TBR: All Your Worth
Today’s book is All Your Worth: The Ultimate Lifetime Money Plan, by Elizabeth Warren and Amelia Warren Tyagi. Moxie has it on her list of "highly recommended" books on her sidebar, so I requested it from the library.
All Your Worth is basically an amplification of the financial advice provided in the last chapter of their first (mostly policy-oriented) book, The Two-Income Trap. In that book, they argued that most families get into financial trouble not by overspending on shoes or lattes, but by committing too much of their income into fixed costs — especially housing — so that they have no ability to cope with unexpected emergencies — the loss of a job, a medical crisis. Therefore, they propose a financial plan that won’t get you rich quick, but will keep you out of debt and bankruptcy.
Their plan is simple: Never spend more than 50 percent of your take-home pay on "Must Haves" — housing, insurance, car payments, and any other long-term commitments. Save 20 percent (either in the form of obvious savings, or by paying off debt). The remaining 30 percent can be spent on anything you want — nicer food, clothing, charity, electronic toys — as long as they don’t involve ongoing commitments. Pay cash for your wants, and put at least 20 percent down before buying a house. As Warren and Tyagi themselves say, their plan is in many ways a throwback to 30 or 40 years ago, when credit wasn’t readily available to everyone, and bankers wouldn’t loan you more money than they realistically thought you would pay back. They’re explicitly encouraging you to live less luxuriously than most people at your income level — but to have the security of knowing that you won’t be knocked off course by a setback.
This isn’t rocket science — it’s very similar to the "60 percent solution" offered by MSN Money editor Richard Jenkins. And Warren and Tyagi acknowledge that there are times that it’s not going to work — when you have a new baby, when someone in the family is seriously ill, when you’ve just lost a job, are going back to school, or are starting a new business. But they argue that you should know when you’re in those special circumstances — and set a specific time when your budget will be back in balance.
Probably the least satisfying part of this book for me was the discussion of housing costs. Warren and Tyagi argue that housing hasn’t, on average, appreciated any faster than inflation, so there’s no point in going into hock in order to get into the market sooner rather than later. That may be true about the country as a whole, but certainly not if you want to live in a coastal urban area. In their first book, they wrote quite poignantly about how people were going into hock in order to get their kids into good school districts; in this book, they simply say "don’t do it."
I haven’t done the exact calculations that Warren and Tyagi recommend, but I’m pretty confident that we’re within the proportions that they recommend. So I can testify to their general point — if you keep the big expenses under control, you don’t have to scrimp on the little ones. (We have memberships with both NetFlix and GreenCine.) But I’m the first to admit that a lot of our "wisdom" is actually luck — we bought our house 8 1/2 years ago, and so our mortgage is very managable. If we were buying for the first time today, we’d be in a very different situation.
January 25th, 2006 at 7:33 am
I don’t have the numbers off hand, but my guess is that their plan is simply not doable for most families in urban areas. The average family income in Toronto for a two working parents with two kids is $90k/yr–the average house price is something like $275,000, and that includes condos. A 20% downpayment would be $55,000, and a family with two kids making $90k/yr is never going to be able to save $55,000. And I should point out that a $275,000 house would either be a shack on a railroad track, a 1000 sq ft condo in the suburbs, or a townhouse or semi in an even more distant suburb. We’re not talking quality housing here.
January 25th, 2006 at 8:04 am
Remember, they’re saying that you should be able to save 20% of your income. So, 20% of $90k is $18k a year, so they say you should be able to save that in 3 years. Their argument is that the house will cost you a lot more because of higher interest rates and PMI if you don’t have the downpayment, and if you’re so close to the edge that you can’t save before you buy the house, you can’t really afford the house anyway.
The problem — at least in this area — is that in those 3 years, the same house will go up to $400,000 and you still won’t have your 20% downpayment. Warren and Tyagi’s answer is to say that you shouldn’t be chasing markets like this.
January 25th, 2006 at 9:45 am
I agree that the housing costs don’t add up. But what I appreciated about the book was that they are very straightforward in saying that if you choose to pay a huge percentage of your income for hosuing, you’re choosing to put yourself financially on the edge. And it’s your choice, but you can’t kid yourself that paying 60% of your income just on housing is also going to allow you to afford other things you want, including retirement savings.
