Set Spending Goals by Category
Once you feel comfortable that you know where your money is going and you've identified some ways to cut costs in a number of categories, establish a monthly spending target for each category.
Do your fixed expenses first, such as your mortgage and car payment. In Chapter 3, you'll learn how to try and reduce your costs on seemingly fixed expenses, but for now let's assume that your mortgage, car payments, child-care costs, and taxes are fixed. Look at each of your remaining budget categories and set a spending target, taking into consideration what you know about your own spending habits and where you can cut back without causing a hardship.
An important part of budgeting is coming up with concrete ways to cut costs. Setting a spending limit with no thought about how to reduce expenses will be an exercise in frustration as you review your failures monthly. Come up with innovative ways to put money in your own pocket.
Calculating Your Net Income
When you've set a tentative target for each category, subtotal the income and expense categories and subtract the total expenses from the total income to arrive at your net income. This will be the amount of money you have left over for building an emergency fund, making additional payments on your credit cards, and working on your other financial goals, assuming you've recorded all of your income and expenditures accurately. If the number is negative, your expenses are greater than your income. Don't be discouraged. Your situation can no doubt be greatly improved by tweaking your spending habits. If you have a positive net income, be sure to transfer most of it to a savings or investment account at the end of each month. Extra cash left in a regular checking account has a way of getting spent.