All Your Worth: The Ultimate Lifetime Money Plan Book Review
All Your Worth: The Ultimate Lifetime Money Plan, published in 2005, was written by the mother-daughter team of Elizabeth Warren and Amelia Warren Tyagi. These women don’t get bogged down in the details of frugality and investing. They’re more interested in changing behavior, in fixing the big stuff. They offer a framework around which the reader can build lasting financial success.
A Balanced Budget
Though Warren and Tyagi would have you believe that their system is different from anything that’s ever been published, it’s not. It puts a different spin on things sometimes, but ultimately their advice is similar to that found in most other solid personal finance books. All Your Worth is about creating a budget.
So what is the secret to riches? Why do some people get ahead, while others constantly struggle? Our research led us to a very simple and incredibly powerful financial principle that you won’t hear anywhere else — balance…When your money is in balance, you always have enough to pay your bills, have some fun, and save for your dreams.
When the authors write about balance, they’re writing about budgets. In order to succeed financially, Warren and Tyagi believe you need keep three broad areas of your finances “in balance”. They say to:
- Allocate 50% to Needs (which the authors call Must-Haves). Needs include housing, transportation, groceries, insurance, and clothes you really need.
- Spend 30% on Wants. Wants include cable television, clothing beyond the basics, restaurant meals, concert tickets, comic books, knitting supplies, etc.
- Set aside 20% for Savings, including debt repayment.
Warren and Tyagi want you to save a lot and have fun. To achieve this, they encourage you to reduce your Needs. In fact, this is the cornerstone of their advice.
Needs: Count the Dollars, Not the Pennies
Unlike many personal finance authors, Warren and Tyagi tend to be anti-frugality. They don’t believe that is pays to skimp on the things that bring you pleasure. They advocate saving money on the most expensive things so that you can still afford your morning coffee.
Here’s a little secret that other financial books won’t tell you: Savvy money managers don’t spend a lot of time looking for ways to save a few pennies. They charge right ahead to the big-ticket items, looking to make high-impact changes in the shortest period of time. They don’t sweat the small stuff. And neither will we.
Warren and Tyagi believe that most people get the big stuff wrong, and that if this can be corrected, then quick and drastic improvements can be made. They don’t think you should shop for generic toothpaste, rinse out your ziploc bags, or make your own laundry detergent — they think you should focus your attentions on getting the most favorable mortgage possible (on a house you can actually afford), ditch long-term contracts, and look for ways to save on other big-ticket items.
If you can get the big stuff right, if you can cut your costs on your Needs, then you should be able to reduce spending in this area to below 50% of your take-home pay. If you blow your budget here, though, it makes everything else more difficult. Suddenly you don’t have enough money to save or to purchase the things you want.
Wants: If You Can’t Afford Fun, You Can’t Afford Your Life
If you’re practicing balanced spending for your Needs, the All Your Worth plan allows you to spend 30% of your take-home pay on whatever you want. Do you want to eat out ever night? Do you want to buy comic books? Do you like to have a closet full of shoes? Have you been wanting to take a trip to Italy? Do you long for a deluxe widescreen high-def plasma television with 250 channels? Whatever you want, you can have, as long as you don’t spend more than 30% of your money on it.
Warren and Tyagi say that you shouldn’t worry about what you buy with your Wants money — you should worry about how you spend it. People get into trouble when they pursue their Wants without regard to the other aspects of a balanced financial life. To keep from danger, the authors suggest:
- Set clear limits. Stick to your budget. Know how much you can afford to spend on your Wants and do not exceed this amount.
- Use cash. Cash will prevent you from overspending, and will safeguard against problems with credit cards. One way to make this work is to withdraw your 30% Wants budget in cash at the start of every month. When the cash runs out, you’re done with your Wants.
- Beware of emotional spending. I wrote about compulsive spending a couple weeks ago. Warren and Tyagi warn that this sort of behavior can throw things out of balance.
In many ways, allocating 30% to Wants is revolutionary. I’ve looked at a number of suggested budgets lately, and none of them allocates this much for fun. So long as you keep other aspects of the All Your Worth plan in balance, you really can have this much to spend as you please.
Savings: Build Your Dreams a Little at a Time
The final step in the All Your Worth plan is to save and invest 20% of the money you earn. Despite the authors’ claim that they couldn’t find any other good personal finance books, they seem to have cribbed this portion of their plan directly from Dave Ramsey. They recommend the following steps for your saving and investing budget:
- Save a $1,000 emergency fund.
- Repay your debt, starting with the debt that bothers you most.
- Bolster your emergency fund to cover six months of Needs.
- Begin saving and investing for wealth.
Once your debt is repaid and you have set aside money for emergencies, you should begin investing for your future. The authors divide the 20% Savings budget as follows:
- Save for retirement by investing in index funds. (10%)
- Pay down your mortgage (or save for a home). (5%)
- Save for other goals, such as purchasing a car or taking a vacation. (5%)
I like this idea, and intend to use it myself, but with some modifications. For example, in 2008, Roth IRA contribution limits rise to $5,000. That’ll be more than 10% of my monthly take-home pay, so my retirement contribution percentage will be higher than the All Your Worth plan.
Conclusion
The book fleshes out each of these ideas in greater detail, and includes chapters on buying a home, relationships and money, and “financial CPR” — how to handle things when times get rough.