It was something that I needed to hear. Somehow I’d started feeling sorry for myself that we were stuck in this horrible housing market and kidding myself that everything would all still work out. The book kind of snapped me out of it, and I’ve stopped taking the housing market personally. We’re seriously reassessing where we want to be and where we can afford without stretching. Maybe other people can look at the numbers and just make those cut and dried decisions, but I was allowing emotion to cloud my judgement.
Their answer is definitely that you shouldn’t be chasing markets like this. Their concern is not where people want to live, but helping make sure people don’t fall into bankruptcy or end up with no retirement savings. The whole book is about making nasty, tough decisions. It was kind of a bitter pill to swallow as I read it while I was at my in-laws’ summer house.
January 25th, 2006 at 12:34 pm
Not sure if you saw Elizabeth Warren’s article in the latest Harvard Magazine–it’s very interesting, particularly in the way it challenges the assumption that the middle class have a spending problem. http://www.harvardmagazine.com/on-line/010682.html (Sorry, I’m not sure how to create a link to it)
I enjoy your blog, especially the book reviews.
January 25th, 2006 at 3:22 pm
But that’s just the thing–you can’t save that much of your income here, either. AGain, typical family of 4 making $90k/yr will have an after-tax income around $65k/yr, maybe. About $5,400/m. They will need somewhere to live–if they find somewhere with a monthly rent of $2,000 they’ll be lucky. Then cars, assuming one still on payment and one owned with a payment amount of say $300/m, gas costs averaging $100/m x2 for two drivers, groceries around $800/m, daycare at least $800/m and that’s assuming two school-aged kids needing only after-school care. So considering only these basic costs–no clothing, no disposable–you’re talking monthly costs of $4,100/m. Take out even the smallest amount for clothes, shoes, fun stuff, dinner out or take out–say $100/m per family member, so $400/m. You’re left saving, at most, $900/m. Over a year that’s about $11k. And that’s best case scenario. That’s not including phone, cable, internet, cell, perscriptions… I’d be surprised if that family could save more than $250/m.
The only way to beat this would be to rent a place for less than $2,000/m, but I can’t see finding a 3 bedroom apartment or condo for rent at less than $2000/m. We were paying $1500/m for a one-bedroom condo in a way-out suburb seven years ago. Even that condo would be nearly $2,000/m by now–and that’s one bedroom, not anywhere close to downtown or any public transit routes that would reduce the need for cars.
If my family were seriously to live somewhere following those financial rules, we would have a small detached house in Aurora or Newmarket and we would be commuting over an hour each way to work every day. Even condominiums of a decent, family size in our area are more expensive than that would allow. If they don’t address this, then essentially they are telling people in expensive cities to sacrifice their family life to their budget. I’d rather be broke, personally.
January 25th, 2006 at 4:21 pm
I’m curious — are those recommendations specifically for pairs of earners (partnered, cohabitating, married) or are they also intended to apply to single earners like myself?
January 26th, 2006 at 12:37 am
That’s actually more or less what we’ve done. Live in a cheap housing market with good schools, save about 20% of income, have emergency fund, don’t carry debt past the low mortgage, insure up the wazoo. Our mortgage is under $1K for a 3br house & yard in a nice neighborhood, for instance. The problem is in how that planning fails when you get chronically ill, and in how middle-classness works against you in disability.
W&T point out the lower-income/higher-bills problem of acute illness — cancer, heart attack — but I don’t believe they point out permanent loss of spousal income in disability, since becoming a spousal income often means your income either drops or goes away entirely. The only ways to cope with that, esp. since even private disability insurance only pays 60-70% of the disabled’s previous income (LTD insurance companies usually require remittance of any SSDI), are to reduce living standards substantially or to separate/divorce so that the healthy spouse isn’t doing the caregiving work — in other words, dumping the disabled spouse on a quasisystem which will not adequately care for him or her (which is more or less what we’ve done). If there are children, that leads to the usual problems, esp. if the healthy spouse doesn’t make the leap until s/he’s been caregiving and out of the job market for a few years. In fact, the healthy spouse may be required to pay spousal support to the disabled one. Further, if the caregiver leaves work, s/he can no longer buy private disability insurance; there’s no tangible income to insure. I know because I’ve searched for it.
