January 2011


As promised, this is the first in depth look of our January book recommendation All Your Worth by Elizabeth Warren and Amelia Warren Tayagi. We’ll start this series by taking a look at the “Balanced Money Formula.”

 

Warren and Tayagi’s formula stems from the idea that once your money is in balance, you won’t have to count every penny and stress out about how you’re going to pay your bills, pay off debt, and save for the future. You’ll have a lifetime plan that will help you live comfortably and secure your future.

 

Budgeting is a very tiresome undertaking, and though it’s important to financial success, too few people make a budget and stick to it. Often it’s because they feel like they don’t make enough to do all the things that they need/want to get done. Or they feel like no matter how much they plan their budget, the numbers never work out quite right and they spend too much and save too little. It’s easy to get caught up in the negative thoughts while dealing with your spending habits, and the “Balance Money Formula” can help to simplify the budgeting process and help you succeed over the long run.

 

First, as with any budgeting process, you have to figure out your monthly after-tax income. Make sure you find out your after-tax income, not your take home income. If you have seasonal or variable income, average a few months income together, or take your annual income and divide it by 12 to find out your average monthly income.

 

Next, you need to figure out your “Must-Haves.” “Must-Haves” include all your basic needs: housing costs, food, health care costs, etc. If you need it and it’s something that you would pay for if you lost your income, or if it’s something that you have a contractual obligation to pay for (excluding credit card debt), it’s considered a “Must-Have.”

 

Next, you need to figure out your “Savings.” This one is slightly more complicated if you carry a credit card balance from month to month. First, add any monthly contributions you make to a retirement account (averaged for a monthly amount if you make annual contributions). If you have a company match to a retirement account, include that as well (free money!). Next, if you save regularly in any other type of account (college savings, etc.), add that amount in. Also, any payment you make towards your debt beyond the minimum amount due also gets included in the “Savings” amount.

 

Now comes the trickier part. If you carry a balance (over $200) month to month on your credit card, Warren and Tyagi suggest that you find out how much your balance is changing by taking your balance from 12 months ago minus your balance today and divide the difference by 12. For example, if your balance a year ago was $5,000 and today it’s $4,000, your credit card savings would be ($5,000-$4,000)/12 = $83.33 (you are “saving” $83.33 a month on average by paying down debt). Alternatively, if your balance a year ago was $4,000 and now it’s $5,000, your credit card savings would be ($4,000-$5,000)/12 = -$83.33 (you are growing your debt by $83.33 a month on average and taking it away from savings). Add or subtract this credit card number accordingly from your other savings. The total of these categories equals your total “Savings.”

 

Warren and Tyagi use this credit card method to show that if you are growing your credit card debt, you are just taking away from what you are saving. So if you are saving $100 a month elsewhere, you are really only saving $16.67. Or if you save $50 a month elsewhere, you actually are saving -$33.33 and making your financial situation worse. It’s really a great way to see the impact your credit card debt can have on your future.

 

“Wants” come last, and they are the easiest to determine. Just subtract your “Must-Haves” and your “Savings” from your after-tax income. Whatever the number comes out to is what you spend on your “Wants.” A key point that Warren and Tyagi make is that if your money is in balance, it really doesn’t matter what you spend your “Want” money on. That’s what it’s for, to be spent however you want to.

 

After you figure out the dollar amount you spend on average a month in each category, divide each by your after-tax income and multiple by 100. This will tell you what percentage you spend in each category.

 

Warren and Tyagi’s “Balanced Money Formula” calls for your “Must-Haves” to be 50%, your “Wants” to be $30, and your “Savings” to be 20%. How do your percentages measure up? What category needs the most work? Next week we’ll continue our series and discuss Warren and Tayagi’s ideas about making changes where needed to find balance. Again, All Your Worth includes many worksheets and help with figuring out how your percentages add up.

If you want to read an excellent book with some great ideas about how to budget your income, read All Your Worth: The Ultimate Lifetime Money Plan by Elizabeth Warren & Amelia* Warren Tyagi. We first heard of this book from the blog Get Rich Slowly, and we’re very glad we did. It’s a quick, easy read that makes you want to sit down and figure out if your money is “in balance.”

The idea is simple: in order for you to be successful financially in the long run, your money must be in balance, explained by the authors’ Balanced Money Formula. All of your after tax income, no matter what you do with it, falls into three categories: Must Haves, Wants, and Savings. To be in balance, your Must Haves should be 50% of your after tax income, your Wants 30%, and your Savings 20%.

The book provides easy to use worksheets to figure out what you currently use toward each category, and how much you may need to change in order to be more in balance. It also has a number of self tests to determine where you are struggling the most and then has tips on how to change. Warren & Tyagi discuss the “Thinking Traps” that people get stuck in while trying to make a change to their finances that make it difficult for them to succeed.

We believe this book would be helpful to anyone who reads it, even if you feel you’re living well and saving well on your budget. If that truly is the case, then use the information and worksheets to reaffirm that your budget is in balance. But for others, it may be very helpful to see your income broken down into these three categories. We both loved the simplicity of the process and plan on using the ideas in our own personal finances. The idea of the Balanced Money Formula is that once you get your money into balance, you won’t have to worry about it anymore because you won’t be spending too much and you’ll be saving enough. And you’ll know it.

