They’re calling it “the conversation.”

“It” is the talk going on throughout America about budgeting, amidst a growing recognition that money can’t be made just by saving. And in a dour economic climate where people are living paycheck-to-paycheck, with no additional money coming in, "the conversation" is necessary.

In this conversation, according to my friend Michael Cembalist, who writes the single most valuable newsletter from any bank, Eye on the Market, for private clients at JP Morgan (Stock Quote: JPM), you sit down and break out your expenses according to three categories:

• Mandatory

• Discretionary

• Frivolous

I take my cue from Cembalist, who has captured the trends and zeitgeist of the era better than anyone else out there. In the process, he’s divining the best investments available, and is well worth listening to in the critical area of personal financial budgeting.

Being a good, responsible American, I sat down to list my expenditures for the months of October, November and December. Frankly, I was aghast. My mandatory list included: taxes, insurance, mortgage, cleaning bills, lights, heat, and phone. All of them were obvious and I had hoped they would comprise the bulk of my spending.

Anyway, I whipped right through them.

But when I sat down with the cancelled checks and the AMEX bill (Stock Quote: AXP), I wanted to shoot myself.

The discretionary list, the little joys that make life more interesting, were pretty big, but the frivolities were off the charts. My research revealed outlandish expenditures that would embarrass a big bank CEO. I treated myself and my family to the most expensive presents, nights on the town, drinks, and clothing. Worse, just about every one of the items on my discretionary did not mean much to anyone who received them . . .  INCLUDING ME!

The real capper on the jug was my frivolity budget – here I was really intent on bearing down.  Most of the budget discussions I had prior to this revelation involved either mandatory OR discretionary spending, which made it difficult to figure out what needed to be slashed. But when you added my “frivolous” list to the mix, you could see nights where you only went out to have a drink—enough of that.

You could see nights where you ordered the most expensive thing on the menu or a bottle of wine that, upon some shameful reflection, you didn’t even finish. You could see that you had gone to the mall for the heck of it. Above all, you could see how uncreative you were in stretching your money.

Now, I know I make a good living, but I also know that in the month of December, an important month for presents and tips and vacation, my expenditures exceeded my income. 

By far.

The good news? After my little budget exercise, I knew that I would not be repeating that December scenario any time soon.

Try it yourself.  Divide your spending into those three categories and tell me it doesn’t make a difference. I know it did to me.

As painful as it was, I am glad I had that “conversation” with myself. It’s a wake-up call every American could use.