories have the biggest spending, where you have opportunities to reel in that spending, and where you need to plan for a bigger budget. Without proper categorization, your budgeting will be inaccurate, and your progress towards improving your budget will be limited. I would like to focus most of our attention in setting up a budget on making categories.