Circular 592
Revised by Bryce Jorgensen and Michelle Stizza
College of Agricultural, Consumer and Environmental Sciences, New Mexico State University (Print friendly PDF)

Authors: Respectively, Associate Professor and Bernalillo County Extension Family and Consumer Sciences Agent; and Assistant Professor and Family and Consumer Science Agent at Santa Fe Cooperative Extension. New Mexico State University.

INTRODUCTION

Do you know where your money goes? You may answer, “House payments, car loan, utility bills, and food,” but after that, things begin to get a bit fuzzy about where the rest goes, right?

After you have set your spending goals, as you did in Circular 591, Managing Your Money: Where Do I Begin? (available at https://pubs.nmsu.edu/_circulars/CR591/index.html), the next step is to learn where all the money goes. Then you can make a realistic financial plan. Developing a financial picture of where you are today will help you improve your future financial decisions.

WHAT DO YOU OWE?

You must list all your credit and debt obligations before you can analyze your total financial situation. Use Worksheet 1 to gain a clear idea of all your credit and debt obligations—both loans and credit cards. After that, the next step is to analyze your cash flow.

WHAT IS CASH FLOW?

Your cash flow is simply the money going into your pocket and out again. It matches your income with your expenses. Sounds simple, doesn’t it? It really is. But very few people take the time to keep track of what comes in and goes out each month. Use Worksheet 2 to track your income and expenses (cash flow). For the most accurate look at your budget, you should keep records of an entire year’s income and expenses. That’s a lot of work; however, it is necessary to help you learn what records you will need. Worksheet 2 provides space for two months; for additional worksheets, please refer to Guide G-258, Managing Your Family’s Money (available at https://pubs.nmsu.edu/_g/G258/index.html).

To begin tracking your income and expenses (cash flow), gather all your monthly bills, receipts, bank statements, and any statements from your mobile payment apps. They can be from last month, the current month, or both. These records will help you monitor your monthly spending. Another way to monitor your spending is to use a daily expense tracker in which you record all the cash that you spend daily. Include both fixed and flexible expenses.

Fixed expenses are items such as rent, mortgage, car payment, and other regular installment payments that basically stay the same each month and for which you are committed for a period

Flexible expenses are expenses that change from month to month, such as food, clothing, and utilities. You have a bit more control over some of these items. If you are starting a household for the first time or have multiple accounts and mobile payment apps, it may be difficult to find complete records. Do the best you can for now and start keeping track of as many expenses as you can. Start writing down everything you spend for at least a week. The more accurate and complete the worksheet, the easier and more effective your money management plan will be.

If your income exceeds expenses, you will have money to put into a savings plan to use toward achieving your financial goals. However, if your income does not cover all expenses, see what you might do to decrease your expenses or increase your income. Look at your budget to see if you can find some spending leaks. We’ll be discussing this problem in Circular 593, Managing Your Money: Stop Spending Leaks (available at https://pubs.nmsu.edu/_circulars/CR593/index.html). It is critical to try to control fixed expenses before you commit to an additional expense. You may need to ask yourself some questions when considering new expenses: Are there other options you need to consider? Is there a way for you to reduce some of your flexible expenses?

KNOW YOUR NET WORTH

You have already taken the first step in developing a money management plan by completing the first two worksheets. You also need to determine “where you stand” overall by preparing a net worth statement.

The networth statement is the best indicator of your financial position at a particular point in time. It will help you determine the progress made toward your financial goals. Net worth is the amount you get when you subtract everything you owe from everything you own. This information can also be useful when you apply for a loan, write your will, borrow money, determine insurance needs, or settle a divorce.

Net Worth = Total Assets – Total Liabilities

Use Worksheet 3 to calculate your total financial net worth at this moment. List all your assets–the things you own. List the value of things like your house or furniture as the amount you could get if you wanted to turn that item into cash today. Next, list all your liabilities– the amounts you still owe. This is the total amount you would need to repay if you could repay the debts in full today.

