Sometimes people who save their money are shown as the colorless folks, the conservative ones who don’t dare. But this couldn’t be further from the truth. In fact, people who save are the ones who dare to dream, the ones who have big ideas – and who make real plans to make those dreams happen. In our opinion, savers are the ones who taste life at its richest.
~ Elizabeth Warren & Amelia Warren Tyagi, All Your Worth, p. 182
I’ve read quite a few personal finance, investing, and trading books. Almost all of them provide some value. They often deliver similar messages in different ways. I have yet to read a few of the real classics, but they’re up next on my list and I’ll post some reviews as I finish them. Having said that, I would say that this is the best personal finance handbook I have ever read.
The subtitle of the book is “The Ultimate Lifetime Money Plan”. At first, I thought “Yeah, right. Yours and the 7000 others that claim to have all the answers.” I won’t try to tell you that this book does have all the answers, but it speaks a lot to a concept near and dear to me: balance. And it really does provide a very basic methodology to help you see if and where your balance sheet needs fixing.
Before we get into what the book’s all about, let me just say that I’m a huge fan of Elizabeth Warren. She is the Harvard Law professor frequently in the news, most recently in her capacity as the chair of the Congressional Oversight Panel that monitors the Troubled Asset Relief Program (TARP) in the States. I’m sure there are more than a few people who would nominate Elizabeth Warren for President if they could. She was recently declared the Bostonian of the year. For many years she has been a sharp critic of the big banks and a staunch defender the middle class. As recently as December 3, 2009 she wrote a great article on America Without a Middle Class.
Earlier, she wrote The Two-Income Trap (also with her daughter Amelia Warren Tyagi), which explores reasons why middle class citizens are finding it hard to make ends meet even with two incomes. I’ve read a few good summaries of that book, but have not yet read it. There’s a good interview with Amelia Tyagi from 2004 if you want to get the gist of what the book is about.
The Balanced Money Formula
All Your Worth promises to help us put our money in balance for good. Warren and Tyagi don’t promise it’s easy, but they do convince us that it’s possible with some effort and perseverence. The core of the lifetime money plan is The Balanced Money Formula, shown here:
At first glance, some (including myself) might say, “50% for must-haves, you’ve got to be kidding me”. However, I encourage you to read through the whole book to understand what qualifies as a must-have and what is a want. Basically, must-haves are the things you would need to continue to pay if you lost your job tomorrow. They include your mortgage payment, utilities, food needs, and any bill that you are contractually obligated to pay (eg. your car payment or your cell phone if you signed an agreement for a specified term).
Any expenses outside of these basics is considered a want. Money that you use to pay down credit card debt or make extra payments over and above those required on your mortgage, car loans, or student loans goes in the savings category. Retirement contributions, education savings, and plain old cash put aside in a bank account also go into the savings pot.
The authors provide detailed instructions that will help you figure out whether or not your money is in balance. The worksheets and calculations are detailed enough to do the job, but simple enough for even the mathematically challenged to use. If you already have even a sketchy budget, or a basic idea of what you spend and where you spend it each month, you’ll be ahead of the game. If not, what are you waiting for?
Half the Battle Is In Your Head
There are also a couple of sections on “negative thinking traps” and how to counteract them. Warren and Tyagi encourage us to identify traps like these:
- Money is too hard; I just can’t do it.
- It’s someone else’s fault that I’m in financial trouble.
- Everything will get better when _________ happens to me.
- I’ll never get to 50-30-20, so why bother trying?
We need to replace these thoughts with more positive (and accurate) statements like the following:
- I’m smart enough to run a house or earn a paycheck, so I’m smart enough to manage money wisely.
- I will do everything in my power to make my financial future as good as it can be.
- Everything will get better when I take action.
- I may not be perfect, but I can make things better.
(Reference: p. 66, All Your Worth)
In regard to the last thinking trap, I can tell you that I have been reading this book for well over a month now in a stop and start fashion. I was just stalling on putting our own finances to the test. I do have a pretty decent budget plan, but I knew that given the events of the past couple of years, our money balance would be way too heavy on the must-haves. It was.
But Warren and Tyagi didn’t make me feel too badly about that. Their model allows for some leeway when big events like marriage, divorce, the birth of a child, or a dramatic change in income happen. Even better than that, they offer some solid advice on what to do with a financial situation that is out of balance. They suggest numerous ways to cut back your must-haves, some of which might be painful. But they consistently remind us that if we want to retire with dignity, we need to get our money into balance as soon as possible.
The bottom line of Chapter 2 (Step 2: Escape from the Thinking Traps) is best summed up in the authors’ own words:
If you believe that you are in control of your future and you can get straight with your money, then there is no telling just how far you can go.
The Lifetime Savings Plan
Once your must-haves, wants, and savings are in balance, the authors offer a Lifetime Savings Plan to make the most of your savings and start to build some wealth:
Warren and Tyagi are not fans of debt. I mean any debt. They believe that credit cards, personal loans, overdue bills, and all sorts of consumer debt steal from your future. This is what they mean by “Steal-from-Tomorrow debt”. But they do recognize that a mortgage on a home of your own is a little better than consumer debt – if you buy a home you can afford. What’s that? It’s one that keeps your Balanced Money Formula in balance. If the payments inflate your must-haves over 50%, move on to another house that doesn’t. Simple, right?
In fact, the authors make all of this stuff sound pretty simple. Warren’s Oklahoma roots often surface in the plainspoken, sometimes folksy prose. But let’s be clear: these ladies know what they’re talking about. Warren is a preeminent bankruptcy scholar and Tyagi is a financial consultant who has advised some of the largest corporations in America. In fact, they include a whole chapter on “Financial CPR”. This includes emergency plans in case of job loss or other financial game changers. It also offers a quick insider’s tour of the American bankruptcy system, just in case pulling the ripcord on your emergency plan just isn’t enough.
It’s Not About Money
The last chapter reminds us that we are doing all of this so we can spend more time enjoying our lives and less time thinking about money. This book would be perfect for young people just starting out, for those well into their financial journey who feel they can do better, or for anyone who has decided to get it together financially and is willing to do what it takes to get there. Even those who are doing pretty well with their money management might find an interesting new way to look at their financial life. This is a straight goods, no-nonsense, down to earth, simple, and perhaps most importantly, effective way to view, plan, and manage your money for a more prosperous future.
If you’ve read the book already, what did you think? If you haven’t, do you think it might be useful to you?