I like All Your Worth. Its advice is solid. It does a great job of looking at the Big Picture, allowing each reader to fill in the details. But the book does have some flaws:
- I don’t like the repeated condemnation of frugality and thrift. I think they’re important.
- The authors claim their advice is different from other personal finance books, but it’s not. Their advice is excellent but it is not new.
- Warren and Tyagi sometimes make wild assumptions, such as a 12% annual stock market return.
These problems aren’t severe — just annoying.
If you’re struggling with debt and looking for a plan to get things right, then borrow this book from your public library. For those who complain that most financial advice — including that at Get Rich Slowly — is geared too much at the middle-class, and isn’t appropriate for those who earn less and who are struggling, All Your Worth may offer some answers.
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There are 76 comments to "All Your Worth: The Ultimate Lifetime Money Plan Book Review".
Skip the finance section and go directly to philosophy. There is no such thing as original thought. The idea of balance is thousands of years old and was central to early western philosophy with the ideas of Socrates, Plato, and Aristotle. The idea of balance goes farther beyond ancient greeks to ancient eastern philosophy such as Taoism and Buddhism…
And those ancient philosophers received their “wisdom” from generations before them as well…
I’m confused by the 5% “saved for other goals, such as purchasing a car or taking a vacation.”
Earlier in the review, transportation is listed as a need, and a vacation as a want. Shouldn’t those things be coming out of the 50% and 30%, respectively?
I thought the whole idea of having a generous wants limit was to avoid spending your savings.
“Spend your savings on new cars and vacations”…now that is new PF advice the authors really CAN take credit for. 🙂
Man this book annoyed me with the frugality bashing. I am able to spend more on things I enjoy doing because I am frugal on things that don’t matter. Who cares what kind of toothpaste or shampoo I use. Actually I get a lot of that stuff from free samples so I don’t have to pay anything for it.
@drhands
The 5% allocated to save for other goals such as a car or a vacation is meant to prepare for expenses that would be impractical to pay on a monthly basis: purchasing a car, planning for a large vacation. The Wants and Needs spending is meant to cover more regular expenses.
@The Saving Freak
When I began this review, I was prepared to hate the book. Elizabeth Warren drives me nuts with her constant frugality-bashing, both in All Your Worth and in other places. I also don’t like how she plays up the victim angle of personal finance: “We’re all at the mercy of big corporations!” Now I believe big corporations do their best to milk the consumer, but I think that consumers have the power (and the responsibility) to fight back. Anyhow, I started this review prepared to hate the book, but found I actually liked it. Still, I’m working on an entry that addresses her anti-frugality stance.
This book was not on my radar, thanks for the review. Love your blog, btw, very informative!
I agree with the avoidance of emotional spending. Strongly disagree with the use of cash though. With cash, you only get a 1:1 return. With cash back and reward points you get more. It’s important to learn to use them as part of your financial planning strategy.
-Raymond
I never have, and never will recommend this book. I don’t feel that the advice is financially sound, nor is the material comprehensive enough.
If you want a real financial plan that will change your life, look up Dave Ramsey.
Money Blue Book – I know a lot of millionaires and none of them told me that the secret to their wealth was Discover points.
Cash is king, debt is dumb.
Kevin, you’re right that the book is not comprehensive. It’s not a personal finance manual, which is one reason I recommend borrowing it from the library. I do, however, think that the advice is sound, except for the avoidance of frugality. The best part of the book is that the broad overview is something that can work for people who find the other stuff intimidating. I think the budget they set out is a great base upon which to build. And yes, Dave Ramsey is the logical next step after this.
If I were to set a reading order, it would be All Your Worth, Total Money Makeover, Your Money or Your Life.
I think that if a person reads these three books in this order, they’ll have a good grasp of how to get out of debt, and how to make their money grow…
Are the figures (50/30/20) stated above before or after tax, or is the tax included in the 50%?
I kind of like this plan, it may stop me having to keep reminding the S.O. that she spends way too much money.
This is an after-tax budget. These figures are for take-home salary.
Is 12% annual stock market returns such a “wild assumption” if you are investing for the long term? That is about the rate of return of the S&P 500 since 1976.
Hey Kevin, here’s a millionaire who recommends cash back rewards cards and promises to write more about them in the future: http://millionairemommynextdoor.blogspot.com/2007/12/debt-reduction-tips-from-debt-free.html
I know you’re just following the great Ramsey’s advice… but people without behavioral problems can handle debt just fine, thanks.
A caller once called Ramsey and said that he paid off his credit card in full every month, had a ton of savings, was getting cash back, and had never been in debt. Ramsey gave his packaged response that if you play with snakes, you get bit. But then he said that he was an exception, that he was VERY weird, and that he wasn’t doing anything wrong.
Well, there are more of us like that out there… we just don’t call in to the Ramsey show every day.
By the way… annoyed that Warren and Tyagi assume a 12% annual return from the stock market? How about Ramsey’s fabled 15% annual return on growth stock mutual funds? Makes me cringe every time he says it. Please keep in mind that he says this EVERY time he tells people to invest. I foresee a lot of sad new investors in the future.
