Category: Personal Finance

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Personal Finance

The Real Cost of Car Ownership

Earlier this week, we took a look at one of the big personal finance decisions out there–buying a car. But the price of the vehicle alone isn’t the only consideration. Unlike a blender or sofa, your shiny new mode of transportation will tap your budget year round. But by how much?

Generally speaking, car ownership involves four additional costs: fuel, maintenance, insurance and taxes. (Some states and municipalities don’t have a property tax on vehicles, so you might be off the hook for that last one.) Problem is, these costs aren’t like your mortgage or cable bill. They can be hard to predict and aren’t due at the same time each month.

So how can you plan for these? Well, just like any other irregular or unexpected costs, it’s a good idea to  put something away each month for car expenses. The trick is figuring out how much you’ll need. Let’s start by estimating the annual costs for each of these items.

Fill ‘er up

With gas prices rising and falling like the barometric pressure on a spring day, budgeting for fuel sure ain’t easy. But you can get a rough idea of what to expect, and then tweak that amount as the year goes on.

You’ll need to consider several variables for this one: the miles you travel in a given year, your vehicle’s miles per gallon, and the cost of gas where you live. This is going to be an estimate, of course. Unless you’ve got a wicked crystal ball, you won’t be able to predict any of this for sure–but you can get close.

If you’ve been keeping records of your miles traveled, you can take a look at the previous year to predict this number. Of course if you’re like me, those records don’t exist. So figure out a rough estimate based on your commute (if you have one), annual trips and even carpool. You should add on for errands and other around-town trips. For reference, the U.S. Department of Transportation estimates that on average, Americans drive 13,476 miles per year.

Now calculate the amount of gas you will likely consume. Let’s say your car gets 32 miles per gallon, and you expect to drive 14,500 miles this year. To find out how many gallons of gas you’ll use, divide:

14,500 ÷ 32 = 453.125 gallons

And the last part is simple: multiply this number by the cost of gas per gallon. In my area, we’re averaging about $3.85 per gallon, so for the sake of this example, let’s use that number.

453.125 • 3.85 = 1,744.53

The annual cost of gas for this fictional vehicle is estimated at $1,744.53.

Maintenance and Repairs

While maintenance can be pretty predictable, repairs are something that you can’t foresee–just like you didn’t see that light pole behind you in the Giant parking lot. But you can budget for these.

Again, if you keep good maintenance records, you can review these to see what you have paid in past years. Your mechanic may have these on file, as well. Remember, most maintenance is based on the number of miles driven, so if you add a long commute, you can expect these costs to rise. The kind of car you drive also matters. And of course, older cars will likely require more maintenance and repair.

If you haven’t tracked these expenses, you will probably have to make a good guess. Ask your dealer or mechanic about this. Or start with $2,000 per year and see what you have left over in December.

Whatever you do, don’t forget your Emergency Fund. This is where you’re big, unexpected repair costs will come from, like an accident that isn’t covered by insurance.

Speaking of Insurance

If you’re driving in the good old U. S. of A. and you don’t have “Farm Vehicle” stamped on the bumper of your truck, you will need to pay insurance. Again, this is a cost that depends on several variables, including your age, your driving record, and much more. But once you choose your insurance policy, that number will be set in stone, as long as you keep your driving record squeaky clean.

The Tax Man

Some states (and some municipalities) require personal property taxes on vehicles. Problem is, these payments are not usually monthly. Sometimes they are only charged annually, and in some places, residents pay these taxes quarterly.

To budget for taxes, take a look at what you paid last year. Or look up a property tax calculator for your state.

Month by Month

Let’s say you’ve found all of these annual costs. Now it’s time break them down, so that you can put away some cash each month.

Fuel = $1,744.53 per year

Maintenance = $2,000 per year

Insurance = $1,566 per year

Taxes = $2,867 per year

First add these to find your total annual costs:

1,744.53 + 2,000 + 1,566 + 2,867 = $8,177.53

Now divide this total by 12 to get your estimated monthly costs.

8,177.53 ÷ 12 = $681.46

So, based on this fictional numbers, socking away $682.46 for car expenses should cover the annual cost of owning and maintaining this fictional car. (Your milage may vary.)

Do you have any tricks for covering these unpredictable costs? Share your ideas or questions in the comment section.

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Personal Finance

Dealership or Want Ads: Deciding between a new or used car

When you’re looking at your personal finances, the big expenses stand out. That means purchasing a car is a huge consideration, and deciding between new and used can make your mind turn to mush. Do dealer and automaker incentives–like free financing or cash back–make a big difference? Sometimes yes, sometimes no.

Today, I’m bringing you an excerpt from my book, Math for Grownups. Use this math, and you can make an educated vehicular purchase, speedy quick.

Used cars are generally less expensive than new ones, unless you’re deciding between a pre-owned Hummer and a brand new Hyundai, of course.

But how do dealer and automaker incentives stack up to buying used?

Check it out!

Roxanne is trying to decide between two cars. Her local dealership has a current model priced at $25,000, including tax. But online she saw the same car—pre-owned—for $15,000. The used car is in excellent condition and certified. Plus, the warranty transfers, so price is her only real consideration.

The dealership is offering free financing. And the automaker has a $2,000 cash-back program. That means she’ll pay exactly $23,000 for the car and no interest at all.

But to finance the used car, she’ll have to get a loan. To compare the prices, she’ll need to find out how much she’ll pay in all for the used car. That means she needs to know what interest on a loan will cost.

In order to calculate that, she’ll need to know the principal (the amount she is borrowing and the basis of the interest calculation). That means the principal is $15,000. She’ll also need to know the interest rate. Her bank is offering a 6% interest rate on car loans, for a period of 4 years. The interest is compounded annually, so once a year, the interest rate is calculated and added to the loan amount.  Thus compounding interest means that in every year for the term of the loan, except the first year, Roxanne is paying interest on the interest she paid the year before (and the year before that . . . and you get the idea). 

