Today’s question comes from Mandy June from California, USA.

Her question is:

As a part-time worker and full-time student, how much of my salary (percentage) is okay to spend on things like clothes or going out to eat each month?

This is a great question! A lot of people are trying to figure out the exact same thing every day in their life.

Sadly for Mandy June there is no one and definite answer to her question. I will do my best however to give a good answer.

Things to consider

In order to answer Mandy’s question there are 2 important factors that we should take into account.

1. How much money do you make
2. How much of it do you have to spend on fixed fees.

Unfortunately for us, we do not have this information at the moment, so I’ll have to do my best with the facts I have.

The money you can’t afford NOT to spend

While everyone should know how much money they make I’d like to talk about the money we can not afford to leave unspent.

If we could spend all the money we make, most of us would be very well off. Unfortunately, most of us have to take care of the necessities first.

In Mandy June’s case we would need to know about the expenses she absolutely has to take care each week before spending her money on anything else. Things like the rent she needs to pay and the fees for her school. These are a few things she has to take care before she can go shopping for clothes or thinking about eating out.

Some more necessities to take care of before spending what you have left:

• Rent or mortgage
• Utility costs – electricity, water etc
• Food (not eating out but just the food you need to survive)
• Car payment and Gas
• Credit Card payment
• Insurance
• Expenses on children (if you have any)
• Any other fixed fees we could have

Only after paying all of the above can we start thinking about spending money on clothes and eating out. In Mandy June’s case we can probably assume that she has all these already taken care of.

What are your financial goals?

Since Mandy June is a student we can probably safely assume that she works to put herself through school. We don’t know whether or not she’s trying to save money for buying a house or perhaps saving for her retirement.

In order to determine how much we should spend on our clothes and for eating out each month we should first have a goal of how much money we want to save each month.

Good advice to consider

Whatever your financial goals I believe that one should live her life and adjust her spendings in a way that she will constantly keep getting richer.

Net Worth

The best way that I know of is to start calculating your Net Worth. A net worth shows how much you are worth in dollars. It only takes into consideration the facts of how much you have and doesn’t take into account how smart you are or how much you think you are going to make. This is why it is the best indicator to measure your financial success and whether you are getting richer or poorer.

If you want to know about how to calculate your own net worth you should read the article “How to Calculate Your Net Worth? With Examples!”

F*ck You Money

Another thing to consider is to save enough money for whatever might happen in the future. This is called F*ck You money.

Having enough cash reserves to continue your lifestyle for 6 months should be the goal for everyone. Having reserves like that will make you more confident. It gives you the ability to quit your job when your boss starts harassing you or not worry about being fired. If you have 6 months to find a better job you can be confident that you’ll find the work of your dreams. You can check out my article about f*uck you money here.

My answer

Here is Mandy June’s question:

My answer:

It is OK to spend as much money as you like while at the same time making sure your Net Worth or cash reserves grow each month. This means that you can buy yourself things and eat out but at the same time you will get more rich every week and month.

I’ve gone over more than 10 “How to calculate your net worth” guides, only to realize that none of them really give what people want – a good real-life example.

Here is a tutorial on how to calculate your net worth based on my current real life situation. Yes all the “money numbers” in this post are real – they are not made up.

What is Net Worth?

Your Net Worth is basically a sum of money that you will have when you sell all your worldly possessions and pay off all your debts. The bigger the number that you get, the better.

Calculating your net worth can be a good way to bring you down to earth – it only takes into account the things you have already done in your life and doesn’t take into account the fact that in the future your knowledge and education can be major source of wealth.

This keeps things in perspective.

When first calculating their net worth most people are startled to find that they are worth a lot less than they thought. The first time I calculated my net worth I was very surprised to find it negative – I had more debt than valuable assets that I could sell. It was a blow to my ego – I had always thought better of myself.

Basics of Calculating Your Net Worth

Calculating your Net Worth consists of 3 main parts:

1. Adding together the value of everything you own
2. Adding together all your debt
3. Subtracting all your debt from everything you own

Your Net Worth is positive when you can pay off all your debts after selling everything you own.