I often wonder if 20% to savings and debt is really enough to become wealthy. I suppose if you lived by this example, that would mean you are living 20% below your means, but that doesn’t seem like enough to me. To me it seems like you should strive for 20% to savings as the bare minimum. Even doing that, you would need to work 3-4 months for every month your savings can carry you in retirement. I don’t like those numbers because that would mean I need to work 3-4x longer than I will live after I retire. If you follow the logic, that means retiring late and dying soon after (40 years of work for 10 years of retirement). This doesn’t even begin to take into account saving for specific non-retirement goals such as education for your kids or a new car or whatnot.
This is not a criticism by the way. I’m just thinking aloud that I should strive to save more money.
I like the idea of having balance rather than having to stick to a strict budget. Do you get to spend 30% on wants while still carrying credit card debt or is the balance proposed for after debt or those without debt. I agree with the idea that making big changes (mortgage rate, cars, etc.) has a much greater impact than skipping the daily latte but I also think that getting into the habit of skipping the daily latte is more important than the $5 saved. Being aware of the latte factor helps me stay engaged with my spending and allows me to make changes/choices on a daily basis. Big ticket items are important but only come around every so often. I do agree that having no fun/pleasure is a sure way to fail so I agree that having some spending money for same is important. Thanks for the review, I plan to pick this one up at the library.
I checked by budget spreadsheet and found that I was close to this, but I’ve been saving 20% before taxes. On the other hand, I keep my needs at about 48% after taxes already. I have to be explicit in tracking taxes, because my fellowship has no money withheld, and I’m responsible for quarterly tax payments.
I’ve been feeling kind of constricted lately (maybe I just need to be more frugal!), as I am a poor graduate student and have to travel a lot, which makes it harder to be frugal at mealtime. As such, I switched to 20% savings after taxes, and now have 31% discretionary money. It’s only a few bucks a week, but I’m curious to see whether it feels any different.
I already take out my discretionary money in cash every week on Friday.
@icup – You forgot about compound interest (or returns) on your savings, and that even after you retire your portfolio will generate income.
Forget whether a 12% return is reasonable or not for now: do the math with a more conservative 6% average return. I’ll assume you make $50,000, and estimate that therefore your take-home pay is about $30,000 (I don’t know where you live so I’ll be conservative), and you put 10% of that ($3000/year) into your retirement savings. I’ll keep everything in today’s dollars, thus assuming that there is no inflation and that you never get a raise, just to keep it simple. If you do this from age 20 to age 65, you’ll have almost $680,000 in your account at 65. You’ll do better if you invest monthly rather than all at the end of the year as I used in my calculations.
6% of $680,000 will give you $40,800 a year income forever, without ever touching your principal. Since you’ve (hopefully) spent the other 90% of your take-home pay finishing off your mortgage and other debts, and you no longer need to put 10% of your pay into retirement savings, you should easily be able live on $40,800 rather than $50,000.
A spreadsheet will let you work out the math with whatever rate of return, income level, tax rate, inflation rate and pay increase rates you like to make this more appropriate for your situation. You probably didn’t start saving like this at 20 (and if you did, you’re my hero), but most people’s pay increases will average better than inflation as they progress through their careers, so their contributions will get relatively larger.
Whatever the case, you don’t have to work for 40 years for 10 years of retirement. You need to save until your portfolio plus other assets (like a pension) generate enough income for you to live off of either indefinitely, or at least for as long as you could conceivably live.
You know, I always see information on the “latte” factor and such, but what about those expenses that can be reduced but are easily forgotten? Housecleaning services, extra gas for unnecessary trips, gym memberships…I don’t think that ignoring the $20-50 here and there is “not sweating the small stuff.” Or do those factor into “wants”?
You know what I want? A book about finance for someone with children. I read “The Two-Income Trap” a few years ago (a great read, by the way) but that’s one of few books I’ve found that really address the issues of having a family. For example, daycare is often more expensive than college (plain jane daycare in Tucson runs around $300/month, or $3600/year. The good kind, with actual education involved, runs $500-600/month per child, for a total of $6000+ a year! The U of A tuition, on the other hand, is $4200/year).
Give me a book that tells me how to anticipate my son’s growth spurts and pay for them, and I will buy it and put it on my shelf.
Whenever I see these rules of thumb, I go back to what I was brought up on – save 10% (gross) – give 10% (gross) and stay out of debt. Aside from the sprititual and philoshopical reasons for tithing, I think keeping money in it’s proper persepective is the key to balance.
Also, have to give my two cents on credit cards. We have a Southwest Card we use for everything – and when we charge something we write in our checkbook just like a check. When the bill comes, we’ve already debited our budget (we just keep seperate budget accounts in our check register) and pay in full each month. Not sure of Dave Ramsey’s snake analogy – but we get 4-6 free flights a year combining this with our mileage program (which Southwest will do).
Interesting points, especially in regard to the 50%/30%/20% breakdown.
I’ve just separating my spending into this in Excel and mine doesn’t quite match up to that, but at least the three sections don’t go above 100%.
An allowance for life stages needs to be factored in there somewhere. At the moment my wife is working part-time to be with our infant daughter as much as she can. To do this we make sacrifices in terms of wants. We see it as the sensible area to make cut-backs.
I’m not actually sure I’d feel comfortable spending 30% on wants, and when some personal finances sites recommend putting 10% into a pension then 20% of a couple’s income arguably isn’t much to put towards long-term savings. Perhaps those two figures should be reversed?
