Analyze your expenses
In the previous step, you identified how much you spent on each category during the previous month. Now you need to add them all up so that you have a total expense for the month. Next you need to subtract this amount from your total monthly income. If you have a surplus, meaning your income was larger than your expenses, you had a good month. However, if your expenses exceeded your income, you have some serious work to do.
To begin this step, you can use any computer program or Web service that you used to track your expenses, you can use our budget planning calculator, or you can just print it and do the calculations yourself (it's not that complex). If you created your own list of categories, then you will need to prepare a separate sheet of paper with three columns. In the first column, list just the major categories (i.e. food). In the second column, sum the current expenses for all items in each category. The third column will be completed as you identify your budget changes, which is the remainder of this task.
Now it is time to analyze the amount spent in each category and make some hard decisions. You need to identify expenses you can eliminate or at least areas where you can reduce the amount you spend. These decisions will depend on how seriously you need or want to save.
Begin by examining each category to see how important it is. One way is to note by each category whether it is a "need" or a "want". For example, groceries are a definite "need", but going to the movies should be a "want". The intent here is to identify those areas that are not critical to your survival and could be eliminated or at least reduced. If you need help deciding, consider reviewing our suggestions. You will quickly learn that there are NOT many "needs", rather most of the things we feel we need are really "wants" that we could do without if it were important enough.
Now that you have decided what are "needs" and "wants", evaluate each category again. Within the needs, you may be able to lower your expenses. Within your wants, you should certainly be able to cut some of the expenses. For example, if going to the movies is something you really enjoy, how about going less often or when the prices are cheaper, or doing without the popcorn, candy and sodas? By examining each category, you should be able to identify ways to cut your costs. As you complete each category, transfer the revised spending amount to the third column of your sheet, computer program or our budget planning calculator.
Keep analyzing and trimming your expenses until your income is larger than your expenses. If you are still not happy with "What's Left" (see the calculator), try and cut some more expenses until you reach a figure you are satisfied with. If you're still unable to cut your expenses enough, consider other alternatives that may not be so obvious (read 10 ways to supercharge your cash flow).
One caution with regard to this analysis step is not to try and change too much at once. It's best to start with one or two categories, cut as much as you think you can, and then see how well it goes during the next month. If you are successful, then you can select some more categories and repeat the process. If you are not successful, then you need to figure out why. Did something unexpected or unusual happen? Did you simply not stay focused on cutting these costs? Did you try and cut an unreasonable amount for this category? Once you realize the answer, you can adjust your plan accordingly and try it again until you are successful.
If you want to know how your expenses compare to similar households, visit the two sites below. Each site contains a calculator that lets you enter and then compare your expenses to similar households.