How Personal Budgets Work

By: Dave Roos

Personal Spending Goals

Shopping couple
You may have to cut back on some shopping to stick to your budget.

­­­As you find ways to trim your cash spending, start deducting those amounts from your current spending totals. The idea is to draft realistic spending goals that will allow you to save more each month. Try to keep everything in its appropriate category (entertainment, transportation, et cetera), so it will be easier to keep things organized when you draft your new budget.

Next, move on to your other discretionary spending. Perhaps you're spending too much each month on new clothes, concert tickets and organic produce from the upscale grocery store. Make some reasonable estimates on how much less you could spend each month by only buying clothes during sales, only attending concerts from your favorite artists and shopping at the farmer's market. Use those estimates to draft your new budget.


Taxes are another place to make spending cuts. If you're self-employed, look for ways to increase your itemized deductions (without getting too creative, of course). If mortgage rates have dropped more than two percentage points in your area, consider refinancing your mortgage [source: CNN Money]. It could be worth the fee.

If you look at every entry on your current list of expenses, you can usually find a way to cut back, even if it's just a little. For instance, lower your heating bill by keeping your home a few degrees cooler during the winter. Switch from the unlimited cell phone plan to 500 minutes a month. Only play golf on the public course.

Take your new, lower spending estimates and write them down in each category. If you're using finance software, use those estimates as your monthly spending goals. Congratulations, you now have a personal budget!

Now that you've drafted a budget with new spending goals, it's time to put your plan into action. Read more on the next page.