The other problem is that having substantial savings and insurance makes you a sitting duck during disability. You won’t qualify for Medicaid or many other services, and frequently the kinds of services required in disability are fantastically expensive, when available at all, and are not covered by private or employer-sponsored health insurance. Or by catastrophic coverage, either, which W&T rely on to limit the out-of-pocket damage. The result is that unless you essentially dump the disabled spouse, you’ll see those savings vanish in short order.
I think they’re a bit optimistic about the value of their buffers, in other words. Very good if you get a survivable cancer that takes you out of commission for a couple of years leaves you otherwise OK. Not so good if, say, an industrial AC unit falls on you and leaves you a quad.
We’ve gotten by all right, but only because my husband’s a remarkably good sport, we’ve tapped savings, and my father’s essentially made up the income difference. At least two of the three are not sustainable, so we’ve informally split. Means I can largely ignore my husband’s illness and take myself back to school/work. I doubt W&T would see family breakup & dumping the disabled as preferred outcomes, but I haven’t seen that they’re problems solvable with private insurance. It’s basically a health infrastructure problem plus the fact that non-family disability care would require a staggering amount of money. I’m not sure anyone would be willing to plow in the kind of money needed to build and sustain the necessary infrastructure.
Oh…and I haven’t heard any mention of W&T suggesting the Hirshmann(?) line, but key to our financial survival has been having only one child. Financially, one is bad enough. Two would hamper my career prospects and raise childcare costs to the point where we’d be in serious trouble.
January 26th, 2006 at 9:03 am
Just out of curiosity, I did a search on the Canadian real estate site (mls.ca) for houses in my area with four bedrooms. I didn’t specify anything else (detached, semi, town, condo, a/c, etc)–just houses w/ 4 bedrooms and under $400,000.
There were two–one was a 2,000 sq ft semi at $380,000, and one was a former marijuana grow house at $280,000.
I then did a search for houses in the Ottawa area (a moderately expensive area by Canadian standards) for comparison’s sake. This time I searched for 4 bedroom houses with air conditioning up to $300,000–$100,000 less–and I got 30 pages of results.
Which I think demonstrates pretty clearly that their advice will work very well in some locations, and not at all in others.
January 26th, 2006 at 10:49 am
Beanie Baby, you seem to be taking this all very personally. W&T aren’t telling you what to do because they’re invested in what you do. They’re just crunching the numbers and telling you how they add up. If your choice is to be broke, then that’s your right. The assumption is that if you read their book you don’t want to be broke. They’re giving advice based on that assumption. If you are committed to living an an area with high housing costs, you have to either make more money or realize you’re not going to be financially stable. Obviously the decision is your own to make.
Megan, they apply to everyone.
Amy, in The Two-Income Trap W&T point out that the number one indicator of whether a family or individual will declare bankruptcy is whether they have children. Also (in TTIT), they specifically point out that one way to avoid financial jeopardy is to have only one child (although having none is safer). When are you going to get your own blog, BTW? I enjoy your comments and want to read more.
January 26th, 2006 at 3:22 pm
Thanks, Moxie. The blog shell is up (usrobots.blogspot.com, Elizabeth feel free to delete the pimp) and I’ll have the a post up sometime this week, but I don’t think it’ll have much to do with family policy or politics, at least not the way we talk about them here. I want to encourage conversation among artists & scientists about a mechanistic view of life, which is what you get in bioscience and (it seems to me) is part of ordinary life’s backdrop at this point, mostly through medicine.
I’d like to see related themes named & engaged in serious fiction, ordinary livingroom-drama and metafictional stuff; in general I don’t, and the implicit backdrop to current fictional worlds tends to be received bits of theology, or reactions to them. Mothers’ spirits, souls, a furious suburban nihilism, etc. I think the machine business is something quite different & that art in general’s been ignoring it except to pick up flashy images context-free, maybe because so much art is so specialized & academic-careerist now. Artists don’t generally study science or even talk to scientists. Anyway, I’d like to hear some conversation & see what work comes out of it. Seems like philosophers & theologists have a place there too; I just don’t know anything about philosophy or theology.