Remember to list dollar amounts according to the portion of wealth or debt that you are responsible for. For example, if you share a second house ($1 million value with $200,000 mortgage) with your spouse at a 60%:40% ratio, record $600,000 for the second house’s asset value and $120,000 for its mortgage shortcut to estimating your net worth is by answering these questions:

1. Suppose you were to sell all your major possessions (including your home), turn all your investments and other assets into cash, and pay all your debts (following the portions you are responsible for). Would you have something left over, break even, or be in debt?
2. If you would not break even, how much would the difference be?

There are a few important things to note with this method. If you answered, “in debt,” your net worth value will be negative in the answer you provided for the second question. This shortcut method tends to be less accurate than a full analysis of your assets and liabilities, but it provides a very quick and rough estimation of your net worth.

WHAT ARE YOUR ASSETS?

Assets are any financial or material possessions that have monetary value. They may be divided into financial and non-financial (or physical) assets. Remember that these must be valued at the current market value, or what you could sell them for today, not what you paid for them, what you “hope” they are worth, or what you could get if you waited for the ideal time to sell. They include:

Financial Assets

• Cash on hand or in savings accounts (including certificates of deposit [CDs] or checking accounts and money in “piggy banks”).
• Stocks, bonds, mutual funds.
• Cash (not face) value of life insurance.
• Money others owe you (but only if you can be reasonably sure they will repay).
• Annuities, retirement plans.
• Employee benefits, such as company stocks.

Non-Financial or Physical Assets

• Your home.
• Other real estate, business interests.
• Automobiles, trucks, other vehicles.
• Household furnishings, clothing, antiques, jewelry, books, coins, art.

WHAT ARE YOUR LIABILITIES?

Liabilities are the financial obligations or debts you owe to other people or institutions. The information you gathered for Worksheet 1 should help you fill out this portion of the net worth form. List the amount you would need to repay the loan in full. Included are:

• Mortgages.
• Installment loans (cash, auto).
• Department store and credit card debts.
• Taxes.
• Unpaid bills (medical, utilities).
• Any other liabilities.

Total your assets and your liabilities. Subtract the liabilities from the assets. The result is your financial net worth. This number may not mean a lot to you as a single number, but if you do this once a year, it can help you track your financial progress. This doesn’t mean it should go up every year, and it certainly is not an indication of your value as a person. But it can help you see what is happening to your overall financial picture. You should not compare your net worth to someone else’s because other people have different values, goals, and situations.

DEBT ELIMINATION

What does debt mean to you? Debt comes from many sources, such as credit cards, auto loans, student loans, divorce, mortgages, financial ignorance, medical expenses, poor saving habits, less income and more expenses. Being smart about the types of loans you take out and knowing the amount you will borrow from the lender are very important factors when it comes to deciding to take on more debt. Because you will have to pay it all back! PLUS, interest!

Debt Clock

To understand how much debt we have as consumers, and to find current numbers, we can look at https://www.usdebtclock.org/. On average, we have $77,000 in personal debt per American citizen! The breakdown of consumer debt in the United States as of November 2024 is:

• Total Student Loan Debt: 1.7 trillion
• Total Credit Card Debt: 1.4 trillion
• Total Personal Debt: 25.6 trillion 

Why get out of Debt?

Can debt be a good thing? Not likely. In fact, when you looked at the numbers above, did you think, “Wow! That looks great!”, or did you think “Wow! That’s too much! I didn’t know debt was that bad.” Debt keeps you bound to lenders for as long as you owe them something. It makes it harder to achieve your financial goals, because you are spending your future income to pay for something you want now. The more you do this, the less you have in your monthly budget to save for your financial goals. Being debt-free can give you peace of mind, lower feelings of financial stress, and encourage you to make your money grow.

