spending for dummies

Accumulating debt isn’t something that happens overnight.  Typically it is the results of a general lack of awareness of how much we actually spend vs. how much we make.  Sounds simple right?  Try this:

Step 1- Calculate your gross monthly income.  If you get paid:

Weekly: multiply your base pay by 4.33.  This will give you your gross income for the month.

Bi-weekly: multiply your base pay by 2.17.  This will give you your gross income for the month. 

Bi-monthly: multiply your base pay by 2.  This will give you your gross income for the month.

Next if you receive bonuses or overtime, estimate the total you received in the previous year and divide by 12.  This will give you a goof monthly estimate.

Add all sources of income together and this is your monthly gross income.

Step 2- Assume you pay approximately 20% of your income toward taxes.  Multiply your gross number by .80.  This will give you an estimate of your net (money you have to spend each month)

Step 3- Calculate all your expenses.  Include:

Mortgage
Real estate taxes
Homeowners insurance
Home repairs
Cars and car insurance
Health Insurance
Utilities
All credit cards
Gas
Food
Leisure
Clothing

Doing a quick estimate will work for the purpose of this exercise

Step 4- Divide your total expenses by your net (spendable) dollars.  This will give you what the banks  refer to as your debt ratio. This is an important number to know when applying for a mortgage.

Example: 

Mr. Jones weekly pay = $1,000 x 4.33= $4,330 month.

Mrs. Jones bi-weekly pay = $2,200 x 2.17 = $4,774

Total monthly income = $9,104

Multiply x .80 (20% toward taxes) Total Spendable income = $7,283

Total monthly expenses = $5,200

Debt ratio = $5,200 divided by $9,104 = 57%

Good news, our couple in this example have a positive cash flow. 

If your debt ratio exceeds 100% you are spending more money each month then you bring home.  In the long run this will lead to the accumulation of significant debt.

Making good purchase decisions starts with knowing how much you actually spend on a monthly basis.