I’ll put this one on my reading list. I pretty much have been following their philosophy without realizing that. Wants are what we value, which is an individual thing. For example, a big one for me is visiting my daughter and grandchildren in HI, so I go there 3-4 times a year. I drive a car w/no car payments, so make a car payment each mo. to my savings acct. which affords the trips. And I can do so worry-free because I’m in balance on savings and needs. And I have been adamant about not rocking that balance, because then I wouldn’t enjoy my wants, or worse, not be able to cover my needs. I get paid monthly, so go to the ATM on the 1st & w/draw cash for me, and on the 15th, and I work with that amount, period.
I wanted to add one other thing to just keep in mind. While it is noble and admirable for younger people to save for their retirement, please keep in mind that many of us don’t live to see that day! My brother was due to retire at 56 (worked hard, hard, hard) to get there, and one week later, got pneumonia, advanced cancer was discovered and he died in the hospital within 3 weeks. I also lost someone at 46 due to pancreatic cancer. I’m not waiting to live when I reach retirement; I’m living now, yet savings toward that end too, making sure my wants are satisified just in case I don’t live to see 65.
I did our rough numbers.
During 2007 it looks like we will spend @47% on “savings” (with more than half of “savings” going towards our debt paydown project and the remainder going to our 401ks and reg. savings),35% towards needs (except not groceries/clothing, but all housing/insurance/real estate tax/utilities/phones, etc.) and 18% towards groceries/clothing and wants (vacation/travel/gifts/dining out/entertainment/charity).
So I’d say in 2007 our budget breaks down to 10% wants, 43% needs and 47% savings and we are clearly out of balance because we are focusing on getting all our unsecured debt paid off in 2007. I certainly feel like our budget is out of balance (we’ve had a lot of no’s we can’t afford to do x, y, and z conversations this year) but it has been worth it to knock out almost $50,000 in debt thus far this year.
How surprising that a Harvard law professor and a McKinsey consultant are anti-frugality. Is it possible that they have never had to use that path to get the all-desired income>spending ratio you need to be getting ahead?
I actually know of Prof. Warren (though I never took her class) and she’s well thought-of.
Still, knowing what HLS professors make and the lifestyle of Cambridge, MA, probably not my first source for advice on finances.
12% annual market return is a really big stretch (especially in coming times, lots of folks including Bogle think lower returns will be happening). That said, I’d like to read it myself to make some determination about what I think about it…adding it to my “to read” list.
Amen Tired! I figure if I can pay for daycare for two, I have college savings in the bag.
I have to admit that I haven’t read the book. But I wonder if income ever comes up in the discussion?
It’s an admirable goal to have 30 percent to spend on fun and still save enough to reach your goals and go on vacation. But if you are under-earning, that can be nearly impossible, whether you’re frugal or you drink lattes or whatever.
This is something I would hope that Elizabeth Warren would acknowledge given her expertise in the world of consumer bankruptcy, not that all bankruptcies happen to people with relatively low salaries.
I’ve found that many personal finance books ignore the simple fact that for some people, their cost of living outstrips their earnings, no matter how you slice it.
I reorganized my spreadsheet to follow needs, wants, and savings.
I came up with 39% needs (housing, living, transportation, communication, education).
23% wants (entertainment, donations and gifts, vacations, personal spending).
38% savings (18% savings, 20% debt).
Thanks for this, just reading your review has given me some ideas, and i may just give this book a look. Being very new to all this financial planning malarkey, the idea of working things out in percentages alone is pretty new to me, and one i like very much! Plus i’d never really considered i could pay my uni debt off before starting savings account, as long as i had an emergency fund in place. I like the idea of paying debt faster – i want to shift it.
Excellent review, now if only i can remember how to use the damn percent button on my calculator i’ll be all set… :~P
Thanks for the book review. I’ve been thinking of getting my 20 year old brother a personal finance book, but I wasn’t sure what to get. Since he, quite frankly, isn’t big on frugality and isn’t likely to change anytime soon, I think this might be a good book for him. He does care about not being broke and has no debt, but he likes having nifty new toys on a regular basis and doesn’t seem to have a plan for his money. All Your Worth might provide a good starting point.
Here’s the likely premise behind the Warren strategy. If you do what they say and you run into financial trouble, you can still cut back on all the nitpicky things. If you do what they say and you don’t run into trouble, you can still cut back on nitpicky things. But, if you have a massive mortgage and car payment, you can’t cut back on those.
Another one who’s agreeing with Tired and Kara. Daycare is crazy expensive! We live in Southern CA where the cost of living is pretty high, and daycare costs us $200/week. Yes, a week for one child, and that’s for good quality care. Not top-notch, but good. That’s over $10,000 a year! I have read All Your Worth, and I liked it OK, but at one point, I couldn’t figure out how she would classify the daycare expense — want? need? — and believe me, I was mentally threatening her that she had better give me a good answer! Ultimately, she gives in and says that it would be a need, but all she says on the issue is that, well, sometimes things are out of blance for a while, and that’s tough, but don’t worry, it’ll get better! Obviously, I know that’s true, but she didn’t offer much comfort, and she certainly didn’t address fruglity there, although that would have been a very opportune time to do it.
Tired, I love your point about daycare costing more than college! I never thought of it that way! We’re currently paying for full-time daycare and grad school tuition for my husband, so you can imagine how much fun we’re (NOT!) having. When you put it the way you did, though, suddenly I feel pretty decent!