Apart from that I’ll keep free-riding on Elizabeth’s & Bitch’s blogs. It’s already more time than I have for shooting off my mouth these days. 😉
January 26th, 2006 at 3:55 pm
I’m commenting without reading the previous comments, always a potentially dangerous business, so forgive any obvious repetition.
My current financial bind is based ENTIRELY on my having moved to a better school district, hence doubling our mortgage. Of course, rent in this neighborhood runs higher than my mortgage, so that wouldn’t be an option for us, either.
So here’s the thing: I get the point. Yes. BUT…Isn’t all of this discussion assuming that your only goal is financial stability? Sure, we would be better off financially right now if we’d stayed in the crappy school district. But emotionally? Nope. And the well being of my kids? Totally different. They would have suffered, especially because of the schools. (And private school tuition would have been more than the increase in my mortgage…)
So, yeah. I know what I’d need to do to get financial stability, and I’ll do what I can. But there are other variables that come into play here. It’s not just all about the money. Yeah, we’ll be in trouble the next time a financial crisis hits, but we’d have also been in trouble–just a different kind of trouble–if we’d stayed where we were.
January 26th, 2006 at 6:58 pm
I don’t think anybody said it was all about the money. Otoh, hoping for the best can lead to some serious problems. You might want to use non-crisis time to investigate cheaper housing markets with decent schools, maybe in different states or regions, if schools are your main drivers.
January 27th, 2006 at 10:10 am
Oh for the love of ….
I’m not “taking it personally.” Those numbers are averages, and they represent a significant portion of the Canadian population, who don’t have the kind of “choices” you seem to think they do.
I realize they are not writing for a Canadian audience, but keep in mind–here, mortgage interest is not tax-deductible, mortgages are amortized over 25 years, both of which leads to higher housing costs all on their own.
I find their arguments infuriating and insulting for the same reason I found Hirschman’s arguments infuriating and insulting: they only work when only a handful of people follow them, and they treat a systemic problem as something to be solved by individual choices. Therefore, it won’t work. Maybe for one person here, one person there–but a solution for the double-income family trap? No way.
January 27th, 2006 at 10:13 am
Facts 9-11: Flotsam Plus Toronto
A Day Behind! Fact 9: I’m caught somewhere between anarchism and direct democracy in terms of my political beliefs, even though I don’t expect either of them will ever be implemented. Fact 10: I do not throw rocks at buildings,…
January 27th, 2006 at 11:15 am
Now I’m curious. Beanie Baby, have you read either of their books?
They are very clear in stating that they have no hope that any changes will be able to be made in national policy or laws. Therefore, what they are recommending is the most an individual family can do, but is actually very little protection.
I’m not sure how that can be found insulting.
January 27th, 2006 at 12:29 pm
Amy, I’m sorry to hear about your husband’s disability and the problems it’s caused for your family. I think you’re right that the system is totally broken for families in the middle, who neither qualify for public assistance nor have enough wealth to handle it on their own.
I don’t think Warren and Tyagi ever claimed that their system would enable you to weather a long-term income shock (like disability, or divorce) without cutting back on consumption signficantly. Their argument is that their system buys you time and lets you adjust on your own terms, rather than through foreclosure and/or bankruptcy.
Andrea, Tiny Coconut — I think you’re both saying similar things — that abiding by W&T’s formula would require making cutbacks in your life that are unacceptable (e.g. having an unbearable commute, or sending your kids to less good schools. It doesn’t come across as strongly in this book, but their major thesis in The Two Income Trap is precisely that — that most people aren’t winding up in financial trouble because they’re buying big screen TVs, but because the things that we consider core — housing, decent schools, health care — have gotten so unbelievably expensive.)
January 28th, 2006 at 9:29 pm
thanks, Elizabeth. To be honest, though (and when am I not?) saving and insuring a la W&T won’t buy you enough time to be helpful unless you’ve got one hell of an income and/or extraordinary luck in healthcare insurance/services. There’s too much that’s uninsurable when it comes to disability, so savings are a little like an extra storey in Banda Aceh. We looked into group-home and in-home services for my husband, for instance, and they’re laughably expensive. Thousands a month.