Roxanne can use an online calculator, or she can turn to a really simple formula:

A = P(1 + r)n

Okay, breathe. It only looks hard. It’s not difficult at all if you remember the order of operations—that is, what you do first, then second, and so on.

First, do anything inside the parentheses. Next, take care of exponents—those are the little numbers at the right top of another number. They tell how often to multiply the bigger number by itself.  (Thus 42means 4 Ÿ 4, and 165 means 16 Ÿ 16 Ÿ 16 Ÿ 16 Ÿ16.) Then multiply or divide. And finally, add or subtract.  In other words, Please Excuse My Dear Aunt Sally, or PEMDAS:

Parentheses
Exponents
Multiplication
Division
Addition
Subtraction

Ready to apply this formula?  With PEMDAS, you can do it!

A is the total amount she’ll owe

P is the principal

r is the interest rate per compounding period

n is the number of compounding periods

Roxanne’s principal (or the amount she’s borrowing) is $15,000, so P = $15,000. Her interest compounds yearly, so her rate is 6%. To make it easier to multiply, she can convert that percent to a decimal: r = 6% = 0.06. And because the compounding period is annual, and the length of the loan is 4 years, n = 4.

A = $15,000(1 + 0.06)4

First add the numbers inside the parentheses.

A = $15,000(1.06)4

Now calculate the exponent. Remember, 1.064 = 1.06 •Ÿ 1.06 Ÿ• 1.06 Ÿ• 1.06.

A = $15,000(1.26)

Last step!  Just multiply.

A = $18,900

So, Roxanne would pay $18,900 total if she finances the purchase of the used car.

That’s a heck of lot less than the $23,000 she’d pay for the new car. And she hasn’t even figured in her down payment yet.

Why does that change anything? Because after making a down payment, she would be paying interest on less principal (remember, that’s the amount she’ll be borrowing). How would a $1,500 down payment affect her decision?

For the used car, she’d finance $13,500 instead of $15,000.

A = $13,500(1 + 0.06)4

A = $13,500 •Ÿ 1.26

A = $17,010

So the total she’ll pay for the used car is $17,010.

And for the new car?  She just needs to subtract her down payment from the adjusted price: $23,000 – $1,500, or $21,500.

Judged on the basis of price alone, the new car doesn’t seem so minty fresh.

Do you have questions about using this formula? What about questions about buying cars and fitting the payments into your monthly budget? (On Friday, I’ll talk about the year-round cost of owning a car, a consideration that is critical at the buying stage. And later this month, we’ll take a closer look at compound interest.)

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Personal Finance

Saving for a Rainy Day (or for Singin’ in the Rain)

If you run your own business — like I do — your personal and professional expenses will overlap. So I understood exactly what commenter, Emma, was getting at when she posted this on Wednesday:

My question is like this: what are some things I can do to keep saving when I know I have large expenses that come up a lot? I’m am actor, and I’ve had several big trips for auditions and jobs the past few months that have taken a lot of money all at once to get me to where I needed to go, staying over in a hotel, food on the road, that kind of thing. And I get home and it’s like…. oh. Guess my savings for that pay period is kind of shot.

Here’s the short answer: You have to budget for these expenses, even though they’re not regular. The costs of traveling to auditions and jobs is what I would call overhead. But whether these are business or personal expenses, the issue is the same: You’ve got to budget for them.

The same is true for anyone facing irregular or unexpected costs. Many financial advisors suggest something called an Emergency Fund (EF). Whether this fund is used for home repairs, unexpected medical costs, to replace a totalled car or to travel to The Poughkeepskie Playhouse to star in a revival of 42nd Street, the mission is the same — have enough cash on hand to cover unforeseen expenses.

You also must budget for savings. Even if it’s only $50 each month, make sure that this money is going into a savings account before other expenses are paid for. I like to say that I’m paying myself first. After a while, you won’t even know that it’s gone. You might even be able to set up an automatic transfer, which is a great way to keep you honest.

Why do you need savings? Well, the answer is obvious. If you literally follow the old stage adage and do break your leg, you could be out of commission for a while — no auditions + no gigs = empty bank account. In fact, it’s now recommended that you have six months to a year of living expenses in your bank account for this very reason. So, if you’re spending $3,500 each month, you’ll need $21,000 to $42,000 in the bank to take care of these emergencies. That’s a lot of cash!

If that amount feels out of reach, set some goals — 10% by the end of the year, for example. Doing a few calculations can help you break things up into manageable pieces.

And here’s the other thing: you can squirrel away cash for lots of different reasons, including travel. You could decide to split your savings deposit, putting 70% in an emergency fund and 30% in an auditions/jobs account. So, if you have $100 for savings each month, that would mean $70 in savings and $30 in a travel account. This will give you some cushion, if a really cool opportunity comes up that you haven’t budgeted for.

So how do you budget for travel to auditions and jobs (or create an emergency fund)? My suggestion is to take a look at what you’ve spent in the past. Add up all of your audition expenses for the last three months and divide by three. (Or over the last year and divide by 12 or whatever numbers you have on hand.) Then take a good critical look at that number. Does it realistically represent what you normally spend on auditions and jobs? Did you go on more or fewer than usual? Did you have to fly farther or stay in an expensive city? Adjust this number based on the answers to those questions.

Now you have a good idea of what you can expect to spend each month on traveling to auditions or gigs. More than likely, this won’t be an exact number. If you spend less, put the extra in an auditions/jobs account. If you spend more, take it from that account. (And if you don’t have enough saved up yet, you might need to make other adjustments to your budget — like eating Ramen noodles for a while.)