Good point, Andrea. I think Suze Orman made the same point in one of her early books. It’s one of the reasons my spouse and I always bought houses and cars on his salary alone. My salary was used for wants. When I stopped working after we had children, it certainly made it easier to make ends meet.
Well, thanks to your articles, Lazy Man, and a few other genius freaks out there in Silicon Valley, I’m well on my way to being debt free (not including the car). This looks like a pretty good idea, and I’ve decided to give it a try.
The “absolute” needs (as far as I am able to calculate) do seem to fit below the 50% marker or really close to it, but getting those “wants” below 30% seems to be the problem – no matter how hard I try, I can’t figure out where all of it is going, but I’m getting better.
I do share the concerns of low wages and actually having to support young children like some of the other readers. Well, we’ll try it for a month or so, and then see what things look like. Thanks for the advice!
Andrea @29, yes…
If you are putting 20% of your money in savings and spending 30% on expenses you don’t really need, then your income can drop by 50% – or you can run up 50% of your income in emergency expenses – without getting into trouble. That’s pretty impressive, to me. “If you can’t afford fun, you can’t afford your life” isn’t just “you deserve pretty things”– if you’re maxing out your income on your food, gas, rent, and car payment, then if Something Bad Happens, it’s real hard to cut back on one of those!
Just got this book from the library and loved it. I think for some of us that have tried to track spending and always give up, or have tried other methods and failed, her simple formula and framework are VERY helpful. I will definitely recommend it to other friends who are struggling, and who can never seem to make a detailed budget and stick to each line.
I too thought that this was a Great concept and ran the numbers for the past month.
NEEDS 44%
WANTS 13%
SAVINGS 41% (including debt)
TOTAL: 98%
This isn’t a “perfect” budget, but it suits my purposes. This month was also the month of 5 paychecks, lots of snowflakes and the END of my debt, thus the heavy push towards the Savings category.
Next month looks something like this: (less hours and no snowflakes yet)
NEEDS 62%
WANTS 13%
SAVINGS 21% (including charity)
TOTAL: 97%
When it’s layed out like that I see what the author’s point is. I’d like to further explore the concept, but I can’t find the book at the library 🙁
I’m with Tired… and looking at their recommendation, it seems that all of my fun money (30% of my budget) is allocated to child care. Funny, I never thought of that as fun until now. I suppose that works if you think of children as a luxury.
I am currently in my 3rd year of college (with a regents-full tuition scholarship) from which my only debt right now is the $120 in books that I bought for the coming semester. I am BIG on being frugal in the textbook category. Most of the time I think the books are a waste, but still cannot bring myself to be one of those students that never has the book with them in class or to reference when needed. But more to the point! I am a full-time student, applying to pharmacy school at this point, and so I will continue this occupation for the next 4 or so years. I work part-time ~20-30 hr/wk depending on the time of the school year.
My net income is probably around $9K/yr, but have not had my current job for a full year, so I’m not quite sure about this. Just this school year, I decided that I no longer wanted to live in the dorms, for which my parents paid, and instead moved into an apartment with my boyfriend (who also is a full-time student with a part-time job). I bought my current car my senior year of HS and paid off my 3 year loan in a year and half, so that has taken a load off my hands in debt. My mom had been living off her own $25K/yr and supporting us 3 girls. She is one of the biggest reasons that I am trying to be so financially sound. She still graciously pays for things such as my car insurance and cell phone, but I have taken over all the main living expenses that I now deal with. My boyfriend and I split rent and utilities 50/50, but I usually pay groceries and seem to take on all the other expenses. He has debt and pretty much refuses to talk about it with me.
Right now I am ecstatic that I have close to $2k saved in high yield savings (well it was high when I opened @ 5.5% and now under 3%), have just started 2% gross contributions to Walgreens Profit Sharing (not matched for another 3 months), and mostly keep my credit cards at a $0 balance (never more than 25% on my $3k limit).
I definitely don’t follow this distribution of income right now, about 46% goes just to rent and rental insurance, 10% to savings (at this point, but plan to increase this as I get raises as a pharmacy tech and eventually get to my career as pharmacist), the rest as budgeted, usually comes out to more than 100% of my estimated income, but I always seem to have money at the end and obviously I over-budget, but also do babysitting on the side for extra cash.
My biggest vice is that I try to be too organized with it all. I spend more time trying to organize my money habits than anything else. I try to read up on advice, but all the books I have read do not touch on the subject of starting a high-paying career after college (and after working only part-time and for little over minimum wage, any career would be high-paying for me!) or give advice on saving for life’s beginnings such as weddings, first houses, and having kids. It always seems that they come from the stance that all of that has already happened to the author and reader, not telling them how to avoid getting into the problems that most people are already in because of these rocky beginnings. MY CALL FOR HELP is just that. How does a college student make plans for a wedding before graduating and making money from their career? How do I go about getting my ideas of finances across to my boyfriend, so wedding plans would not be in vain? How do I help young married friends decide when to start a family financially? How do I go from barely making it to making it big and not going crazy with it? Is there a book out there…or books, that can help me at this stage in my early 20’s and not have to take advice written for middle-age debt ridden people?
It was good to see that this book – unlike the other personal finance books I have read – does not casually assume that readers have a reasonable (within shouting distance of average) income to work with.
When I jumped ahead to the Financial CPR chapter, it was good to see that periods of financial distress are addressed. But even so, the authors presume such periods are temporary. I have not yet finished reading the book, but so far I have not seen any discussion of indefinite financial distress.
