Do The Math

This is Part 2 of the series of personal finance tips for my Siblings, “How Not to Blow Up Your Financial Future”.

Disclaimer: I am neither wealthy nor a financial professional- read at your own risk!

Let’s check out the overview of the 5 Steps to Not Blow Your Financial Future:

  1. See the Big Picture.
  2. Do the Math.
  3. Set a Plan: Budget.
  4. Live Within Your Means: Avoid / Eliminate Debt
  5. Save: Earn More and Spend Less.

Research is what I’m doing when I don’t know what I’m doing.

Wernher von Braun

Do the Math

If most of your decisions are made on a whim with no numbers or data to justify it, this is probably the section for you. It’s nice to be able to break down a problem into a solvable equation. Not all financial decisions need to be made this way, but many a financial mistake has been made in skipping this. Avoid the guesswork and actually know how your choices affect your finances.

Making A Financial Decision

Here is great advice from our awesome financial advisor on making big financial decisions, given to us when we were trying to purchase a home:

Run the numbers so that you have a clear financial path surrounding the decision. Before applying the emotional factors, look at the financial and see if there is a clear winner. Once the numbers are on the page, then apply the emotional factors and see if you are swayed one way or the other.

Nick Peterson

Some examples from my own life where we did the math to come up with an answer…

  • Should I go to college?
  • How can I pay off this loan in X amount of time?
  • Can we afford this car / vacation / insert-thing-I-really-want?
  • Is this a good deal—and even if it is, should we invest in it?
  • Is my side gig worth it?
  • Which health insurance plan is a good fit?
  • Which loan gives us the best terms?
  • Can we survive on a single income?
  • Does childcare cost more than quitting my job?
  • Is buying a home, renting, or building right for us?
  • Are we meeting our goals with our location / lifestyle cost?

If you have a question, there’s probably a spreadsheet or calculator for that! Your budget can also be invaluable information in helping answer the above. If you need help figuring it out, reach out to me.

Doing the Math Also Looks Like…
  • Pros and Cons list
  • Cost-Benefit Analysis – tallying up all costs of a project or decision and subtracting that amount from the total projected benefits of the project or decision
  • Loan Comparison Calculator
  • Calculator for Mortgage, Auto Loan, Savings, or Investment
  • Forecasting
  • Creating a Balance Sheet
  • Playing with the numbers on a spreadsheet
  • Talking to experts
  • Shopping around for the best rates
  • Checking your Credit score or Free Credit Report
  • Researching from credible resources
To Help with Calculations…

Here’s some other economic concepts you’ll want to understand to help you Do the Math:

  • Net Income – “take home pay” … Net Income = Gross Income – Taxes – Deductions
  • Savings Rate (%) – how much money you’re saving monthly; use it to plan for retirement… Savings Rate = Monthly Savings / Monthly Gross Income
  • Debt-to-Income Ratio (%) – how much of your income is spent on debt; use it to determine if you have too much… Debt-to-Income Ratio = Monthly Debt Payments / Monthly Gross Income
  • Net Worth – the sum of our financial habits over time, lowered by spending and increased by earning or saving or investing… Net Worth = Total Assets – Total Liabilities
  • Opportunity Cost – the value of the road not taken… because every decision involves trade-offs
  • Compounding Interest – interest earned on interest… making money grow faster
  • APR (%) – annual percentage rate… the actual cost you pay each year to borrow money
  • The value of Time – time is the ultimate “scarce” resource because it can’t be replenished—unlike money… so the importance of time exceeds monetary value
  • (Not to be confused with) the Time Value of Money – money is more valuable today than an identical sum in the future
  • Dollars-per-hour – for assessing the effectiveness of your side hustle or job… Pay per hour = $ Total paid / hours spent working
  • Law of Supply and Demand – check out the 4 basic laws of supply and demand for an explanation of the free market and interest rates

Thank you for reading, and I’m serious about the spreadsheets 😉

Check out the next step on Budgeting here.

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