Warren & Tyagi write:

“We can’t guarantee that you will succeed. But we can guarantee that unless you believe that success is possible, nothing will change. If you persuade yourself that you are destined to fail, then that’s one prophecy that will come true for sure. All Your Worth asks for some hard work and some lifelong changes, and that can’t happen if you quit before you start.”

Since we loved this book so much, expect some follow up posts in the coming weeks to discuss it further!

* Sorry for the typo in the original post!

Over the weekend, I (Dawn) went to the North American International Auto Show in Detroit, something I like to do every year. It’s a great show for auto enthusiasts, people who are shopping for a new car, and those who just like looking at all the fancy, expensive cars up close (me).

 

It was a reminder to me how overboard people can go while buying a car. The show cars are gorgeous and have all the features you could want. It’s very easy to look around and start to dream about how amazing it would be to have a car like one of these.

 

If you are in the market for a new car or will be soon, this can also apply when you’re shopping around, especially if you’re looking at a dealership. It’s easy to get caught up in the features and perks, and then rationalize why you should spend that extra money. It’s an easy way to end up with buyer’s remorse.

 

So, to avoid this from happening to you, here are some tips for planning your purchase:

 

  • Shop online first – The web has great resources when deciding on the car for you. You can find anything form reviews, safety ratings, features, to seeing the actual car you may be buying. Use those recourses extensively before you even leave the house. Decide on what car you want and what features you can’t live without (and those you can), so you won’t be as tempted by the cars you may see in the dealership lot. One of our favorite resource sites is autotrader.com.

 

  • Decide on your maximum price – If you decide what you are willing (and able) to spend first, it will help you decide on the type of car and features you can afford. For many people, maximum price will be based on the monthly payment, but for those paying cash for a car, this decision is just as important. If you are financing, we always recommend doing so for no more than 3 years (which will have a higher monthly payment then the more popular 5-7 year loans).

 

  • Decide if you’re buying new, used, or leasing – Again, you can find tools to help you with this decision online. Many sites have calculators to estimate what your payment might look like. Leasing is more difficult because you often have to go to the dealership to even find out the pricing. But knowing beforehand what you want to do will help you when it comes time to sign the contract.

 

While these tips are probably most important while buying from a dealership, they also can be used if you’re buying from a private seller. However, another note to add if you are buying used, make sure you know the full history of the car. There are a lot of used cars that look great on the surface, but may have hidden issues.

 

There is nothing wrong with wanting a nice car to drive, but it’s so easy to get caught up with everything that’s available while picking one out. Remember that you’re buying (or leasing) a car, not investing in one, so be careful how you spend your money.

 

Do you have any tips on how to shop for a car?

We know that sounds crazy, but we’re not talking about minimizing your tax refund through credits and deductions at filing time. We’re talking about adjusting your withholding if you are consistently receiving large refunds year over year. This means that you’re likely paying the government more than you should. Why would anyone want to do that? That’s money that you could be using during the year!

 

We’re not advocating owing taxes at filing time either, but you should try to get as close to break even as you can. This is the perfect time of year to review whether you need to make any changes. As you prepare to file your 2010 return, look over your numbers. How does your withholding number look compared to what you actually owed? Do you think you need to make a change? If you’re unsure, there is information on the IRS website and a withholding calculator to help you determine.

 

Arguments for large tax refunds

There are those who would argue for large tax refunds. They may like the excitement of getting that money or feel it’s the only way they can save for that summer vacation every year. Here are some common arguments we have heard and our reasoning about why they don’t work.

 

  • It feels like free money – While it may feel that way, it certainly isn’t “free money.” It’s your money that you worked for! It’s just being given back to you later than you should have received it. If you’re withholding taxes from your paycheck at a higher rate than necessary, you may really be missing out during the year when the money could be useful (even if it’s for savings).

 

  • It’s the only way I can save – Whatever it’s for, some argue that they count on the refund as savings. And if it is a significant chunk of money, you may feel that you don’t have the discipline to save that much money on your own. But it’s completely interest free! And even though interest rates are low right now, some really is better than none! Compound interest has a major impact on saving money, which you can’t take advantage of it you are getting that money back in a refund. So, a simple way to alternatively save is to set up an automatic savings plan that takes the additional amount you might received in your paycheck due to adjusting your withholding and transferring it into a savings account the day your check is deposited. All you have to do then is not touch it. And since you were living without that money before, you should be able to continue to do so.

 

Take some time to review your withholding, even if you don’t make any changes. It may be worth knowing just how much you may be missing out on during the year.

Last summer on The Simple Dollar, Trent Hamm wrote the post “I Can’t Find a Job in This Economy!” We just came across this post again last week, and we wanted to touch on some of the ideas mentioned and add a few of our own.

Being unemployed is disheartening in the best of times. If you are heading into 2011 without a job, the New Year may not look as bright as it should to you. But in a down economy where the national unemployment rate is high and millions of people out of work, the situation may seem hopeless, especially if you have been out of work for some time.