For example, how does someone living at poverty level get and keep their Must-Haves below 50% of their income? Most of these people are spending 50% of their income on shelter alone, let alone food and other necessities.
I haven’t ever read this book. I think the key thing is not the specifics of the numbers in the BMF or how everything falls into a particular category, but rather that you have a formala – a plan – in the first place. I’ve used and taught my children the 60% Solution that Liz Weston wrote about some years ago, which has worked well for me and seems to be working for them, too.
Although we are further along on the path to financial independence, I may take a look at this book just because I think it would be helpful to line up the categories.
We kind of use a similar system in that we pay our must haves, we allocate to savings AND ONLY THEN do we spend. And for spending we use an allowance system, meaning we don’t have specific categories for our day to day spending but we do limit it.
I’ve always been confused by the separation of wants and savings, as often I am saving for something that I want (in addition to the efund and retirement savings). I guess I need to read the book to see what the author says the savings are for, because everytime I’ve seen the balanced money formula floating around the internets, I’ve thought, “holy crap! Only a 20% saving goal?”
I’m saving 40% right now and working towards saving 50% of my income by the time I turn 30 next year. I never really had much of an entertainment/ wants budget because I don’t spend regularly on wants. I don’t really eat out at restaurants or bars. Usually drinks are at someone’s house and I lump any alcohol in with the grocery budget. I don’t go to movies, or shopping on a regular basis. Most of the things I do for fun are free…hiking, visiting friends and family because I live about 30 min away from most of them, going to the beach, free events around town, my parttime job allows me free access for myself and 3 guests to most Florida attractions.
Howeeeveerrr, I tend to spend big several times a year (after saving for it) on travel/vacation, furniture, home improvement. I wonder if I’m supposed to take the average that I spend in a year on wants, and subtract that from my monthly savings to find out what my actual savings goal?
Or maybe I should just read the book ïŠ
@lmoot, there is a whole chapter on Wants! Saving up for a Want that you can’t afford right away still counts as a Want. I think the easiest thing would probably be to have your “saving up for big Wants” and your regular Savings in separate accounts, so you could clearly see which was which and make sure you are meeting the 20% Savings goal.
ING (which is now Capital One 360) is what I use for this, because you can create the sub-accounts for different goals, though I know there other online banks that do something similar.
But yes, reading the book is good, too 😉
Ok, that makes a whole lot more sense. Thanks for the clarification. Apparently PF is trendy now, I’m on hold for 7 books right now at my library (one of them has over 30 holds!).
I guess this one will need to go on the list.
I haven’t read the book, but my interpretation is the same.
-Savings for a replacement car, car insurance premiums, required home maitenance, etc. = NEEDS, even if it’s not spent that month.
-Savings for home improvement, vacation, etc. = WANTS, even if it’s not spent that month.
-Savings for retirement, mortgage prepayment, e-fund, = SAVINGS.
One thing that would be good for the book to address (though it may and I missed it) is how to calculate the balanced money formula for different types of paychecks, and in particular for pre tax and after tax income. I believe the book states that everything should be calculated for after tax income. But as I save my retirement money pre-tax, then am I supposed to calculate that I have a 0% savings rate? Or translate those savings into an after tax rate? The other part I needed help in was figuring out what were in the must-haves groups. Our percentages fell into acceptable or non acceptable areas depending on how much of our grocery bill we put into must haves, and also how to categorize line items for the kids (lessons and camps).
@partgypsy, this is all addressed in detail in the book! But basically, it doesn’t matter whether what you save is pre-tax or not for the purposes of the book. Your income is your income after ONLY taxes are taken out. Everything else (health insurance, disability insurance, retirement contributions) goes into a different category.
The book has worksheets which clarify this more.
In fact, here’s a handout currently available on GRS you can try!
https://www.getrichslowly.org/images/GRS/BMF-handout.pdf
Unfortunately, the handout gets a pretty big thing wrong: Minimum payments on your debts (mortgage, car loan, credit cards, whatever) count as “must-haves,” because they are payments you must make every month. It’s only the EXTRA payments beyond the minimum that count as “savings/debt reduction.”
I like the concept of breaking things down by needs/wants/savings. Like a previous commenter noted, it’s a worthwhile activity even if you’re not trying to match the exact percentages here.
One thing I would caution about is automatically counting extra payments on debts as savings. It’s true that you’re saving money on interest payments, but it’s not necessarily the best use of your money. It really depends on the interest rate and what your other savings goals are. For example, if your student loans have a relatively low interest rate, I would probably put your extra money towards retirement before paying extra on the loan. Those early retirement contributions can make a big difference down the line, and with annual caps you can’t necessarily make them up.
Just be mindful not only of the percentages, but also how those percentages are specifically being used. Not all savings are created equal.
I recommend that anyone reading this book should also read Warren and Tyagi’s other book, “The Two-Income Trap.” It’s not a personal finance book per se, but it elaborates on a point they briefly touch on in “All Your Worth”: The reason so many people find themselves in financial trouble these days is that the cost of “normal” Must-Haves is higher than for previous generations, so people are committing a larger percentage of their income to fixed expenses, so they have less flexibility in their budget, so it takes only a small setback to push them over the edge.
