I’m confident enough to admit it: During my maternity leave with Tommy, I developed a bad, daily Dr. Phil habit. Every day at 3:00, Tommy and I would stop what we were doing and settle in to teens gone wild or husbands who thought their wives were too fat. In between the heated lectures and doo-doo-DOO music going to commercial break and Dr. Phil cheekily using the word “ass” five times a taping, I saw a one or two shows that stuck with me. One exceptional offering featured Elizabeth Warren and her daughter Amelia Warren Tyagi, who had recently written All Your Worth. The book is a primer for getting your finances in order, regardless of where they currently stand, and provides a fairly simple game plan for doing so.
I immediately ordered the book, already terrified at the prospect of raising two kids without losing our shirts. I sweated over the worksheets, read through and integrated some of the tips for simple changes that can yield big results (like shopping insurance every few years), and ultimately felt much more comfortable about our finances. Then, when I realized the repo man wouldn’t be coming for our children any time soon, I put the book on the shelf and forgot about it until this summer’s third-baby wake-up call.
While the book contains fantastic advice for all aspects of your financial life, two pieces of information really stood out for me:
Insight #1: Finances should follow a simple 50-30-20 rule.
This formula breaks down your take-home pay into three simple categories. Fifty percent is earmarked for obligations like mortgage, insurance, food, utilities, car payments, and daycare (if it’s a necessity for income). Thirty percent is for “fun,” although that’s a loose term for anything that isn’t an obligation. Fun can be a vacation or this season’s It bag, but it also covers things like basic clothing, eating out, and satellite radio – areas we’ve come to see as necessities. The remaining 20 percent is for savings.
The authors maintain that if your money is in this balance, you’ll be fine. If it’s out of balance, you should strive to get it there. If you find that “fun” is taking 50 percent of your take-home pay, you need to scale it back to get things better in balance. If you’re not saving any money, you need to acheive a balance that lets you do so. If your obligations are requiring more than 50 percent of your take-home pay, there’s a solid reason why you always feel behind – it’s difficult to maintain or get ahead with that level of obligation. In the latter situation, the authors maintain, it might be time to look at downsizing a house, selling an SUV you can’t afford, or even moving to a more profitable part of the country. I loved this incredibly simple formula, seeing as I’m one of those people who periodically tries to track every little expense, and runs out of steam about four hours into the exercise. This was a system I could work with.
Insight #2: The rules have changed, and you need to get on board quickly with the new ones.
Elizabeth Warren is the first person I’ve heard articulate how the current state of our finances is the result not only of complete lack of self control, but also the changing rules of credit and financing. It’s easy to see a problem: Consumer debt is escalating, foreclosures are at scary levels, and savings rates are in the toilet. But in the last 30 years, people have had much more ability and encouragement to get themselves into trouble than ever before, and she maintains that we have to understand the rules and arm ourselves. Fifty years ago, if your income wouldn’t comfortably cover a mortgage, the bank would turn you down; the bank wouldn’t try to put you in an interest free “product.” Likewise, you could have an outstanding record and a solid paycheck, and still not qualify for a credit card. External parameters were put around your finances that limited how far you could go into hock. This obviously is no longer the case. (If you disagree, rent the excellent documentary Maxed Out. Or better yet, borrow it from the library for free.)
In the relatively short time I’ve been managing my adult finances, I’ve seen these rules changing. When I was taking out a loan for my first house, for example, I was looking at financing about $65,000 on a salary in the mid-forties. At this point, I was still filing taxes with an EZ form and carried no debt, but my very simple finances were scrutinized fairly heavily by the mortgage company, and required what seemed to be reams of paperwork to show my income, my lack of debt level, my savings, my favorite flavor of ice cream…
Two years ago, when an atrocious, ostentatious, infamous Indianapolis house was foreclosed on and I wanted to get a viewing with my real estate agent, a prerequisite for seeing the place was getting pre-approved for the mortgage. The house was listed at $550,000, a figure so divorced from the reality of Phil and my ability to pay that it was laughable. But I knew that the kooky house required a “special” buyer and likely would sell for half that price (it sold for $267,000, although sadly not to us). So when I called to get pre-approved, I began blathering on that while the house was completely out of our means, it certainly wouldn’t sell at its listing price. Before I could get the sentence out, the broker cheerfully stated, “You’re approved!” Whether I could have actually gotten a half-million-dollar mortgage is debatable, but reading article after article about the current sub-prime debacle makes me think it was reachable. If I’m told by a mortgage company that I can afford a half-million-dollar house, without the personal backing to know the figure is ludicrous, I would assume the lender knew something I didn’t.
All Your Worth made me look more empathetically at those who were allowed – even encouraged and coerced – to finance an unsustainable lifestyle.
Regardless of your financial position, I think you’ll get something out of this book. It has now helped me, twice, relax about our finances, realizing that they’re in balance. Likewise, it’s given me some great advice on where to look for further savings, how to invest money when there is money for investing, and what to stay away from. On my shelf of financial books, it’s a stand-out.