Here’s one more step you can take. Your business is like mine. It’s feast or famine — you never know exactly how much you’ll be bringing in each month. So estimating a percent that you can use for travel expenses can help you stay on track. There are several ways to do this, and here’s one idea:

1. Find your average monthly expenses for traveling to auditions and jobs. (This is what you did above.)

2. Find your average monthly other expenses. (This will include rent, groceries, utilities, education costs, and yes, savings.)

3. Add the two together to get your total average monthly expenses. (Another way to think of this is your total income.)

4. Divide the travel expenses by the total. That will be your audition expenses rate.

So let’s say that your average monthly audition expenses are $2,000 and your other monthly expenses are averaged at $4,500. That means the average of your total monthly expenses (or total income) is $6,500. To find the audition expenses rate, divide:

2,000 ÷ 6,500 = 0.31 or 31%

So, on average, 31% of your monthly expenses should go to traveling for auditions and jobs. Even if your monthly expenses go up or down, you can keep this percent in mind for setting your audition expenses budget. If you’re making less money, you can trim your travel expenses. If you’re making more money, you can up that part of your budget.

Hope that helps, Emma!

Do you have different advice for Emma? If so feel free to share (nicely) in the comments section. How do you think this process would work for your unexpected expenses? If you have a personal finance question, don’t hesitate to ask!

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Personal Finance

Math at an Indian Restaurant

I’m late posting today for good reason. I’ve been in New York City since Wednesday, attending the American Society for Journalists and Authors conference. And it’s been a blast! I rode up on the bus with hilarious humor writer, Michele Wojciechowski. I’ve met folks I’ve blogged for (including Debbie Koenig at Parents Need to Eat, Too) and folks who have been featured in Math at Work Monday (like career coach, Kiki Weingarten (and her sister Rachel Weingarten).

I’ve also attended workshops on creating video (look for that soon!) and being fearless in writing (with super mom blogger Jen Singer). Tomorrow, I’ll be moderating a panel called One Plus One Equals Cash: Math for Writers. Yep, I’m bringing the math message to my fellow freelance and book writers.

This little introvert is going to be exhausted by the time I get back to Baltimore on Sunday night. But I’ll also have a ton of inspiration — exactly the kick in the pants I need for the kind of isolated work I do.

Of course conferences mean dinners out with lots of people at one table. And in New York, this almost always means splitting the check ourselves, maybe even after a glass of wine or two! It’s a daunting prospect even for a former math teacher. So here’s a quick look at how you can do it, easily and without worry.

Dividing the Restaurant Check
1. Decide if you’re going to split everything evenly or if people want to pay only for what they purchased. Last night, I ate Indian with a group of friends. We chose to have a variety of dishes and share them family style. At the end of the dinner, we simply split everything seven ways.

2. Add the tip before you divvy things up. The server should receive 15% to 20% for good service on the entire bill. If you figure the tip after the division, you could end up tipping less than the server deserves. And — trust me on this — it makes the math easier.

(Remember how to find the tip? Take 10% of total bill by moving the decimal point one place to the left. For 20%, double that amount. For 15%, take half of that amount and add it to the 10%.)

3. Round. Unless you’re Mr. or Ms. Picky-Pants (and honestly, no one wants to eat dinner with someone like this), rounding is going to be close enough. But here’s the thing. You must round up. Otherwise, you could leave too small a tip or find out you don’t have enough money to cover the whole bill.

This rounding thing goes for both splitting options — dividing the check evenly or adding up each person’s total. But how should you round? Well, that depends on you and your comfort with the mental math. You can round to the nearest dollar (which is usually my preference) or to the nearest 50 cents. Use your best judgement — but pay attention to how your choice may affect others’ totals and the server.

4. Another option is to estimate. Last night our total bill was $156 with the tip. We had seven people, and I immediately noticed something wonderful — $156 is pretty close to $140. Why does that matter? Well, it’s because 7 x 20 = 140. (Okay, so actually I noticed that 7 x 2 = 14, but it’s basically the same math fact.) This meant that each of us would owe something close to $20.

Clearly we each owed more than $20, right? (156 is greater than 140.) So, I estimated that it would be pretty close to $23. Because I was thrilled to figure this out, I pulled out my iPhone and checked. Turns out $156 ÷ 7 = $22.29. My estimation pretty darned good!

5. And of course another option is to use a calculator. I am here to tell you that there is no shame in this! Look at it this way: you have lots of things on your mind, and that glass of wine probably isn’t going to help you do mental math. You’re a grownup, and your fourth-grade teacher isn’t looking over your shoulder telling you that calculators are bad. Use the tools that work for you.

6. Finally, when everyone has contributed, add it all up to make sure there’s enough to cover the bill. Several of us remember last year’s cocktail party when people left early but didn’t leave enough money to cover their drinks. That left the rest of us stuck with more than we expected to pay. Checking your answer is a great way to avoid these costly mistakes and tarnishing your good name!

Of course there are many other ways to approach these everyday — or every conference — problems. You just need to pick the one that works for your special brain. Remember, just because you do it differently doesn’t mean you’re wrong.

But I do encourage you to look at the relationships between numbers — even when you’re using a calculator. You might pick up a few neat tricks. And if you’re my age, it can’t hurt to exercise those brain cells a little.

How do you split the check at a restaurant? Have you ever said, “I’ll treat!” to avoid the math? Share your tricks here and feel free to ask questions, too.