That’s why it’s so important to keep your Must-Haves within 50% of your income (or at least, as small a percentage as possible). The exact breakdown of the rest of your income into Savings and Wants is less important, because both of those categories can help absorb the hit if your income drops or you’re met with unexpected expenses.
I think it’s a good point about keeping the “Must-haves” lower to keep greater flexibility. But I think it’s just as important to focus on keeping your “savings” as high as possible. With higher savings, you’re not only building the same kind of flexibility/protection as keeping “must haves” low, but you’re also building assets. Honestly, I would put the savings percentage at the top of the list in terms of importance.
Honestly, I think you’re missing the point. Have you read the book?
I have not read the book. I do think I understand the point though. Your point (from the book) is that it’s important to keep the percentage of “must haves” low because those are the things that can’t be sacrificed easily when circumstances change. You say that the breakdown between savings and wants is less important because they can both be sacrificed easily and therefore won’t put you in harm’s way financially. Please correct me if that understanding is wrong.
Assuming that’s correct, I think it’s a largely a great and very useful point. It’s absolutely a huge benefit to have your financial commitments low for all the reasons listed above.
My point was to disagree with the statement that “exact breakdown of the rest of your income into Savings and Wants is less important”. I think that your savings percentage is hugely important for several reasons. First of all, increased savings gives you flexibility to whether adversity, just as decreasing your “must haves” does. But it also gives you the resources to take advantage of opportunities. As a simple example, you may want to take a course to learn something that will advance your career. If you hadn’t previously concerned yourself with your want vs. savings breakdown, you might not have the resources to take that course. But if you’ve kept your savings rate high, you can take the course.
When you cut down on needs, you free up time/money for other purposes and decrease your reliance on any specific income/job. That’s a big benefit. But what you do with that extra money is just as important, and increasing your savings percentage can provide the same benefits and open up new opportunities.
“Less important” is not “unimportant.” I’m not saying that it’s not necessary to save, or that it’s possible to get ahead by spending 50% on must-haves and the other 50% on wants. That’s obvious.
So much personal finance writing focuses almost exclusively on the trade-off between wants and savings. Save money by not going to Starbucks. By not going out to eat. By not buying new gadgets and new books and new clothes. By not going on fancy vacations. Etc.
But as “The Two-Income Trap” (which arose from a study on families who declared bankruptcy), the vacations and gadgets and new clothes aren’t what’s getting people into trouble. Warren and Tyagi explain that the families they spoke to would actually have been better off if they HAD been spending all their money on vacations and gadgets and new clothes, because they could easily have cut those expenses as soon as one of the parents lost a job, got sick, or had to stay home with a disabled child.
To be sure, putting money into an emergency fund would have helped even more. But to benefit from an emergency fund, you have to spend it. Most of the emergencies that really sink people are semi-permanent (e.g., you lose your job and have to take a different one at a lower salary) – if you’re counting on your emergency fund to get you through, what happens when it’s gone?
I’m still confused by the wants/needs/savings breakdown. If this is based on after-tax income, is the 20% for savings meant to be *in addition to* your pre-tax retirement accounts?
No. As the book explains clearly, your after-tax income is your gross income minus JUST your taxes. Pre-tax contributions to retirement savings still count as savings. And other pre-tax deductions (such as health insurance) count toward your Must-Haves.
Thanks! That makes me feel better about what I am saving.
Thanks for highlighting this. I need to go back and re-calculate at some point.
My fixed expenses “Must Haves” are rather low- around 25-30% of our income, so BMF probably wouldn’t make sense for me. However, I like reading a wide variety of personal finance books as I usually find something useful to take away.
I probably won’t check this one out, only because it’s somewhat outdated.
Its a funny thing as our income as grown our savings percentage as grown, its like a miracle. Of course it helps not to keep adding new debt, keeping your wants to a min., and trying to save as a high of percentage as possible. I think our current percentage is close to 50% including employer match. Our costs haven’t increased in 5 years although with college coming up soon I expect that they will. Although if we get the old ball and chain mortgage paid off in the next 5 years it might offset.
Frankly though it is hard watching the Jones, I know so many of them. Not that I want to keep up but its like watching the Hindenburg go down, oh the horror, look away, look away while the pee away every cent and complain they don’t have any money. Although I do have my eye on the C7 Corvette Stingray coming this summer, I look at with great desire with my eyes while simultaneously flagellating myself.
I think it’s hard to watch the Joneses, too. Our neighbors have gone on two very nice trips in the last few months, and I always wonder how they do it, especially given their careers. Are they charging every dollar and building a house of cards, did they make some good investments and are now treating themselves, or is someone else footing the bill?
Obviously, I can’t ask them, but I do wonder.
The book is fantastic for me for two reasons:
1) It’s supremely superior to the “track every expense” system where you keep receipts for every piece of chewing gum you get at the gas station. Time is money (and life, and enjoyment) and I hate accounting. Draw a box around your percentages and you’re gold– who cares if you spent your wants on chewing gum or hiking shoes or going clubbing as long as they stay in the box–this book doesn’t moralize.
2) It’s a solid alternative to the early retirement crash diets and the “live like nobody else” Dave Ramsey system. Yes, you can live on pennies a day, you stick to survival while you reach financial goals, but do you really want to? Some people, do and can, but it’s called “extreme” (or “like nobody else”) for a reason. My wife and I lived without “wants” for a year and it was BAD. St. Elizabeth saved our marriage a lot of trouble–we’re grateful, forever.
