Do the Math – Net Worth and Personal Budgets

Five Rules To Improve Your Financial Health

By Jean Folger on November 18, 2013

Filed Under: Budgeting, Financial Advice, Inflation, Net Worth, Personal Debt, Personal Savings

The term “personal finance” refers to how you manage your money and how you plan for your future. All of your financial decisions and activities have an effect on your financial health now and in the future. We are often guided by specific rules of thumb – such as “don’t buy a house that costs more than 2.5 years’ worth of income” or “you should always save at least 10% of your income towards retirement.” While many of these adages are time tested and truly helpful, it’s important to consider what we should be doing – in general – to help improve our financial habits and health. Here, we discuss five broad personal finance rules that can help get you on track to achieving specific financial goals.

Do the Math – Net Worth and Personal Budgets

Money comes in, money goes out. For many people, this is about as deep as their understanding gets when it comes to personal finances. Rather than ignoring your finances and leaving them to chance, a bit of number crunching can help you evaluate your current financial health and determine how to reach your short- and long-term financial goals.

As a starting point, it is important to calculate your net worth – the difference between what you own and what you owe. To calculate your net worth, start by making a list of your assets (what you own) and your liabilities (what you owe), and then subtract the liabilities from the assets to arrive at your net worth figure. Your net worth represents where you are financially at that moment, and it is normal for the figure to fluctuate over time. Calculating your net worth one time can be helpful, but the real value comes from making this calculation on a regular basis (at least yearly). Tracking your net worth over time allows you to evaluate your progress, highlight your successes and identify areas requiring improvement.

Equally important is developing a personal budget or spending plan. Created on a monthly or annual basis, a personal budget is an important financial tool, because it can help you:

· Plan for expenses

· Reduce or even eliminate expenses

· Save for future goals

· Spend wisely

· Plan for emergencies

· Prioritize spending and saving

There are numerous approaches to creating a personal budget, but all involve making projections for income and expenses. The income and expense categories you include in your budget will depend on your situation and can change over time. Common income categories include:

· Alimony

· Bonuses

· Child support

· Disability benefits

· Interest and dividends

· Rents and royalties

· Retirement income

· Salaries

· Social security

· Tips

· Wages

General expense categories include:

· Debt payments – car loan, student loan, credit card

· Education – tuition, daycare, books, supplies

· Entertainment and recreation – sports, hobbies, movies, DVDs, concerts, Netflix

· Food – groceries, dining out

· Giving – birthdays, holidays, charitable contributions

· Housing – mortgage or rent, maintenance

· Insurance – health, home/renters, auto, life

· Medical/Healthcare – doctors, dentist, prescription medications, other known expenses

· Personal – clothing, hair care, gym, professional dues

· Savings – retirement, education, emergency fund, specific goals (i.e. vacation)

· Special occasions – weddings, anniversaries, graduation, bar/bat Mitzvah

· Transportation – gas, taxis, subway, tolls, parking

· Utilities – phone, electric, water, gas, cell, cable, Internet

Once you’ve made the appropriate projections, subtract your expenses from your income. If you have money left over, you have a surplus and you can decide how to spend, save or invest the money. If your expenses exceed your income, however, you will have to adjust your budget by increasing your income (adding more hours at work or picking up a second job) or by reducing your expenses.

To really understand where you are financially, and to figure out how to get where you want to be, do the math: calculate both your net worth and a personal budget on a regular basis. This may seem abundantly obvious to some, but people’s failure to layout and stick to a detailed budget is the root cause of excessive spending and overwhelming debt.

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