From The Simple Dollar, we think the following ideas are important to think about:

treat your unemployment like it’s a job and spend at least forty hours a week specifically looking for work.”

“No job is ‘beneath you.’”

You need to look for jobs outside of your local area and accept that you may need to move to find work.”

If you are unemployed, searching for a new job should be your temporary “career.” Spend all the time and energy on searching for a new job that you would working that new job (once you find it). It won’t be easy, and it certainly can be disheartening, but eventually it will pay off. And until it does, you’ll feel better about the time you spent unemployed because it won’t have been wasted.

When you have kids to care for, bills to pay, and a house to keep, feeling that no job is beneath you may be easier to swallow than if you’re young, single, and living with you’re parents. If your situation is desperate, or if you don’t want to see it get any worse, look for work any where. There are jobs available, and while it may not be ideal, it will be a job that pays. Though it shouldn’t stop you from looking for a better fit, but in the meantime, it can help float you and your family.

Moving to a different area is another idea that many find hard to swallow. But it should be kept as an option, even if it is a last resort. However, don’t limit your search. You may find a great opportunity elsewhere that would make a move a possibility, and you would have missed out on if you were only searching locally.

Hopefully your hard work to find a new job will pay off in 2011!

Happy New Year! Since 2011 has officially started, we wanted to talk a little bit about New Years resolutions. Everybody makes them, though it seems many don’t keep them. If you are like many people, your resolution may be losing weight and/or getting healthy. Since this is a very popular choice for a resolution (which it should be!), we thought we would discuss two of the key issues required: diet and exercise.

 

Diet

Whether your goal is losing weight or just eating healthier for a better life, diet is an important component. Unfortunately for your finances, eating healthy isn’t often cheap. Easy, fast, and cheap meals are often made with junk foods, though with a little research and planning, the potential costs for eating healthy can be eased.

 

Here are some ideas for planning a healthier diet:

 

  • Plan your meals – Spend some time planning out your meals for the week: breakfast, lunch, and dinner. Not only will this help you to avoid eating junk food because you don’t have anything else planned, it will help you to plan the cost of the meals. You are much more likely to spend too much at the grocery store if you don’t know exactly what you’ll eat during the week.
  • Utilize weekly deals and coupons – Many grocers have weekly specials that show what is on sale for the week. You can use these while planning your meals. Also, make use of as many coupons as you can. A good place to find coupons is online. Google “grocery coupons” to find many resources that may help you while planning.
  • Shop at multiple grocers – If you live in an area where you have access to multiple grocery stores, you can utilize this by shopping different store’s deals. This will definitely require leg work, but if you’re willing to put the time in, it can save you money.

 

Exercise

Exercise is another key component to losing weight and getting healthy. People often make split second decisions on high cost supplements to help them lose weight. Before doing so, think about the following:

 

  • Joining a gym – Many people will join a gym at the beginning of the year to help them with their resolution. While there is nothing wrong with belonging to a gym (we both do ourselves), consider the following before signing anything:
    • Find a gym that requires no contract. Many gyms have all the bells and whistles a gym can offer, but you have to sign a contract for a certain length of time. So, if you decide after 6 months you no longer want to pay, you are locked in for the full time frame on the contract. Look for a gym that is a month to month payment that can be canceled at any time.
    • Be sure to visit several gyms before you sign up. You can usually visit a gym to try it at no cost for at least one visit. If you find several gyms that seem to be a good fit, be sure to exercise at each at least once to see where you want to sign up.
    • Ask if there are any deals. Gyms often run deals for signing up, so make sure you ask if there are any you can take advantage of or if there is one coming up that you could wait for.
  • Buying exercise equipment – If you decide that you would rather exercise at home instead of paying for a gym, be sure you know exactly what equipment you want to buy before doing so. Here are some things to think about:
    • Research the type of equipment you want. Go to the store and try it out. Decide whether you’d rather have a treadmill or an elliptical, or maybe something else you never considered. Exercise equipment is not cheap and not something that you can easily return (if at all), so be sure of your decision before making any purchases.
    • Consider what you need the equipment to do. Exercise equipment often have many different levels of features (and many different costs to go along with them). Don’t buy a $1,500 treadmill that goes up to 12 mph and has 50 different cardio workouts when all you want to use it for is walking daily at 3 mph and a $400 treadmill would have done.
    • Consider the space you have available in your home. If you have limited space to work with, you may have to buy a certain type of equipment because it’s all that fits. Also, make sure that you put it somewhere that makes to easy for you to use it. If you only plan on using it when you’re watching TV, make sure you have space in a room with a TV. Sounds simple, but you should definitely plan ahead to be sure that the equipment would even be functional in your home.
  • Consider low cost alternatives. Do some research online for exercises not requiring a gym or expensive equipment. Utilize some low cost exercise alternatives, such as free weight and resistance bands, and find a local neighborhood or park to walk. If you have the motivation, you can get a good workout without spending significant money.

 

Do you have any other tips about diet and exercise? Good luck with achieving your New Year’s resolutions, whatever they may be!