How Personal Budgets Work

By: Dave Roos

Drafting a Personal Budget

The first step toward drafting a successful personal budget is to compare your current monthly earnings and expenses. Simply add up your earnings and expenses separately and see which amount is bigger. If you earn more than you spend each month, then you're on the right track. But if you spend more than you earn, get ready to make some serious adjustments.

The goal of a good budget is to come up with a spending plan that allows you to save 10 percent of your earnings each month [source: CNN Money]. For most people, that means making some spending cuts. But where do you start?


Finance software like Quicken and Microsoft Money can do some of the analysis for you. They can look at your monthly spending habits and compare them to other people in your same demographic. If you're spending too much on rent or too much on restaurants, the software will let you know.

But even if you don't use finance software, a good rule of thumb is to cut back first on discretionary spending. This is one situation where you should definitely sweat the small stuff. Start with that notebook where you logged all of your cash purchases. Look for recurring cash purchases and figure out how many of them are really necessary.

Here are some common cash culprits:

This might be just the opportunity you're looking for to quit smoking, start taking public transportation and learn how to cook. That's not to say that you have to start living an entirely Spartan lifestyle, but look for ways to cut down on unnecessary cash spending.