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.