Once you’ve figured out your personal financial surplus or deficit, it’s time to take a look at those numbers and improve on them.

Obviously, cutting expenses is not as important if you have a surplus than if you have a deficit. However, don’t discredit the idea just because you are making more than you spend. There may be expenses that can be easily cut, or even ones that you didn’t realize you had and don’t need. If you have a surplus, you should still do this exercise and cut spending where you can to make your financial situation even better!

If you are running a deficit, especially a large one (often funded by credit cards), all non-essential spending should be cut. And we’re not saying to never buy or do anything fun, but on a normal, everyday basis, any expense you can live without, cut. If you’re trying to clean up your financial life, sacrifices will need to be made to do so, especially in the short run.

You’ll probably need to review what non-essential spending is to you because it won’t be the same for everyone. What would be considered senseless spending to some people may be a big part of someone else’s lifestyle that would happily cut something else to keep it funded.

Debt is always a tricky subject when it comes to budgeting. If you have a lot of consumer debt, especially credit cards, you should first work out a debt reduction strategy so that you can have it built into your budget. Then, as you pay it down, and eventually off, more cash will be freed up, which can be used towards other things. The debt reduction strategy we favor will be covered in next week’s post.

Next, look at essential spending. There are always ways to decrease these as well, if you have the determination to. You can reduce utilities by being more conscious of your usage or negotiate a better deal for your cable or auto insurance. It never hurts to call a company and ask; there are often deals going on that you can take advantage of, especially with media companies. You can also save a lot by cutting back on dining out and being more conscious of what you buy at the grocery store.

Typically, you should work towards living at no more than 70% of your take home pay if you enjoy giving to charity (80% if not). Once you have trimmed your expenses down, take a look at how it adds up against your income. Keep in mind, if you’re paying down debt, you final budget may not hit this target. But, if you implement a debt reduction strategy, this will change as time goes by. Don’t be too disheartened if you can’t immediately get to 70% or below.

We won’t get into what to do with the extra 20-30% today. It may take some time to work out your budget. And as we said before, you shouldn’t stop enjoying life because you’ve cut expenses. Build an entertainment and hobby allowance into your budget, but just be sure to pick a reasonable number you can afford and don’t go overboard. It’ll be there if you want it, and you shouldn’t feel guilty about using it. And if you don’t use it, the extra will become part of your surplus.

Once you decide on your budget, be sure to stick to it! And, at the end of every year, you should perform zero-based budgeting. Review all your expenses again and make sure everything is still accurate. If some of your expenses have increased, make the necessary adjustments elsewhere. This should keep your expenses from getting off track.