Life is full of numbers to track of: you probably know your car's gas mileage (I get an efficient 29 mpg), the cost of your favorite drink at Starbucks (a painful $4.40), and how much you saved on a new fall coat ($30—woot). But do you know the numbers that really matter about your money? Take a moment to answer these three big picture questions about your personal finances.
What is your monthly take-home pay?
How chubby are those paychecks when they hit your bank account? Sadly, it's going to be much slimmer than your salary divided by 12 because of things like taxes, health care, and retirement savings. To find your monthly take-home pay, look at your bank account and add up your income for the month.
Let's use Sarah as an example:
She's a bright-eyed college grad living it the city with a weak spot for twice-baked almond croissants. She makes $45,000 per year as a graphic designer. It's both the richest she's ever been and also the most broke—this is the first time she's had to pay for life on her own.
Sarah gets paid twice monthly, and she ends up with $1,250 per paycheck after taxes, benefits, and retirement savings.
Thus, Sarah's monthly take-home pay is $2,500 per month.
(An important note: you might have the same salary as Sarah and take home a different amount because tax rates, benefits, and retirement savings vary so widely).
How much money do you spend each month?
Obviously every month will be a little different, but you should have a rough idea of how much money flows out of your bank account. You see where I'm going here? Once you know how much you make and how much you spend, you'll have a solid picture of your finances: if they're heading for sunny skies or dark clouds of doom.
The easiest way to find your monthly expenses is to take your bank or credit card statements for the last 12 months and find an average amount spent. Don't forget to add in items that might not appear in a statement like student loans or rent. If you don't know that number yet, take a moment to find out...or even schedule time on your calendar to dig in. It's a really good number to know.
Back to Sarah. Let's look at her monthly expenses:
- Student loans: $500
- Car payment: $200
- Rent: $700
- Groceries: $300
- Internet/cell phone: $80
- Twice-baked almond croissants: $20
- Miscellaneous: $300
- Total: $2,100 per month
Now Sarah has two numbers: she makes $2,500 and spends $2,100. She's a savvy money maven and does a great job of spending less than she earns, but geesh, life is expensive!
How much money do you have right now?
Let's forget about big debts like student loans and mortgages, and disregard money that's tied up in retirement accounts or home equity. This should be purely liquid money that can flow like honey when you need it. Don't forget to subtract out credit card debt if you have any (yikes...get rid of it ASAP. Check out two approaches here). Here's your equation: take your bank account balance (both checking and savings) and subtract your credit card debt to find your liquid money.
Let's look at Sarah's pockets of money.
She has about $4,500 in the bank and $800 on her credit card. After paying her credit card, she has $3,700.
Sarah gets some solid points for having a buffer in her bank account. A savvy financial move is to have $1,000 saved as an emergency fund for unexpected expenses. Next month Sarah could get a flat tire. Instead of going into debt to pay for the repair, she can dip into her emergency fund.
Sarah's next money goal is to build up a three-month buffer of living expenses (a cushion for a worst-case scenario like losing a job or injury). Her next money goal is to have $7,300 saved ($1,000 for an emergency fund and three months of living expenses). But first, off she goes to celebrate with a twice-baked almond croissant. Small victories!
How'd you do? Whether you aced it or need to go hunt down some numbers, hats off to you in taking a big step in wrangling your personal finances. Now go forth and be wise with your money!
