Accounting Formulas You Can Use Right At Home--With Examples!
Balancing the budget is more important than ever for Canadians. From tax credits to monthly grocery money, you'll do better and stretch your money further if you pay close attention to your spending. But getting caught up in all of those numbers can be daunting for the average homeowner, so how do you cope? Make use of simple accounting services or formulas, and you'll be ahead of the game in no time. Read on to learn how to utilize these each and every day.
Calculate Net Worth
Your net worth is one of the most important calculations you can make. It tells you how much money you have to spend outside of your current responsibilities.
To calculate this, you'll first need to make two lists--one for your current assets, and one for your current liabilities. For the sake of this example, your assets should be considered to be your household's overall net income per year, after taxes. Liabilities refer to any regularly scheduled payment or credit you've accumulated. That includes credit cards, monthly bills, rent, power, and water.
You may also want to factor in grocery budgets, large insurance payments, and anything else that gets paid on a regular schedule. If you need help, use this budget calculator to lay out your amounts.
Take a look at the math when used to calculate a yearly net worth.
Household Income Per Year: $50,000
Household Liabilities Per Year: $20,000
Simply subtract your liabilities from your income.
$50,000 - $20,000 = $30,000
What you're doing here is taking your net income, subtracting everything you pay out each and every year, and getting the remaining amount left over. This can be very useful when trying to budget a debt recovery plan, especially if you're looking into a big purchase like a car or a home.
To supplement your own information, use the following formula:
Formula: Household Assets - Household Liabilities = Your Total Net Worth
You can use this step-by-step formula to figure out how much interest you'll pay over time on any monthly payment that requires it. It works for credit cards, mortgages, financing bills, and lines of credit, too.
Start by figuring out the amount you want to borrow. Here's a real-world example:
Loan Required: $100,000
Payment Months: 120
Interest Rate: 1%
$100,000 % 120 = 833.33
Formula: Your Total Amount Borrowed % Your Payment Months = Your Monthly Payment Before Interest
Next, find 1% of $100,000
$100,000 % 1% = 1000
Formula: Your Total Amount Borrowed % Your Interest Rate = The Total Interest You'll Pay Over Time
Quick Tip: This example assumes you'll be making payments on time. Late payments may change your results, as fees and extra interest are added. For this reason, you may have to recalculate your formula after each late payment.
Next, divide this by the number of months in your payment plan.
1000 % 120 = 8.33
Formula: Your Total Interest Result % Your Payment Months = Your Monthly Interest Payment
Add this result to your monthly payment amount.
833.33 + 8.33 = 841.66
Formula: Your Monthly Payment Amount + Your Monthly Interest Payment = Your Total Monthly Payment
If you get numbers after the decimal place, as in this instance, round to the nearest dollar. In this example, you would round up to 842. This result is the amount you need to pay each and every month in order to have your loan totally paid off in 120 months.
These two formulas may be simple, but they can be extremely helpful when trying to get a fast, overall picture of your current financial status. The first is crucial before planning any budget. The second can help you to ensure that you make good decisions about credit before you sign any papers. To ensure that you're always ready, keep this sheet tucked into a kitchen drawer or home office desk. It's an excellent step on the path to making good financial decisions for your household.