All Your Worth

This post is the second in a series of books about money. Read the first post here.

Elizabeth Warren teaches contract law at Harvard University. She is well known for being highly critical of the banking sector, specifically their credit card operations. I've heard her on NPR a couple of times in the last few months being critical of the way the bailout is being handled. If you decide that you love Elizabeth Warren as much as I love her (and I do love this lady she is mucho fantastico) you can listen to her on NPR here here here here here or here.


But I've loved Elizabeth Warren since I encountered her books.


In 'All Your Worth' Elizabeth Warren, and her daughter Amelia Warren Tyagi lay down their common sense approach to budgeting. It has been a highly productive and useful approach for me, and I know that it will be for you as well.

Talking about budgeting money, and actually doing it within the dynamics of a marriage are very different. Talking about what 'should' be done with money is much easier, and actually dealing with the inevitable limited resources that come up in a marriage with children is much harder. I can remember hearing adults talk among themselves about money when I was younger. I remember imagining myself effortlessly navigating the financial currents in the context of a marriage. Looking back on my younger self I can see that I was terribly naive, pretty stupid, and highly judgmental of others, in a bad way.

The 'All Your Worth' budget can be simplified to this pie chart:




There are 3 categories your money goes into, and if you want to have a good relationship with money, as well as the rest of the people in your life, you need to keep your dollars within these categories at this ratio. Must haves should be 50% or less of your budget. Must haves are things like rent, utilities, contractual payments, food (necessity food, not eating out at the chinese buffet, or buying fudgesicles), insurance, and gasoline. If you have a cell phone plan with a contract, it goes into the 'must have' pile. If your cell phone plan is month to month and you can cancel it at any time, then your cell phone expense goes into the 'wants' pile.

Savings is savings. This includes savings accounts, any 'buffer' money you have in your checking account, 401K contributions or whatever.

Wants are the discretionary money you spend on twinkies, ipod's, CD's, movies, and other things you want or like.

'All Your Worth' says that if you keep your spending within these categories, you won't be stressed out about money. And they're right. If your 'needs' category is 50% or less and the main breadwinner gets injured, or loses his/her job, the family can tighten their belts and survive while they receive unemployment benefits. If the needs category is 50% or lower a wife or some of the older kids can get a job and fill in the financial gaps. If the needs category is 50% or lower the family can be much more flexible during lean times and the family savings won't get decimated.

Most families completely blow it on the needs category. Elizabeth Warren wrote another book called 'The Two Income Trap' (another must-read book) where she talks about the results of her research into families that declare bankruptcy. She looked at family budgets going back to the 1950's by category. Most people assume that we spend more on things that we want, because in our mass consumer culture there is more stuff to buy than there was back in the 1950's. It turns out that we do have more shoes, appliances, and other gadgets. But those 'optional' gadgets are also a lot less expensive in real dollar terms than they were back in the day. The number one thing that has changed on an aggregate level the last 50 years has been the price of homes in good school districts. Housing costs have ballooned to consume a disproportionate slice of the pie. Health care has also become much more expensive.

Tally up your own expenditures. I can almost guarantee that your 'needs' category is at least 60%, and probably higher.

This is a different approach to budgeting. When you categorize your expenditures in terms of needs, wants, or savings, and hack them down so they are closer to 50%, 30% and 20% you realize that it isn't always the usual culprits causing financial pain in your life. At least that has been my personal experience, and whenever I sit down with another person to work on a budget this ratio becomes clearer and clearer.

One of my employees was always asking for overtime, and complaining that he didn't make enough money. One day I sat down with him and (with his permission) we listed out his 'needs' expenses. I put together a little spreadsheet that graphically represented his needs, and assumed that whatever was left over would be split proportionally between wants and savings. After his car payment, rent, car payment, car insurance, he didn't participate in the health insurance plan at work, his gas, food, utilities, and cell phone he didn't have much left. He was feeling like all his money was spent before he earned it. No wonder. He was (is) spending 91% of his income each paycheck on 'needs'. It is extremely difficult to go through life with an abundance mentality with that kind of budget.

I have about 60 relatively low wage employees. Whenever one of them talks about buying a new car, or moving into a bigger apartment its almost like clockwork. Three months later they hate their job, don't get paid enough, and aren't getting enough overtime. They're mad at me for needing to keep within my operating budget and not being able to give them a raise or have them work more hours.

When my wife and I approached our budget in an effort to bring it into better balance we came up with different solutions that we had not come up with before. We changed our health insurance during open enrollment. We shopped around for car insurance. (My wife did most of the work here. Don't be fooled by how I'm describing it.) We decided not to move, although the thought crossed our minds.

It's easy to argue about money. But if you're going to direct any animosity toward your budget, the animosity should be directed toward the 'needs' category if it is over the 50% mark. Do we really need a new car or would a less expensive used car be sufficient? Do we really need unlimited minutes on our cell phone? The approach of being hostile toward your 'needs' category frees up some oxygen in your budget for the 'wants' category, which is why we like to make more money in the first place. Paying car insurance premiums does not make me any happier. Listening to my ipod on the way to work makes me happier. Playing raquetball, and soaking in the hot tub at the YMCA makes me happier. Going out on dates with my wife makes me happier, especially if I'm not worried about adding to a credit card balance. A lot of the significant savings in your budget can be found in the 'needs' category simply by admitting that you don't 'need' that particular item, and eliminating it.

Reducing expenses to fit into certain categories has more punch. But sometimes increasing the size of the pie is the best way to get things into balance. That's just the reality sometimes. More money is pretty much always easier than less money.

One sticky point with me is where to put church contributions. Does tithing go in the needs category or the wants category? My logic is that tithing goes in the wants category because we should 'want' to pay tithing but it isn't a contractual thing. My wife says it should go in the 'needs' category because it's a commandment to pay tithing (Will a man rob God etc...)

Everyone knows that the savings category is important. Elizabeth Warren reccomends a sequence to use when diverting savings funds into different uses. First you should divert all savings, (and much of your 'wants' budget) into a $1000 cushion. Second you should divert all your savings dollars into paying off high interest credit. Third you should use it to build up a 3-6 month (needs category) cushion. Fourth you should accelerate your mortgage payments. Fifth you should invest it in something you're comfortable with. Step four and five can be split up or done at the same time if you want.

Elizabeth Warren is one of the few voices out there that talks sense about money. I really really like her. Check out her book.