This article is part of our 52 week journey through Bill’s latest book, The Graduate’s Guide to Life and Money. Each week, a full excerpt from his book will be presented from beginning to end. To get your copy of his book, visit www.TheGraduatesGuide.com.
This week we will calculate your current financial situation and look at how recording your expenses will reduce stress.
Do the Math
Now that you have all of your papers and such together, you can find out what your current financial situation is. Your first step is to calculate your net worth. Sadly, it is probably negative at this point in your life. If not, consider yourself either lucky or financially smart. Most people have college loans, car loans and credit card debt to contend with. Add that to the fact that at this point in your life you do not own much of anything and you have the perfect formula for a negative net worth.
I shouldn’t get too far ahead of myself here. You need to know how to calculate your net worth. Basically, add up everything you own. It doesn’t matter how much you paid, but how much it would be worth if you were to sell it. That $500 sofa is probably only worth about $200 once it is a year old. Your car has also depreciated (decreased in value). Once you get that total, add up everything you owe. Look at all of your credit cards, car loans and college loans. Add all of your debt, then subtract that from what you own. That is your net worth. You should look for ways to increase your net worth (not by using “creative accounting,” but by increasing assets and decreasing debts).
It would also be useful to look at all of your other monthly payments. Just to get an idea of how much it costs you to live, you should list all of your bills, including your utilities and rent, as well as how much you spend at the grocery store and eating out. Looking at all of these items should give you a good picture of where you are today.
Use the chart (Figure 6-1) to record all of your expenses, or at least an estimate. If you are preparing to move out on your own, list what you expect you will be paying once you get your own place. This chart could help you in several ways. First, you can see what your total monthly payments will be. Second, you will be able to see where most of your money goes (entertainment, eating out, etc.). Finally, you can use that information to determine if there are areas where you need to reduce your spending. If you want to know what percentage of your expenditures are going to which category, simply divide any expenditure by your monthly income. For instance, if you spend $200 per month on your car payment, and you earn $800 per month, you spend $200/$800 = .25 = 25% of your income on your car payment alone.
Bill Pratt is a former credit card executive turned student-advocate. He is the author of Extra Credit: The 7 Things Every College Student Needs to Know About Credit Debt & Ca$h and The Graduate’s Guide to Life and Money. Bill speaks at colleges to educate and entertain students about real-life issues in money, leadership, and success. His goal is to help students succeed personally and financially so they can improve the lives of those around them. You can learn more at www.ExtraCreditBook.comor www.TheGraduatesGuide.com.