We said no. We’d have been bust before we’d had a chance to take readings, let alone chart a new course. Well, he’d have been bust, anyway. I’d have tried to divorce him fast enough to save home equity, retirement & college savings, but divorce doesn’t always happen fast when one spouse is too sick to deal with lawyers consistently. After “bust”, he still wouldn’t have qualified for Medicaid, thanks to the LTD insurance W&T suggest people buy. Income would’ve remained too high. Most of his LTD check would’ve gone to medical services. He still would’ve been bankrupt, and I’d have been your basic poor single mom.
The upshot’s that he goes without medical services he needs so that we can do things like keep college savings, a house, my IRA. Luckily he’s well enough to avoid falling apart completely. The lack of care just draws out the illness and makes it more miserable. If he’d been sicker, we might’ve had no choice.
And that’s the real bitch of middle-classness when it comes to disability. We’ve been lucky, but frankly, the savings are a liability, another body to hold over your head as you try to cross the river. It’s not just emergency savings that has to go; the social-services system says you’ve got to spend the kids’ college money and most of your retirement savings, too. You end up staring at it and saying it’s not worth trying to be responsible. And then voting Republican until the Dems turn social-Dem, which ain’t gonna happen anytime soon.
I guess what I’m really talking about here is holes in insurance policies and their regulation, and iirc, W&T do address that in a wishful insurance-markets-fantasy kind of way. If you can’t buy the requisite insurance, their plan can’t work. The health plans (major medical, catastrophic) have to cover the services, buyable, with affordable premiums; the states have to require various parities and coverages; the disability plans have to be available to those without earned income.
I’m guessing divorce is a more likely problem for most. I hope W&T recommend learning how divorce works before marrying, doing a Williams-style prenup, choosing your state strategically, and keeping abreast of divorce law.
January 28th, 2006 at 10:22 pm
OK, I’ve just read some of the book by searching inside at amazon, and the kind of things I’m talking about are entirely outside its scope. It’s essentially the Zone Diet book of household fin management, and the “ultimate” in the title should’ve been the giveaway. Good if you want some motivation/handholding and/or really don’t know where to start with basic income mgmt. Otherwise, you probably want something more comprehensive. The entire discussion of liability ins, for instance, says, “It’s good! You should buy some! Disability happens a lot, and you could be screwed without it.” I mean this is not a sophisticated or policy-level treatment, but it’s not supposed to be.
Heh. I think I’ll recommend it to the Flylady people.
January 29th, 2006 at 6:30 am
Missing from the discussion is the possible/plausible effect of school vouchers and/or open enrollment in existing public schools on the pressure for middle class parents to pay for the ‘best’ school districts. I’m in Arlington VA and we have rather permissive rules on waiving in to the elementary schools; this does a lot to let parents buy in less desirable districts so lowers the premium for the desired ones. A voucher system could have the same effect, but more strongly, and would let people cross city lines. Arlington schools, though, are pretty good across the board (we spend $19000 per student per year, a couple of our high schools regularly appear on national ‘best high schools’ lists) and we don’t have the overwhelming pressure on the ‘best’ schools you would have in a public school open enrolment system where the gradients are steeper (NYC, DC, e.g.), as well there is no place in town where you can buy a house for a price that wouldn’t be daunting for a new family starting out, just some neighborhoods which are more daunting than others.
Like Elizabeth, we were enormously lucky in when we bought, and because our housing costs are so low compared to those of others in our neighborhood we have been able to follow most of the Warren proscriptions while our neighbors have been financing their lives with HELOCs and are looking nervously over their shoulders at any suggestion that the housing appreciation party may be nearing its end. So I vote with Tiny Coconut – the drawbridge has been pulled up in the face of young families trying to enter the system, to try to follow the Warren Rules would probably make them postpone childbirth until they were infertile in most coastal areas. A bleak prospect.
January 29th, 2006 at 6:32 am
Sorry – HELOC = Home Equity Line Of Credit.
January 29th, 2006 at 11:35 am
😉 it’s a big country, dave.
This is the second voucher argument I’ve found attractive in the last six months. I’m beginning to feel like Dr. David Banner. What’s happening to me? Arrr. You wouldn’t like me when I’m looking for schools for my kid.