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Booknotes: All Your Worth

January 26th, 2007 at 05:12 pm

Until I read this book, I never had a good sense of when my saving was "enough" and it was ok to spend on things that would be enjoyable today. I almost missed out on buying my first house because I wasn't sure it was ok to reduce my 401k contribution from 15% to 10% for a few years. On the other hand, after marrying my DH, we bought a larger house together and remodelled the kitchen, and I didn't have a good sense of whether the amount we were spending on it was ok or should've gone into long-term savings instead (we paid cash, so it wasn't "beyond our means", just a though call on enjoying life vs saving).

All Your Worth was the first book I've read that gave the guideline I was missing. Her recommendation is that you divide your money 50% for needs, 30% for wants, and 20% for saving/debt reduction. It strikes me as a reasonable balance that should allow you to have some enjoyment of your wants today while still saving for tomorrow.

Here are her definitions of needs, wants, and savings:

Needs: Mortgage or rent, utilities, a basic grocery allowance, car fuel, all forms of insurance (health, dental, car, home, etc.), minimum credit card payments, car loan, phone and internet access (necessary for job hunting), and any contracts you've entered into (such as a cell phone contract).

Savings: Emergency fund, 401k and IRA contribution, extra payments that reduce loan principal, long-term investments (for instance stocks and mutual funds), and other long-term savings vehicles

Wants: Everything else -- clothes, entertainment, cash, dining out, vacations, groceries above your allowance, etc.

The thrust of the book is that you analyze your needs, wants, and savings to see where you're out of balance. The point is to focus on finding ways you can save big bucks (insurance) instead of pennies (Starbucks coffee). (My favorite quote is, "What do all these financial advisors have against coffee, anyway?"). If your needs are too high, she advises you to look for ways to reduce them by taking out less expensive insurance and not entering into contracts. She has a section on how to tell if you ought to go to extreme measures such as selling your house or car and buying a cheaper one.

She goes a little too far for me in saying you should pay for all your wants in actual cash. The book is geared toward people who have credit card debt, so I felt some of the advice didn't apply to folks who have some assets built up. She is a big advocate of paying off your mortgage early, where I think it's smarter to invest that money in mutual funds and get a larger return.

She also gives some examples of when it's ok to temporarily violate the 50/30/20 rule. One example was taking a couple of years off after the birth of a child then returning to the workforce.

As for myself, our budget is currently 58/33/9, so we are out of balance a great deal on the needs side, and a little bit on the wants side. I'm working on getting the wants down to 30% so we can increase the savings/investing to 12%. (Interesting -- I set this goal initially because I thought increasing our savings in small steps would be easier to stomach than making a big change. I just checked with my Target Savings Goal calculation from The Complete Idiot's Guide to Getting Rich, and to meet our TSG we need to save exactly 12%!)

Here's the breakdown of our budgeted needs:
mortgage/tax 36.0%
insurance 3.3%
utilities 3.3%
car loan 2.8%
contracts 2.9%
groceries 4.4%
gas 5.4%
total 58.2%

We might be a candidate for downsizing the house if I didn't plan to return to work in a few years. (If I were to go back to work our needs would drop to around 40% for part-time or 30% for full-time.) Although I plan to shop around, our insurance already has high deductibles so I don't think there's much savings to be had there. The biggest places to consider saving are the car loan and contracts -- that's 5.7% that isn't going into savings. The grocery allowance is reasonable (in fact we enjoy cooking and entertaining so there's a separate line item in our budget on the wants side for food above the allowance.) Gas isn't going down unless DH changes jobs or the Middle Easts settles down.

I actually set up the catagories in my budget according to needs, wants, and savings rather than the traditional auto, home, etc. This makes it really easy to quickly determine how my balance is looking.

4 Responses to “Booknotes: All Your Worth”

  1. tinapbeana Says:

    a similar kind of 'formula' is what got me originally believing i could save a li'l something no matter what. 60% expenses, save 10% for short term (once a year kinda things), 10% for long term (once every 5-10 year kinda things), 10% for retirement, and leave 10% for fun.

    i don't keep exactly to this formula any more, but i found it a very reasonible jumping off point.

  2. moneycents Says:

    I enjoyed reading your post. It seems like you have your plan down. Very good ideas. thanks!

  3. DivaJen Says:

    I think there was a discussion about this book recently in the forums as well. I like their formula as a starting point too. It's one of the financial books that I decided to buy and not just borrow from the library.

  4. katwoman Says:

    I love it! Although I usually peruse personal finance books it looks like this one 'got away'. It's definately going to be one I will pick up.

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