And yes, you can alter the percentages in different stages of your life or if you *really want to* save more, but the principle of balance remains and also the avoidance of unnecessary accounting.
That’s that. Also I should add that while the book was written before the bursting of the bubble, its arguments are actually strengthened by what happened and will happen again. It’s a classic. Needs no retouching on this front because as the economy cycles and the money supply fluctuates the fundamentals remain true, people will try to sell you more than you can buy, etc.
I use this book as an addition to the personal finance class I teach teenagers, for all the reasons you state. I don’t try to teach them to do a standard budget, because frankly I don’t do one myself. It’s a lot easier to tell them to keep their must-haves below 50% and save 20%, then do whatever they want with the rest. Budgets don’t work for most people, just like diets don’t work for most people.
How old are the teens you are teaching personal finance to? And what other materials do you use? I’m thinking about suggesting a personal finance elective for our school, and would love recommendations.
“St. Elizabeth saved our marriage a lot of trouble—we’re grateful, forever. ”
HEE! I’m a fangirl of her, and I thought this was cute.
I think Dave is great for getting you excited/focused and for killing debt.
But once we had our unsecured debt killed, it was hard to come up with a new system.
We do track our expenses, but its easy because we just use our debit/check cards and then download the data from the bank.
But we use an allowance system, which provides the same idea, we have our allowance for day to day expenses and we can each spend as we like within reason.
I did not care for this book. I agree that it is a good activity to review your expenses and determine if they are really necessary. Yet trying to categories wants and needs into two buckets is wasting your time. For example, is your rent/mortgage payment a need? No, shelter is a need. If you bought/rent an extra room you don’t use daily, then a portion of rent/mtorgate payment is a want. If you buy a steak is it a want or need? You don’t need a steak, you can get your protein from beans. So is it really worth it to figure out needs/wants? I recommend using a zero-base budget and anaylsis where you are spending your money. This anaysis should keep in mind that you are using your life-energy to earn this money, so spend it on what matters most to you. Perhaps the next book review should be “Your money or your life”. This is a very old and outdated book, but it takes the concept of money to a different level. Money is only a tool for trade.
Hanna, did you read the book? As the authors explain, their way of dividing your expenses into must-haves and wants is not the same as the typical needs/wants exercise that so often shows up in personal finance writing. The “must” in “must-have” refers to payments that you must make, not things that you physically must have to survive.
Their criterion for determining whether an expense is a must-have or a want is “Could I postpone this expense for six months if I had to?” So your whole rent or mortgage payment is a must-have, no matter how many unnecessary rooms are in your house. Same goes for your entire car payment, or any payment you’re under contract to make, even for something as unnecessary as a gym membership. They have you allot a certain amount for basic groceries as a must-have, and anything you spend on top of that (for things like steak) is a want.
On the flip side, although clothing is a need, most people have a closet full of old clothes that they could wear a little longer if they had to. So clothing almost always falls under “wants.”
Your mortgage payment is a need, since you must pay it to keep your shelter. If your payment puts you over 50% in needs, you should consider selling your house, refinancing, taking in roommates, or increasing your income.
Food is a need and if you can eat steak every day and stay below 50% in needs, you’re doing fine (in terms of money, anyway). If your steak-eating puts you above 50%, you should consider eating less steak and more beans.
I don’t see the conflict between the basic messages of “All Your Worth” and “Your Money or Your Life.”
“Similarly, a lot of the advice about not letting banks, mortgage brokers, and Realtors talk you into buying more than you can afford doesn’t ring as true now that mortgages are much harder to get.”
Umm, that should be the bedrock of sound financing no matter how hard it is to get a loan.
Love the book as well, although I feel that 20% savings is a tad too low. Not everyone earns $100K a year. On a $45K income, 20% is just $9K a year, is that really enough to save for retirement or emergency fund? I save first and if there is anything left to spend on wants then I spend it. I have not set foot in the mall since before X-mas.
This book was instrumental in changing my thinking about money a few years ago. Some of the worksheets started me down the financial fitness path. Yeah, I’m a fan.
Not much to add to this conversation except for the fact that I love, love, love this book. While we’re in debt I’ve switched our savings and wants goals (30/20 instead of 20/30), but will switch it back when we’re done with our student loans. It makes me so happy that there’s someone intelligent out there who realizes that while living on the bare minimum might get you out of debt, it will also likely make several years of your life miserable. I currently have their other book, “The Two Income Trap” on hold at the library.
Wow, I never connected that Elizabeth Warren of All Your Worth is the same Elizabeth Warren that’s the new senator for Massachusetts. Knowing that now, I have even less interest in reading the book. Is that a dumb reason? Probably, but so be it. From JD’s description, it doesn’t seem like there’s much utility in this book for me anyway. That said, I am interested in reading more reviews of personal finance books. (Please do ones that JD didn’t already do because his posts are already good resources.)
I actually really appreciated this review and comments. I was already aware of the formula but had never done the math and wasn’t sure on how to categorize certain things.
I think it’s a good starting point — after all, any plan or set of guidelines is better than the nothing most people have — but found it too broad for my tastes. I also disagreed with a bit of what the author had to say about insurance… Anyhow, a good starting point that would help the great majority of people
I liked “The Balanced Money Formula.” I would try to practice it. Hopefully it’ll help me cut down on my free-wheeling expenses and enable me to accumulate the savings that I wish for.