Your Net Worth is negative when your total amount of debt is greater than the total value of the things you own.

Why Calculate Personal Net Worth?

It is safe to assume that most people calculating their net worth for the first time will find it negative – this is not necessary a bad thing. The goal of calculating your net worth is that it enables you to improve your financial situation.

My Net Worth

Assets

Ownership in companies – $ 1 076
Pension funds – $ 940
Real estate – 0 $
Cars – 0 $
Stocks – $ 571
Cash on hand at the moment – $ 2 179

Things I own

• Mobile phone – $ 395
• Camcorder – $ 148
• Digital camera – $ 30
• Laptop – $ 592

All assets combined – $ 5 931

Liabilities

Student loan – $ 4 685

Credit card – $ 66

Laptop payment – $ 316

All liabilities combined – $ 5 067

Net Worth = Assets – Debts
My Net Worth = $ 5 931 – $ 5 067 = 864 dollars

As of June 5th 2008 my net worth is 864 dollars!

Why is my Net Worth like it is?

As you can see above I don’t like buying expensive stuff and I don’t like borrowing. I only take a loan when there is absolutely no other way.

That being said I am not satisfied with my current net value because I feel I should be worth a lot more. But that’s just the emotions talking, not the facts.

The facts are that I own very little and at the same time I owe very little. My assets and liabilities pretty much cancel each other out.

I am more than certain that there are people reading all this that have a lot more assets but at the same time their total net worth is lower than mine (this means that they also have a lot more debt than I have).

Tips on getting started

Different people calculate their net worth differently. As you can see I have included the things I own all the way down to my digital camera that I estimate to be worth only about 30 dollars. Some people don’t include things that are worth less than 500 or 1000 dollars. It would just end up being too complicated and take too much time to complete.

Of course I have things that are more expensive than the things on the list, but I did not include them because they are very difficult to sell.

Two week rule

Coming up with the values of your assets can be tricky. I usually take an educated guess – For how much could I sell this in two weeks? Whatever time frame you choose – stick to it with all your assets. You should only consider doing an exception to costly assets like a house or maybe a car. Expensive things take a little longer to sell.

Check the prices of similar things

If you are not sure about your “educated guess” you should check the local classified ad magazines or the internet for prices of similar things. If you live in the US a good place to start is Craigslist or Ebay.

Don’t exaggerate

Take care to list everything you own with the prices you could really sell them for. While inflating the price of your house on paper can make your net worth look bigger, there is really no benefit in doing so. It might give you a false sense of security and thus do you more harm when you are suddenly in need of selling your assets. If anything it’s a good idea to list your assets as little cheaper than they really are – that way you can be absolutely sure that you can sell them for the price that you have listed.

Should you include the money in your pension plan or a 401K?

Yes you should. While this money might not be accessible to you at the moment it is still YOUR money and on some occasions you can use this money to secure a loan.

I have a house and a mortgage. Do I need to put both of them on my net worth?

Yes. List the price that your house would sell for under assets and the mortgage you still need to pay under liabilities.

If the price of your house is less than the mortgage then it means that after selling it you would need to come up with extra money to pay for your home loan.

If you take a close look of my net worth above you will see that I did exactly the same thing with my laptop that I recommended you do with a house.

I still need to make 316 dollars worth of payments for my laptop (as seen under debt) and I estimate it to be worth about 592 dollars when I would need to sell it right away. That means that after selling my laptop and paying back the debt I would end up with 276 dollars.

Why Everyone Should Calculate Their Net Worth?

A good reason to start calculating your net worth is to increase your financial situation. By calculating it regularly you will have an overview whether your decisions during the last month made you financially better or worse off. Learning from your own mistakes is the surest way to success.

I recommend making the calculating of your net worth a monthly habit. It does magic on making you think about your finances.

If you start thinking about your net worth your chances of multiplying what you already have grow exponentially

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If you have questions regarding how to calculate your net worth, leave them in the comments and I am more than happy to answer them and update this article accordingly.