For the second League of Ordinary Savers in-person meeting, we discussed All Your Worth by Elizabeth Warren and Amelia Warren Tyagi. It’s a great primer for getting finances in balance, and I realized while re-reading it that it follows the same basic present-past-future philosophy I have. I read the book only after I was well on my way to financial freedom, so it must be a natural way to handle things: Get your current budget in order, clean up past mistakes, then plan for the future. (It also says to pay off the debt that bugs you the most, which is one of my other big beliefs, as expressed in my previous post!)
If you’ve never read the book, here’s an excellent (and enjoyably brief) summary of the main points. Even more briefly, the book is about how to get your money to the point where you’re putting 50% to must-haves (or needs), 30% to fun (or wants), and 20% to savings (for retirement, an emergency fund or bigger purchases such as a house) and extra debt repayment. It also gives very basic (but very sound) advice on mortgage shopping, bankruptcy and investing.
We spent a good part of the meeting just talking about the three categories and what should go into them. It’s seemingly simple but deceptively so. For instance, I myself agonized over where to put diaper-cleaning service; our kids need diapers, but I’m quite aware we could get generic-brand disposables for less than we pay for cloth upkeep. Also, if we were REALLY strapped and still wanted to do cloths, we could (shudder) try to clean them ourselves. So I finally put diaper service under “wants” (which is why I don’t call that category “fun” ;)).
One confusing aspect is whether to count parts of your money that are automatically withheld from your paycheck, or just your net pay. It seems easier to just count the net money and not worry about the other parts, but then many of us (including myself) would struggle to get the savings part of the formula up to 20%.
The Warrens recommend calculating everything except tax withholdings. So when you’re making your lists of needs, wants and savings, you would look at your paystub and enter health insurance and related expenses into the “needs” category, and 401(k) contributions into “savings.” (I go a step further; I look at my employer’s matching amount, and I add that to both my gross income and my “savings” category. After all, it is part of your income, albeit a part you don’t see or think about much, and it is part of your savings percentage too.) Remember to multiply by 2 if you get paid twice a month and are calculating your expenses by the month!
It’s pretty simple to make a spreadsheet to do this, and I have one (of course) that I update whenever there’s a change to our income or fixed expenses. (I don’t record every little windfall or unexpected expense, but if there’s a more permanent change such as a raise, or a regular bill changing because the interest rate is variable, I’ll update it in my spreadsheet.) That way I always have a good idea of how balanced our money is.
So, how balanced IS our money? Well, excluding tax (federal, state, Social Security and Medicare), my family’s spending is at 45% needs/24% wants/31% savings (including extra debt repayment). The Warrens might say we should let loose and spend a bit more on wants. But I figure, two of my biggest “wants” are to get out of student-loan debt and save for a bigger home, so in a way, you could put part of that savings/debt repayment ratio into our wants category. See what I mean? It’s a lot more complicated than it seems at first!