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Math for Parents Personal Finance Work

Heading Back to Work: The childcare dilemma

Photo courtesy of D Sharon Pruitt

Every day, around the world, countless mothers (and quite a few fathers) are considering the same question: Now that my kids are older, is it time to go back to work?  The U.S. Census reported that there were 5 million stay-at-home mothers in 2010.  And the decision to forgo paid employment in favor of days filled with finger paint, potty-training and Mommy-And-Me playgroups is certainly rife with emotion and even debate.

It’s also very personal, and not just because these choices reflect our unique sets of values.  The decision to be a stay-at-home parent — or to return to work — is a financial one.

Let’s face it, if the family needs the money, going back to work sure beats sharing a one-bedroom apartment with three kids, a dog and a snoring partner.  Right?  But the math has to work out.

That’s because for many parents, returning to work means paying for childcare — and anyone who has done this knows it usually ain’t cheap.  The good news is that the math involved is pretty simple.  You just need to take a little time to work it out.

Jackie has three gorgeous kids, all under the age of 6 years old.  As the economy has worsened, her husband’s salary just isn’t going as far as it used to, and besides, she’d like to get back to her career as a pediatric nurse.  The doctor she once worked for called to see if she’d be interested in a part-time position at his practice.

Financially speaking, is this a good idea?  Let’s look at the numbers.

If she takes this position, she can earn $210 per day, after taxes, and she would be expected to work three days a week.  The practice doesn’t offer health insurance for part-time workers, but the family is on Jackie’s husband’s plan, so that’s a non-issue.  Other benefits are minimal, as there are no sick or vacation days and no retirement fund.  (She can switch schedules with another part-time nurse to cover any days she needs off.)

How much can she expect to earn each week?

$210 x 3 days = $630

Jackie can’t bring her kids to work with her or let them fend for themselves.  Nope, she’s got to think about laying out some cash for childcare, and like most folks, Jackie has a somewhat complex situation to consider.  Her oldest is in half-day Kindergarten, so she only needs part-time care for her.  But her three-year-old twins need to be looked after all day.  While her mom would love to watch the kids, the eight-hour commute to her house just isn’t practical.

Calling on friends and neighbors, Jackie considers her options.  Pretty quickly, her decision becomes clear.  Luckily, there’s a daycare center just around the corner from her daughter’s elementary school.  Even better, it offers part-time care.  And just down the street from Jackie’s house lives a woman who offers in-home care.  She places a few calls and learns that each place has openings.

Still, she needs to crunch the numbers.  The daycare center charges $50 per day, for part-time care.  The in-home caregiver charges $175 per week, per child.  How much of a hit will Jackie take in her take-home pay?

First, she needs to find the cost per week for her older daughter:

$50 x 3 days = $150

Next, she needs to find the weekly cost for her younger children:

$175 x 2 = $350

Finally, she adds the two together:

$150 + $350 = $500

So she can reasonably expect to pay $500 per week in childcare.  That means she’ll be taking home $130 each week.

$630 – $500 = $130

Yikes!  What looked like a great part-time salary is now looking pretty skimpy.  But there are two more calculations Jackie considers before freaking out: Her monthly and yearly take-home after childcare costs.

$130 x 4 weeks = $520 per month

$130 per week x 50 weeks = $6,500

These numbers tell her that she can contribute more than $500 each month to the mortgage payment.  Or if her husband gets that promotion he’s looking at, they could put almost $7,000 towards their savings.

There are also other financial benefits to consider.  For example, if Jackie keeps one foot in her career, she can get up to speed (and stay ahead of) changes in her field.  And if she’s already employed at the doctor’s office, she may be better positioned for a full-time job once the kids are all in school.

Now Jackie only has to deal with the emotional decisions — which are pretty tough.  But with these figures, she can at least say for sure how her family’s budget will benefit in the short run.

All you parents, what went into your decision to get back in the work force or stay at home? Did you do the math to figure out if it was financially worth it?  Or did the numbers show that staying at home was much more financially viable? Share your stories in the comments section.Save

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Math for Grownups Personal Finance Work

Leaping into Self-Employment (Hint: Math helps!)

Photo courtesy of shimelle

Deciding to leave a steady job with a steady income is a big step.  Leaving in favor of working for yourself might seem like the craziest idea of all.  Believe me.  I know from experience.

I’ve been a freelance writer for going on 11 years now, about half of that time while holding down a part- or full-time job.  But when my family decided to move to Maryland, I figured it was a good time to try freelancing “without a net.”  I didn’t have a job yet, but I did have a Rolodex full of great editorial contacts and a good understanding of how to build a freelance career.

Over the last six years, I’ve grown my business in many ways: from part-time to full-time, from focusing on journalism to writing a book and shifting my attention to curriculum development.  (I did the latter, when the bottom fell out of the magazine industry a few years ago.)

I can say two things about this experience: Math definitely helped me launch and sustain my new career. And I couldn’t have made the leap without the support and advice of writer extraordinaire and all-around generous gal, Linda Formichelli.

I met Linda when we were both starting out, but she was about a year ahead of me in the process.   These days, Linda is an accomplished writer with two books (The Renegade Writer and Query Letters that Rock), bylines from countless top-notch publications and a booming coaching business.

One thing that any experienced and successful freelance writer knows is this: The writing is secondary.  Sure, I’m in it to write.  But without some really good business skills, no one will hire me to do what I love.  In other words, we’re business owners first and writers second.  (And this is true for almost anyone who runs their own business.)

Unlike me, Linda doesn’t have a degree in mathematics.  (Her Master’s from Berkley UC is in Slavic Languages.)  Doesn’t matter.  Linda has learned to apply math to her freelance business.  First up: dealing with the bottom line.

“I needed to figure out my hourly copywriting rate based on how much I needed total to make a living plus the amount I needed for overhead — equipment, office supplies, etc.,” Linda says. “I divided that by the number of billable hours I predicted I would have in a year, and also had to keep in mind the going rates — what the market would bear.”

