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Easy Math for Personal Finances

I bet that when you were in school you thought to yourself, “I’ll NEVER have to use all this math they’re making us learn!”

But the truth is, you use math every day—for example:

  • Making sure you get correct change when you make a purchase
  • Figuring out how much carpet to get for the bedroom
  • Calculating your gas mileage, and more.

You also need to use some basic math when handling your personal finances. Here are a few reminders of what you’ve forgotten since you left school!

Making a Budget: A budget lists all your monthly expenses: The areas in which you spend money each month (utilities, rent or mortgage, insurance, food, etc.); and as well lists your monthly net (take-home) income amounts. Your total expenses should be less than your total net income.

(total monthly expenses) < (total monthly net income)

(total monthly net income) – (total monthly expenses) = over budget (in debt) or under budget (doing well)

Gross Income: Your original pay amount, without any deductions.

Net Income: Your gross income, with deductions subtracted. If you look on your pay stub, you’ll see that your employer (or Social Security, etc.–whoever is paying you) has deducted a few items from your check. These are usually taxes and possibly insurance or other items the company is charging you for: taxes, Social Security, Medicare, etc. If they aren’t on your check—perhaps you do contract work or freelance—you will still have to pay these at the end of the year in your taxes, so remember to subtract them from your gross income now.

(your gross income) – (deductions from your paycheck: Federal tax, state tax, Social Security, possibly more) = (your net income)

Cash Flow: What’s left over after you’ve paid your bills–how much you earn vs. how much you spend. Are you living within your budget and always have enough to pay bills as they come in, or going into debt?

income – expenses = cash flow

Simple Interest: The most basic interest formula—the amount that is earned (or that you owe) on the principal. This is the interest you earn on a savings account or what you may pay on a loan or on a credit card.

Monthly interest: (your principal amount) x ( (your interest rate) divided by (number of months you are calculating for)) = interest

Annual interest: (your principal amount) x (your interest rate expressed as .00) = interest

Compound Interest: The interest you earn (or pay, in the case of a debt) on the principal PLUS any interest that has been earned and added to the principal. Compound interest is most often used in long-term loans, such as a mortgage, and in long-term investments.

(your principal amount) x ( (1 + your annual interest rate expressed as .00) ÷ (the number of times interest will be calculated and added in) ) = (amount accumulated)

Change Your Interest Percentage into Decimals: Usually we think of interest rates as a percentages (7% or 2.4%, for example). In the formulas above, you’ll see we mentioned expressing your interest rate as a decimal (.00). You have to do this in order to make a mathematical calculation. But it’s easy!

(your interest rate) ÷ 100 = (your interest rate expressed as .00)

The easy way: Take (your interest rate), remove the percentage sign (%), and move the decimal sign (.)—which is at the far right of (your interest rate) even though you don’t see it—and place that decimal sign two places to the left.
5% = .05

How Much House Can You Afford? If you are getting a home loan, most lenders will want your monthly home loan payment to equal no more than 30% of your available monthly income (after you’ve paid all other monthly debts like insurance, credit card, student loans).

Step one: Calculate your available monthly income.

(net, or take-home, income) – (regular monthly debts) = (available monthly income)

Step two: Calculate the monthly mortgage payment you can afford.

(available monthly income) x (.30, or 30%) = (your affordable monthly mortgage payment)

Calculate a Tip: Using the standard tip rate of 18% (please feel free to leave more if your server did a good job!):

.18 x (your check total) = (amount of tip)

Now just add it to your check total, and you’re done!

Calculate a Sale Price: Multiply the discount percentage (“25% off!”) times the original price:

.25 x (product’s original price) = (how much you will save on your purchase)

Remember that the more you know about your finances—what money comes in and what goes out—the more able you are to control it and meet your goals. If you understand exactly how these various calculations are arrived at and where the numbers come from, you take that much more control over your future.

Also, here’s a good website, Practical Money Skills, that offers easy calculators for many financial purposes.

Questions? Stop in at any of our convenient locations—we’ll be glad to help!

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