The Myth that More Income Equals Less Debt

George Clason, an American author, once said, “That which each of us calls our ‘necessary expenses’ will always grow to equal our income unless we protest to the contrary.” In other words, as our income grows so will our expenses, because we believe we can spend more. A common belief is, “If I could only make more money each month, then I would be fine.” But once we get that extra money, we STILL live paycheck to paycheck and barely make ends meet. We need to understand and control our spending! It is important to have good spending habits regardless of our income. We need to spend less than what we earn and put money aside for our financial goals. The reality is that improving our financial situation is usually more about decreasing our spending than increasing our income. The good news is that there are strategies for making the most of our money at any income level and eliminating debt.

Steps to Avoid Debt

1. Identify Needs vs. Wants

Dave Ramsey said, “It is human nature to want it and want it now; it is also a sign of immaturity. Being willing to delay pleasure for a greater result is a sign of maturity. However, our culture teaches us to live for the now. ‘I want it!’ we scream, and we can get it, if we are willing to go into debt. Debt is a means to obtain the ‘I want it!’ before we can afford them.” We find ourselves in an overwhelming consumer culture that can make it challenging to distinguish between needs and wants. Therefore, what can we do? The first step is to practice distinguishing between actual needs versus wants. Basic needs are food, shelter, and clothing, but within these basic needs, we need to be modest if we want to reduce our debt.

We can choose to live frugally now while we become debt free and build a reserve. Then, later we can increase our standard of living while making sure to continue spending less than we earn. Learning to delay gratification and not compare ourselves to others are key in our progress to financial freedom. Research consistently shows that minimizing our expenses while attacking our consumer debt empowers us to become debt free and brings us peace of mind. We might ask ourselves, “How might my life be better by having less?” Having fewer material items frees us to concentrate on what really matters. There are many ways to decrease our expenses and increase our income while eliminating debt. All we need to do is take that first step by reducing or eliminating spending leaks.

2. Reduce or Eliminate Spending Leaks

A spending leak happens when we spend money on wants rather than needs. We can have multiple spending leaks every month, week, and possibly each day. Like how a continual drop in a bucket will fill the bucket with water over time, spending leaks will add up to an extremely large amount over time. Spending leaks can be candy, cigarettes, soda, coffee (e.g., buying coffee vs. making it at home), magazines, going out to eat (fast food or restaurants), unintended fees (e.g., late fees, overdraft fees, etc.), spending too much on streaming subscriptions, gas (when driving more than needed), and many other ways. Spending leaks are the things that add up over time, but many times when we look back, we aren’t sure where our money went.

The only way to locate spending leaks is to TRACK every expense. Tracking your expenses and finding your spending leaks will give you power to redirect the money towards higher and better purposes, like getting out of debt and accomplishing other goals. There are a variety of methods you can use to track your expenses. For example, you can track your expenses by only paying with your checking account, and/or a credit card, and then using the statements to track your spending. Second, you can write everything down as you spend. Grab a sheet of paper or create an excel spreadsheet and write down all your expenses. Lastly, use a tool like https://www.empower.com/; there are a variety of online tools and apps that automatically bring all your financial accounts into one place on your phone, or on your computer, and makes it easier to track your money and create a budget.

The method you decide to use should be one that is easiest and makes most sense for you so you will continue tracking every expense every month. People who have tracked their expenses for a month are AMAZED to find spending leaks that add up to thousands of dollars per year! Even if you cannot eliminate your spending leaks, LIMITING them will help you find the money you need to get out of debt.

3. Use a Debt-Elimination Calendar

To use a debt-elimination calendar, set up a spreadsheet or ledger with a row for every month you will be making payments on your debts, and a column for each creditor, organized by the lowest loan balance on the left to highest balance on the right (usually your 1st mortgage). The best way to get out of debt is to pay the minimum amount to all other debts and attack the first debt with the lowest balance with all extra money you have until it is paid off. Once one debt is paid off, move that money to the next debt until it is paid off, and so on until all debts are gone. The key is to continue applying the same total amount of money to your debts each month until all debts are gone. In other words, if you were paying $1400 toward your total debt, you would continue paying $1400 toward your debt, even as credit cards, cars, personal loans, student loans, etc. are paid off, until your last debt is gone (yes, include your home mortgage!). One of the easiest ways to create a debt-elimination calendar is using Power Pay at https://extension.usu.edu/powerpay/ which allows you to input your debts. It will create a personalized calendar for you!