So no, Linda was not consumed with the kinds of pens she would use or scribbling by candlelight each night.  The practical won over the romantic.  Even with magazines.

“Magazines usually pay by the word, and I needed to figure out how that translated to an hourly rate,” she says. “For example, I sometimes make more money per hour writing for 50 cents per word versus $2 per word because the $2 per word articles are much more research-intensive and often required multiple rewrites.”

(I can’t tell you how important her last sentence is.  If a publication requires many hours of editing and rewrites — and some do — your hourly rate plummets.  This is part of what we freelancers call the PIA factor.)

Knowing how quickly she can write also helps establishing whether or not an assignment makes sense.

“I know that I can write about 800 words an hour (after the research and interviews are completed), so I can figure out how much time it will take me to write an article of any length,” she says. “For example, many articles run at around 1,500 words, so this will take me about two hours.”

Depending on what the client is offering, this may or may not be a good deal.  Here’s an example:

You’ve been offered a 1,500-word story assignment for your local alt weekly newspaper.  They’re willing to pay you $0.35 per word, and you’ll need to do four phone interviews.  You estimate that those interviews will take about an hour each, and you think you can write the story in two hours.  You’ve worked with them before, so you know you can count on about 1 hour of editing. Is the assignment worth it?  Let’s look at the math.

1,500 x $0.35 = $525

So if you do the story, you’ll earn $525.

4 hours (for interviews) + 2 hours (for writing) + 1 hour (for editing) = 7 hours

So you can expect to spend about 6 hours on the story in all.  (Notice, though, that there’s no time allotted for research or back-and-forth with the editor.  And you haven’t included any of the time you spent convincing the editor to give you the assignment.)

$525 ÷ 7 hours = $75 per hour

Now, maybe that’s a good rate for you and maybe it’s not.  Regardless, you now have a solid idea of whether or not you should take the assignment.

(If you’re not self-employed, you may be surprised by this rate.  But remember we self-employed folks are responsible for all overhead — equipment, facilities, health insurance, vacation and sick leave, taxes and retirement savings.)

And this works in all sorts of careers, whether you’re an artisan or have a landscaping business.  The math takes the guesswork out of business planning.  And it can keep you on track in any new business venture that comes your way.

If you are attending the American Society for Journalists and Authors (ASJA) conference in New York in April, be sure to check out my panel on math and writing.  I and two panelists will talk about how math is important in reporting and running a freelance business.  I promise it won’t be boring — and you’ll probably learn how to be a better reporter and business owner.  (Psst: Gretchen Rubin, author of The Happiness Project is the luncheon speaker!)

Hey freelancers (of all kinds): what’s your favorite math tip for running your business?  Share it in the comments section.

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Personal Finance

Trim Your Spending with Percents

The first step to becoming more financially stable is writing down what you spend — and being honest about it.  But what happens when you subtract your expenses from your income, and you’re in the red?   Pouring yourself a stiff drink may be a first step, but it’s not going to solve the problem for you.  Instead, you’re going to have to put on your big-boy or -girl pants and get down to the business of trimming your spending.

But one of the tough parts about budgeting is making reasonable assumptions about what you should be spending on any one category of your budget.  Does it make sense to spend 50% of your income on housing?  Should you cut your monthly savings?

Our brains are funny little organs.  We can convince ourselves that we must have that huge flat-screen television set or we deserve to go out for drinks with the girls every Friday night.  But the numbers don’t lie.

Math can help keep you honest about what you’re earning, spending and putting away for a rainy day, retirement or when you decide that you’d rather be a writer than an advertising sales executive.

Each family or person is different, of course, but there are some great guidelines that can help you see if you’re on track. Here are some examples:

  • Housing should cost no more than 28% to 33% of your monthly gross income.
  • Groceries should account for about 18% of your monthly gross income.
  • You should be saving between 10% and 20% of your monthly gross income.

This is one of those situations when math can really help you lower the emotional impact of your decisions. Knowing what is reasonable to spend on these items can make it easier for you to actually make the changes.

So let’s say you’ve tallied your income and expenses and come up short. (No wonder your credit card bills are so high!)  You  gross $3,127 each month, and your rent is $750 each month.  You spend about $650 on groceries and meals out each month, and you try to put away about $100 into savings.

Of these expenses, what should you cut?  Let’s take a look.  The experts estimate that your housing should cost no more than 28% to 33% of your monthly gross income:

28% of $3,127

0.28 x $3,127

$875.56

33% of $3,217

0.33 x $3,127

$1,031.91

Given your monthly income and the experts’ guidance, you should be spending between $875.56 and $1,031.91 each month on housing.  Your rent is much lower that that, so unless you’re having your living room redecorated by Martha Stewart herself, you should be good to go in that category.

On to groceries:

18% of $3,127

0.18 x $3,127

$562.86

But you’re spending $650 on groceries and eating out each month.  Clearly this is where you can cut some of your spending.

Finally, take a look at savings.  While you could zero this out, so that you can pay off some debt, it’s probably not a good idea to forgo savings altogether.  Besides, didn’t all of our parents preach about having a nest egg?  (In fact, financial experts recommend that we have the equivalent of at least 4 months of our salary tucked away — just in case.)  Building your savings takes discipline and time.  And there’s no better time than the present to get started.

But how are you doing now, according to the expert guidance?

10% of $3,127

0.10 x $3,127

$312.70

20% of $3,127

0.20 x $3,127

$625.40

Hold the phone.  With your measly $100, you’re not even close to what is recommended.  Perhaps you could cut back on your clothing budget, so that you can actually retire on time or have a safety net if your job suddenly goes poof!

