Last week we talked about the “Balanced Money Formula” as outlined in All Your Worth: The Ultimate Lifetime Money Plan by Elizabeth Warren and Amelia Warren Tyagi. We discussed how you can figure out your own percentages for each of the categories in the formula: “Must Haves,” “Wants,” and “Savings.”

 

Once you have gone through your own finances, then what? How do you make the changes you may need to get your money into balance? What if you don’t feel you can ever get to the 50-30-20 split that the formula calls for? Warren and Tyagi discuss in depth how to go about dealing with these questions, but we’re only going to touch on a few points they make that we think are key, starting with your “Must Haves” and “Wants.”

 

If you’re like many people, once you figure out your own percentages, you’ll probably see clearly where your finances need the most work. Maybe you spend too much on your “Must Haves,” forcing your “Wants” and “Savings” down. Or maybe your “Wants” are too high, and you feel like you’re living frugally elsewhere and still can’t get ahead. Whatever your situation, Warren and Tyagi suggest that the further you are from balance, the more stressed you will become. So, starting out with this exercise, make the commitment to make changes to the way you handle your money. If you can’t get into perfect balance right away, do what you can to move closer, and you’ll be much better off.

 

“Must Haves”

First, Warren and Tyagi suggest you “Set a Goal.” Figure out, based on your after-tax income what you should be spending on your “Must-Haves” (multiple it by .5). When you subtract your “Must Haves” goal from your current number, it will tell you how many dollars you will need to take away from your “Must Haves” to shift elsewhere (if you are spending too much on your “Must Haves” – if not, move on to the “Wants” discussion).

 

Next, you need to decide what to cut. According to Warren and Tyagi, you should first “Cut the Easy Stuff,” such as the cost of insurance and getting rid of any long term contract you have making a “Want” a “Must Have.” Next, “Cut Where It Hurts a Little,” such as possibly selling your car or getting a roommate. Last, if you still are far out of balance, you may have to “Consider radical surgery,” like finding a new job or moving. There are many pages in the book dedicated to helping you make these decisions, which we will not get into the detailed help offered, but what we can say is this will require work on your part. You must do some research on where you think you might be able to cut. It won’t be easy and it will take some time, but once you make all the appropriate cuts, you will feel much more comfortable, even if it means some pain along the way.

 

“Wants”

After looking at your “Must Haves,” you should look at your “Wants.” According Warren and Tyagi, your “Wants” are just as important as your “Must Haves.” You need to have some fun, and to make sure of that, you need to know exactly how much you can afford to spend. First, “Set a Clear Limit—How Much for Fun.” So, using your updated “Must Have” number, and your “Savings” goal (after-tax income multiplied by .2), you can figure out what you could comfortably spend on “Wants” (after-tax income minus “Must Haves” and “Savings”).

 

Once you have this number, what do you do? “Shift to Cash” is what Warren and Tyagi suggest. We wrote the post “Tracking Your Personal Spending” about using cash instead of a credit or debit card for your personal spending money, and this is basically the same concept. If you have a finite amount of cash which to spend on your “Wants,” you will always know how much you have left and what you can afford to do with it. To decide on how much cash you should have, first subtract out what “Wants” you pay for regularly in your bills (cable/internet, etc.), and whatever is left over, you can pull out in cash and spend how you want.

 

Hopefully, we covered enough for you to get started. Obviously, we have simplified the ideas in All Your Worth and summarized over 100 pages into a few paragraphs, but hopefully the basic ideas are still there. We can’t stress enough that if you are serious about making changes to how you handle your finances, this book has great ideas. Next week we’ll cover your “Savings” and Warren and Tyagi’s ideas on how to handle that 20%.

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