4. Create an Emergency Fund

One of the main ways families get into debt is by not being prepared for emergencies. What is an emergency? An emergency is when an unexpected expense occurs, and it is vital that it be taken care of. For example, flying to a funeral, having a flat tire, breaking your leg, etc. We may not know when an emergency will take place, but we do know that emergencies will happen. Having an emergency fund and being prepared for one when it happens is a good idea. Changing your carpet, getting your oil changed, a birthday or Christmas are not emergencies and should be planned expenses and saved for. To create an emergency fund, you should save until you have $1,000 in your emergency fund. Once you have $1,000 in your fund, keep saving until you have 3-6 months of expenses. The more secure your job, the fewer months you need in an emergency fund.

Why pay the lowest balance instead of the highest interest rate?

There are two popular methods that people use to tackle debt: The first method was explained above with the debt-elimination calendar, which is to pay off the lowest balance first. Organizing your debt from lowest to highest balance allows you to pay off debts more quickly, which has multiple benefits. The first benefit is a psychological win because you see progress quickly. It feels good to pay off debt. The second benefit is you free up the money you were paying toward that debt more quickly to apply to the next debt. This helps you to accelerate your payoff date of all your debt.

The second method is to concentrate first on repaying your debts that have the highest interest rates. This method may save you slightly more in interest charges over time; however, progress will be harder to see and may be slower.

Commit to a Strategy to Pay and Eliminate Debt

To ensure your efforts move you in the right direction, consider committing to the following strategies for paying down and eliminating debt:   

• Pay bills electronically.  
• Pay the minimum on every debt, except the one you’re trying to pay off first.
• Make the payments automatic so you don’t have to think about it and decide to pay more every month.
  • Tip: Bill paying doesn’t need to take long. Most bill-pay programs allow you to set up recurring payments or schedule payments months in advance. In many cases, you can set up your payments and not have to worry about them again. 

• Use the “Envelope System” for variable expenses. 
  • Tip: To limit your spending on variable items like gas, entertainment, and groceries, put the budgeted amount in a labeled envelope and use only that money to pay for these items.  

• Continue to track spending and create/update your budget.  

Ways to Stay on Track and Debt Free

Here are some important questions to ask yourself before borrowing money:

• Do I have enough time to save and pay cash for this purchase?
• Will this purchase be an investment for my future?
• How much joy and satisfaction will I receive from this purchase? Is it worth borrowing money?
• Is this the best use of my money? Would I rather have this than anything else this money could purchase?
• Do I understand that I will be paying more with a loan than what I would have paid with cash (usually $1.68 per dollar borrowed)?
• What is the interest rate? What is the APR (Annual Percentage Rate)? What are the annual fees?

THE BOTTOM LINE

New Mexico, along with most other states, has “paying off debt” as the number one cause of financial stress. We can relieve that stress by tracking our spending, identifying and plugging (reducing) our spending leaks, spending less than we earn by living within a budget, and attacking our debt with the debt-elimination calendar. As we see debt decreasing and that we are winning financially, we won’t miss our spending leaks. We will feel great that we are in control of our finances and that we are making progress towards our financial goals. As financial stress goes down, this will bring more peace of mind into our lives and into our relationships, and we will see our quality-of-life increase.

Now that you have taken the time to complete these worksheets, how do you feel about your financial situation? Happy? Relieved? Discouraged? If you are a bit discouraged, realize that a negative net worth statement may easily happen to someone just starting out on their own or to young families. Just as a photograph shows how you looked at one specific time, the net worth statement reflects your financial situation at only one point in time. It should be revised at least once a year or as your financial situation changes.