I’m the first to admit that these suggested percents are not the be-all-end-all of budgeting advice.  Each one of us has extenuating circumstances to consider.  But why not start with the math?  In terms of what we’re spending, saving and earning, the numbers don’t lie.

P.S. For the really diligent among us, there’s something called the 50/30/20 budget: Must-have expenses (housing, food, insurance, etc.) should account for 50% of your income after taxes, while 30% should be “wants” and 20% should be savings.  The trick here is deciding what is actually a “need” and what is really a “want.”

Using these percents, how are you doing with your monthly spending? Calculate what you should be budgeting for housing, food and savings, and then compare those results with your actual spending and savings.  Tell us how you stack up in the comments section — and best of all, whether the result is surprising.

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Personal Finance

Budget basics

your New Years resolution is to save money — or spend less — most financial folks will tell you one thing: you’ve gotta have a budget.  This means figuring out what you earn and how to spend those earnings.  Budgets can be complex or simple.  It all depends on what you are comfortable with.  (Personally, I go for simple, because all of those details keep me from maintaining good finances.  But if I needed to pay off a lot of debt or save a good amount of money, I might suck it up and look at every single penny.)

For today’s post, I thought I’d just print an excerpt of my book, Math for Grownups.  Chapter 8 is called “At the Bank,” and it deals with money issues (aside from shopping, transportation or housing, which are covered in chapters 1, 2 and 3).

It’s New Year;s Day, and Darrel is pondering his resolutions over a bowl of black-eyed peas.  For sure, he wants to reach level 65 in Purple Heart: World at War. And he wants to ask out that cute girl in the apartment next door.

But Darrel is also sick and tired of worrying about money.  He’s got a good job as a computer programmer, but for some reason, he’s still ending up with too many bills at the end of the month.  Last year, he had to sell is first-edition Spiderman comic to pick up a little extra cash.  He knows he needs to add a really, really boring New Year’s resolution to his list: keeping a personal finances budget.

He vaguely remembers what his high school consumer math teacher told him about budgets.  At least he remembers there are three parts: income, regular expenses, and occasional expenses.  His income should be greater than all of his expenses put together.

He writes the name of the month at the top of a piece of paper, January, and adds his current monthly income: $2,655.

He’s careful to put his take-home income, not his before-tax income, because that’s all he can spend.

Now he brainstorms all of his regular expenses, including his weekly comic store purchases.  Some of his expenses, such as his electric bill vary a bit form month to month, but he adds up the last year’s worth and divides by 12 to get a monthly average.

Expenses
ItemCostItemCost
Rent$800College loans$200
Electricity$145Gas$100
Water$21Comics$100
Cell$80Groceries$400
Internet$42Entertainment$200
Satellite$100Clothing$100
Car payment$360
Total$2,648

So far, so good.  It looks like Darrel is living within his means, but what will happen when he adds in his occasional expenses?  He brainstorms again, consulting his online banking records for guidance.

Occasional Expenses
ItemCostTotal per year
Car insurances$450 every quarter$1,800
Comic book conventions$4,200 per year$4,200
Professional association dues$500 per year$500
Dojo fees$275 per semester$550
Gifts$170 per year$170
Total$7220

He divides that total by 12 to get his average monthly expense: $601.67.

Darrel adds his regular and occasional expenses together: $2,648 + 601.67 = $3,249.67. That’s more than his monthly take-home pay!  He’s going to have to cut back.  It takes Darrel only a few moments to recalibrate his budget.  He’s going to reduce the number of comic book conventions he goes to and cut down his satellite television expenses. With that, he notices that he can put some money each month into his languishing savings account.  And if, at the end of the year, he gets that raise he’s been expecting, he can put even more away for a rainy day.

This little bit of math gives Darrel a boost of confidence — enough confidence that he picks up the phone and calls his cute neighbor.

Do you use a budget?  If so, what kind?  And how has it helped you manage your finances?

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Holidays Math for Grownups Math for Parents Personal Finance

Shop on! With Percents

Everybody loves a sale, right? The thrill of the hunt, the sense of accomplishment when landing a great deal.

But how many times have you reached the register and realized your purchase was more than you expected?  Or have you ever passed on a purchase because figuring out the discount was way too much trouble?

You don’t have to be afraid of the mental math that goes along with shopping.  (That goes for in-person and online sales.)  You also don’t have to be that giant geek standing in the sports goods aisle using your cellphone calculator to find 15% of $19.98.  Who has time for that anyway?

Believe it or not, figuring percents is one of the easiest mental math skills.  And it’s one of those things that you may do differently than your sister who may do differently than your boss.  In other words, you are not required to follow the rules that you learned in elementary school.  Now that you’re a grownup, you can find your own way.

Don’t follow?  Let’s look at an example.

Once again you’ve put off buying Mom’s gift.  It’s just about time to leave for her house, and you have literally minutes to find the perfect present for her — at the right price.  You’ve collected $40 from your brother and sister, and you can contribute $20.  Darn it, you’re going to scour the department store until you find something she’ll like that’s in the right price range.

And suddenly, there it is: a countertop seltzer maker, just right for Mom’s nightly sloe gin fizz. Bonus! It’s on sale — 40% off of $89.95.  But can you afford it?

There are a variety of different ways to look at this.  But first, let’s consider what you know.

The seltzer maker is regularly priced at $89.95.

It’s on sale for 40% off.

You can spend up to $60 ($40 from your sibs, plus the 20 bucks that you’re chipping in).

You don’t necessarily need to know exactly what the seltzer maker will cost.  You just need to know if you have enough money to cover the sale price.  And that means an estimate will do just fine.  In other words, finding 40% of $90 (instead of $89.95) is good enough.

Now you have some choices.  You can think of 40% in a variety of ways.

40% is close to 50%

It’s pretty easy to find 50% of $90 — just take half.

