Budgeting and net worth

Budgeting and net worth

Use personal finance software

So if you're not saving at least 10 percent of your salary, or have any credit card debt, I think you need to record every expense you make for at least a month. Then you should record every expense above, say $20, for at least three months. That way you'll be able to catch items like insurance which may not occur monthly.

And do yourself a favor. Get some financial software like Quicken. After you input your expenses you can slice and dice the data to see all kinds of interesting things.

Spending records reveal surprising expenses

In my case, I found I spent a surprising amount of money on car insurance and computer gadgets. A friend of mine found he spent a lot on fast food.

You may find out how much you're really spending on finance charges for your credit cards or something else. It's different for everyone but you won't know until you track where your money goes.

Why should you budget?

Here's my final attempt to sell you on the need for budgeting. If a small business owner told you that he doesn't track his expenses, he only "kind of" tracks his income, and his business strategy is summed up with the phrase, "Well, we just try to make money" you wouldn't think his small business has much chance of making it.

The same is probably true for a family that doesn't track it's spending.

You don't have to go overboard with budgeting, but you'll be a lot more in control if once every few months you spend a Saturday morning looking at your finances.

Remember, the price of doing anything worthwhile is time. If you don't spend some time on a regular basis on your budget and finances, you'll be disappointed with your results in this one important aspect of life.

The whole point of tracking your expenses, however, isn't so that you look at neat spending charts on your computer. Tracking your expenses allows you to focus on expensive items that don't add to your life. Once you've found them, cut them out and apply the savings to debt reduction or to your goals.

Again, in my case, I noticed that my automobile insurance was much more expensive than I imagined. With a little thought and a phone call I was able to cut my car insurance by $30 a month.

Now $30 a month won't make me rich, but over 12 months that's $360 and could make a decent contribution to a retirement account.

So in my case, I was able to save $360 a year by spending 15 minutes looking at one of my bigger expenses. You can have similar results, but only if you know where your money is going.

Net worth

While you're tracking your spending, you should also calculate your net worth. Your net worth is what you've got left after you subtract your liabilities from your assets.

Although it's nice to calculate your net worth for comparison with the Joneses, there's a better reason for knowing your net worth. You need to know this figure to determine the right amount of insurance to buy, and for other reasons like estate planning or seeing how much financial aid you might receive from a college.

Calculating your net worth is easy. Just add up the market value of all your assets like your bank accounts, retirement accounts, other securities and your home. Then throw in your personal assets like your autos and furniture, but use realistic market values for these items.

Next add up all your liabilities. These include credit cards, student loans and home mortgages. Subtract your liabilities from your assets and you've got your net worth. If you use software like Quicken you can calculate your net worth easily.

Once you've found your net worth, use it! If you're struggling and your net worth is low or even negative, you can use this knowledge to your advantage.

For example if your net worth is only $10,000 and you've got $250,000 worth of liability coverage on your car, you probably can reduce your liability coverage down to the state's minimum. This will save you money so you can start increasing your net worth in the future.