If you are not satisfied with your net worth and want it to grow, you will want to develop a plan to increase it. More income or decreased living expenses, and/or more investment growth are some alternatives.

To increase your savings, you may have to cut spending in some areas. Make sure that your savings and investments are yielding the best financial return for your situation. You may want to reduce your present debt level by making regular payments and not adding any other debts.

Developing a financial plan means taking control of what you have now and having the discipline to manage your money to reach the goals you have set for yourself and your family.

REFERENCES

1. US Debt Clock https://usdebtclock.org/
2. Financial Tracking: https://www.empower.com/
3. PowerPay https://extension.usu.edu/powerpay/

Available Resources

Publications, Books, and eBooks

• Clason, G. S. (1926). The Richest Man in Babylon. Penguin Books.
• Jorgensen, B. (2018). You Can Check Your Credit Report and Rating [Guide G-216]. New Mexico State University. https://pubs.nmsu.edu/_g/G216/index.html

Online resources, and community forums

• Debt Snowball Method https://www.daveramsey.com/blog/how-the-debt-snowball-mehtod-works
• New Mexico State University Cooperative Extension Service https://mymoney.nmsu.edu/links.html

Online informational videos/webinars

• New Mexico State University Extension Family and Consumer Science https://efcs.nmsu.edu/resources/webinars.html

Workshops/short courses and academic degrees

• New Mexico State University Cooperative Extension Service https://nmsuondemand.instructure.com/courses/170/pages/home-page 

Original authors: Constance Kratzer, Extension Home Economics Specialist. Fahzy Abdul-Rahman, Extension Family Resource Management Specialist.

Bryce Jorgensen is an Associate Professor and Extension Family Resource Management Specialist at NMSU. He earned his Ph.D. at Virginia Tech. As a consultant, trainer, author, and speaker, he focuses on achieving individual, relational, and financial wellness for New Mexicans. An expert in the psychology of change, mindset, and behavioral economics, he provides customized programs leading to life and financial success.

Michelle Stizza is an Assistant Professor and an Extension Family and Consumer Science (FCS) Agent at NMSU. As a FCS Agent, she provides programs on Financial Health and Wellness, Food and Nutrition, and Health and Wellness. She believes in creating programs that can help transform lives and create strong, healthy, and vibrant communities. She is earning her Ph.D. in Curriculum and Instruction at NMSU.

Worksheet 1

(Worksheet 1 Download)

How Much Do You Owe?
This worksheet will help you analyze your credit and debt obligations. It is important for you to gather all of this information before you begin developing a money management plan. Do not include mortgage payments. Complete all the blanks that apply. Include all loans, credit cards, and other debts.

Total Amount Still Owed:    $____________________ 

*APR = Annual Percentage Rate 

Note: The average family should not commit more than 15 to 20% of its take-home pay to pay off consumer debts. If your family is larger, you may need to keep this percentage even lower.

To determine how much of your take-home pay goes toward consumer debt repayment, you need to calculate your consumer debt-service ratio.

Consumer Debt-Service Ratio = Consumer Debt Repayment (monthly)/Disposable Income (monthly)

Consumer debt equals monthly repayments for all non-mortgage consumer debts, including home-equity credit-line loans. Take-home pay, sometimes called net pay or disposable income, is the income available after mandatory deductions for taxes and insurance. Irregular sources of earned or unearned income, such as interest earned or overtime earnings, are not included in disposable income for these calculations.

Worksheet 2

(Worksheet 2 Download)

Worksheet 3

(Worksheet 3 Download)

To find more resources for your business, home, or family, visit the College of Agricultural, Consumer and Environmental Sciences on the World Wide Web at pubs.nmsu.edu.

Contents of publications may be freely reproduced for educational purposes. All other rights reserved. For permission to use publications for other purposes, contact [email protected] or the authors listed on the publication.

New Mexico State University is an equal opportunity/affirmative action employer and educator. NMSU and the U.S. Department of Agriculture cooperating.

Revised June 2025, Las Cruces, NM.