50% of $90 is $45

So, if the seltzer maker was 50% off, you could afford it, no problem.  But is 40% off enough of a discount?  You probably need to take a closer look.

40% is a multiple of 10%

It’s not difficult to find 10% of $90 either.  In fact, all you need to do is drop the zero.

10% of $90 is $9

What is 40% of $90?  Well, since 40% is a multiple of 10%:

There are 4 tens in 40 (4 · 10 = 40)

and

10% of $90 is $9

so

 4 · $9 = $36

It’s tempting to think that this is the sale price of the seltzer maker.  Not so fast!  This is what the discount would be.  To find the actual price, you need to do one more step.

$90 – $36 = $54

Looks like you can afford the machine. But there’s an even more direct way to estimate sale price.

40% off is the same as 60% of the original price

When you take 40% off, you’re left with 60%. That’s because

40% + 60% = 100%

Or if you prefer subtraction

100% – 40% = 60%

So you can estimate the sale price in one fell swoop.  Like 40%, 60% is a multiple of 10%.

There are 6 tens in 60 (6 · 10 = 60)

and

10% of $90 is $9

so

 6 · $9 = $54

The estimated sale price is $54, which is less than $60.  You snatch up the race-car red model and head for the checkout.

There are so many other ways to estimate sales prices using percents.  Do you look at these differently?  Share how you would estimate the sale price in the comments section.

Categories
Holidays Personal Finance

To Estimate or Not to Estimate: That is the question

Whether you’re buying gifts for under the tree or just taking advantage of holiday sales, December is one of those times when you might need some mental math skills.  And while it can seem overwhelming to find out how much that 15%-off cashmere sweater will actually cost you, there are some easy ways to make quick work of these calculations and move on to the next item on your to-do list.  (We’ll look at those on Friday.)

But first you need to answer one big question: Is an estimate good enough?

What’s the total cost?

Let’s say you’re picking up a few things for your Aunt Millie. She has given you a $20 bill and a list.  You absolutely cannot exceed $20, and Aunt Millie is adamant that you get as much as you can for that amount.  In this case, you may want to calculate everything down to the penny.

Or what if you’re purchasing holiday gifts for a family in need.  You’ve set your budget — and you’re not going over it!  Once you have everything in your cart, it could be reassuring to spend a moment or two finding the exact cost of your purchases.

(Here’s a cool hint, though.  If you’re shopping online, these calculations are done for you.  Just put what you want in your online shopping cart, and the totals will be appear — including shipping!)

Can you afford it?

But I would guess that most of us merely need to know if we can afford a purchase — or if what we’re interested in buying is too expensive.  And that’s where estimation comes in handy.

Chandra’s family is HUGE.  And after years of buying a Christmas gift for each of her nine siblings and their spouses and partners, she initiated the good old Secret Santa exchange.  What a relief!

The process is simple. Over pumpkin pie after Thanksgiving dinner, Chandra’s mother brings out her best Sunday hat, which contains slips of paper — one for each of the 18 kids and their partners.  Each person selects a name and buys a present for that person.  The catch? No one can spend more than $50.

This year, Chandra is over the moon.  She drew her sister-in-law’s name, and she knows exactly what to get her — a handmade purse from the local craft fair.

A week later, struggling through the crowd of candle-buying, carol-humming shoppers, Chandra finds exactly what she’s looking for: a cute little bag made of repurposed, 1940s dish towels.  What a find!

She snatches up the bag, and pays $40 for it.  But she’s got $10 left over.  Should she find something to put inside?

Chandra starts looking for a little something more: there’s a handmade key fob for $2.50 or a little zipper pouch for $10. She starts feeling like Goldilocks — the pouch is too much and the key fob is not enough.  She leaves knowing she can make up the difference while shopping elsewhere.

And she hits jackpot later that week.  While picking up a few things at her local, independent bookstore, she spies a sweet little journal at the checkout line that would just fit into the purse.  On sale for $6.50, she figures she has enough to pick up a rollerball pen to go with it.

Just right.  (And notice — very little math!)

Is estimation mandatory?

So let’s say you are really into knowing your costs down to the penny.  What if just having a general idea of what something costs is way too unnerving for you?

Pull out that calculator, sister or brother.  There’s nothing wrong with finding the exact answer, if that’s what you need or want to do.  Just do the rest of us shoppers a couple of favors — move to the side of the aisle while you do your computin’ and while you’re at it, don’t look down your nose at other’s estimations.

Are you an estimator or an exacting kind of person? If you estimate, how? If you like an exact answer, what tools do you use?  Share your stories in the comments section.

Categories
Holidays Personal Finance

The Math of Generosity

No matter what holiday you celebrate in December, the month has traditionally marked a time for charitable giving.  The weather is growing colder in some areas, making it much tougher on the homeless.  The end of the year is creeping up, and with it the deadline for tax exemptions for charitable giving.  And holiday cheer often means counting our blessings and remembering those who are less fortunate.

Yes, December is the time for giving.  But how much is enough? And what is too much?  As we attempt to balance our own needs (especially in these difficult economic times), many of us struggle with our own sense of guilt and generosity.

We’re at the end of our month of nesting here at Math for Grownups, and I wanted to share a little bit about the math of charitable donations.  Not much makes me feel better about myself than sharing what I have with others. But finding that perfect balance can be a challenge.

Turns out there are formulas that can help guide these decisions.  As we’ve seen in the past, math can remove uncertainty and help us see perspective.  Of course what works for one person is impossible for another.  And that’s okay.  Remember, as grownups we can break the rules — adjust the calculations a bit to suit our personal situations.

Peter Singer, a philosopher who has written about philanthropy, offers an interesting formula.  Singer’s suggestion is based on the amount of income a person or household earns.  His premise is that the larger a person’s income, the more he or she can afford to give.

This is the table adapted from his “The Life You Can Save” website:

INCOMEDONATION
Less than $105,000At least 1% of your income, getting closer to 5% as your income approaches $105,000
$105,001 –$148,0005%
$148,001–$383,0005% of the first $148,000 and 10% of the remainder
$383,001 -$600,0005% of the first $148,000, 10% of the next $235,000 and 15% of the remainder
$600,001 –$1,900,0005% of the first $148,000, 10% of the next $235,000, 15% of the next $217,000 and 20% of the remainder
$1,900,001 $10,700,0005% of the first $148,000, 10% of the next $235,000, 15% of the next $217,000, 20% of the next $1,300,000 and 25% of the remainder
Over $10,700,0005% of the first $148,000, 10% of the next $235,000, 15% of the next $217,000, 20% of the next $1,300,000, 25% of the next $8,800,000 and 33.33% of the remainder

Most of us are going to fall in the top bracket —  or if you look at your household income, perhaps the second bracket.  And that’s where the math is simple.

Let’s say that Antwan and Jeannette bring in $75,000 as a couple.  According to Singer, their yearly donations should be between 1% and 5%.  They decide that 2% is a good number for them.

2% of $75,000

Just in case you’ve forgotten how to do percents, here’s a little refresher.  Two things to know: 1) percents can be written as decimals by moving the decimal point two places to the left.  2) And “of” means multiplication. So that means:

0.02 x 75,000 = 1,500

For Antwan and Jeannette, about $1,500 is a good annual total for charitable contributions.

But for the wealthy, the math gets a little tougher. Let’s look at another example.

Will earns $650,000 each year.  According to Singer, he should pay 5% of the first $148,000, 10% of the next $235,000, 15% of the next $217,000 and 20% of the remainder.

One easy way to look at this problem is to first consider four different problems:

5% of $148,000

10% of $235,000

15% of $217,000

20% of the remainder

But what’s the remainder?  Add and subtract to find out:

$148,000 + $235,000 + $217,000 = $600,000

$650,000 – $600,000 = $50,000

So he’ll need to find 20% of $50,000.

0.05 x 148,000 = 7,400

0.10 x 235,000 = 23,500

0.15 x 217,000 = 32,550

0.20 x 50,000 = 10,000

Now he just needs to add:

$7,400 + $23,500 + $32,550 + $10,000 = $73,450

According to Singer, a good amount for Will to donate over the year is $73,450.

Of course all charitable giving should be considered in these amounts — from the mittens you donate to the local shelter to the check you send to your United Way.

So do the math yourself — how close are you to Singer’s suggested donation levels?  (If you’re a little too nervous to try, read this first.) Are you surprised to give more?  Do you think you can stretch?  Share your ideas in the comments section.

Categories
Personal Finance

Energy Efficient? You do the math

You’ve heard the spiel: spending money to make your house more energy efficient can help you save big bucks.  But is it true?  How much can you really save by adding a programmable thermostat or weatherstripping windows?  Or are these just tricks by manufacturers to make you purchase their products? A little bit of math can help you find out.

Carly has been living in her first home for two years.  She’s paid attention to her energy bills and notices that she spends $250 each month to heat her house in the winter.  Where she lives, that’s about 5 months of the year.

That means she’s spending $250 x 5 or $1,250 each year on heating costs.

She’s got three projects on her mind: installing a programmable thermostat, weatherstripping windows and lowering the thermostat on her water heater.  If she does this work, how much money can she expect to save?  Let’s take a look.

1.  Installing a programmable thermostat: The U.S. Department of Energy estimates that you can expect to save 10% on heating costs each year by turning the thermostat back by 10 to 15 degrees for 8 hours each day.  And the easiest way to do this is by installing a programmable thermostat.

Pretty quickly, Carly figures out that she can save $125 each year.  Here’s how:

10% of $1,250

0.10 x 1,250 = $125

The programmable thermostat that Carly has been eyeing costs $47, and she’s decided to install it herself (the instructions don’t seem too tough at all). So, this year she can expect to save:

$125 – $47 = $78.

Photo courtesy of oksidor

2.  Weatherstripping windows: It’s a real pain, but Carly is wondering if weatherstripping and caulking her windows can help keep some cash in her pocket.  Again, she consults the U.S. Department of Energy, which estimates that drafty windows can cause energy efficiency to dip by 5% to 30%.  Playing it cautious, Carly estimates a 5% savings:

5% of 1,250

0.05 x 1,250 = $62.50

She figures she’ll need 3 tubes of caulk at $2.50 each, plus weatherstripping materials at $55.00:

(3 x $2.50) + $55

$7.50+ $55 = $62.50

Huh.  She’s not saving anything by weatherstripping.

$62.50 – $62.50 = $0

But if she does the work this year, she can probably avoid it next year — keeping that entire $62.50 in the bank.

3. Turning down the water heater:  According to Carly, there’s nothing better than a hot shower.  But she’s willing to sacrifice that luxury, in order to save some money.  Right now, her water heater is set at 130 degrees.  But if she lowers it to 120 degrees, she can save about 4% in energy costs.

4% of 1,250

0.04 x 1,250 = $50

And lowering the thermostat on her water heater doesn’t cost a thing.

So with these three changes, what can Carly expect to save this year?

$78 + $0 + $50 = $128

That’s not a lot of cash.  But what about the following year?  Assuming she won’t have to reapply any weatherstripping, Carly’s looking at:

$125 + $62.50 + $50 = $237.50

Sounds worth it to me!

What do you think? Is all of this work worth the savings that Carly expects?  What other considerations (or variables) should she consider?  Would you approach this question differently?