For the past few weeks, we’ve been spending a lot of time discussing details from the book All Your Worth: The Ultimate Lifetime Money Plan by Elizabeth Warren and Amelia Warren Tyagi. If you’ve been following our series, you know that we love the idea of the “Balanced Money Formula” and think that it can be a useful tool for everyone. This will be the last post of the series, and we’ll discuss Warren and Tyagi’s ideas on how to make adjustments to your “Savings.”

We think the discussion on “Savings” is more complicated than for “Must Haves” and “Wants.” For “Savings,” it’s not a matter of figuring out your percentage and deciding on the best areas to make changes. Once you figure out how much money you should be saving to reach the “Balanced Money Formula’s” goal of 20% of your after-tax income, what should you do with the money? We’ll discuss what Warren and Tyagi suggest, and then we’ll also add our own commentary where our ideas differ from those in All Your Worth.

In their talk about the “Savings” category of the “Balanced Money Formula,” Warren and Tyagi stress that any money that you use toward paying down debt is considered savings. We think this is an important distinction that many people don’t see. Warren and Tyagi call all debt (aside from your mortgage, car loan, and student loans) “Steal-from-Tomorrow debt.” When you have this type of debt (credit cards, back payments, other personal loans, etc.), all you are doing is throwing money away that could be used toward your future by paying on these debts. This problem can be compounded by adding to this debt year over year. As we discussed previously, if you are creating new debt, you are negating any other savings you do.

First, Warren and Tyagi suggest you add up all of your “Steal-from-Tomorrow” debt. However, their ideas on how to pay down that debt are where we differ in our thoughts. Warren and Tyagi suggest first using all the money you have saved anywhere but your retirement accounts and use it against the debt (leaving only $1,000 in the bank for emergencies). Then, if you still have debt left, use all 20% of your “Savings” money to pay off the remaining debt. We think that this can be a very dangerous situation to get into, and we’ll explain why a little bit later. But, Warren and Tyagi do have some great tips on getting out of debt, things you should consider doing and things you should never do.

After your “Steal-from-Tomorrow” debt is completely paid off, Warren and Tyagi suggest you “build a 6-month Security Fund” (6 months of your “Must Have” number). Once you have that saved, the next step is what they call “a lifetime of wealth creation.” Once you are at this stage, they suggest you save 10% of your after-tax income in a retirement fund, and the other 10% should be split between paying off your mortgage (5%) and saving for any other dreams you have, whatever they may be (5%).

Now, let’s go back and explain why we think that Warren and Tyagi’s plan is potentially dangerous. While we completely agree that carrying debt has a big negative impact on your future, and we also agree that you will never be able to really get ahead while carrying debt, there are some major differences in what we believe and what Warren and Tyagi believe. First, if you are trying to straighten out your finances and are carrying a significant debt load, leaving yourself no security fund while paying off your debt can be very dangerous. What if you lose your job or become disabled? What if your car breaks down and you need $2,000 to fix it? You could potentially cut out your “Wants” and use those dollars, but will that be enough?

Warren and Tyagi only recommend keeping $1,000 for emergencies in the bank, and while the last 30 pages or so of All Your Worth is dedicated to what to do when things get tough (and it has some great ideas), we think that using any savings you currently have and dedicating the full 20% of your after-tax income to paying off your debt has the potential to land you right back where you started if something major goes wrong. The temptation to use your credit cards or take out loans may be too much if you lose your job and you have no savings to live on.

Second, we would not recommend suspending all retirement savings while paying off your debt, especially if you are closer to retirement.

We would recommend a plan with slight variations from Warren and Tyagi’s. First, if you already have at least 6 months “Must Haves” in the bank, leave it there. If you have additional dollars that you feel you could put to better use paying down debt, then you can do so, as long as you feel comfortable with what you have for emergencies. If you don’t have any savings currently in the bank, set aside a portion of your 20% into the bank for this purpose until you reach your “Security Fund” goal.

Next, decide on what you should continue saving for retirement. If you have an employer matched retirement plan, you should save at least enough to maximize what your employer will match with no exceptions. The benefit of this free money is too great to miss out on. If you don’t have access to this type of plan, it will be up to your discretion as to whether or not you want to suspend retirement savings while you pay down debt. If you are younger, it may make sense to do so, as long as you are sure to start up again as soon as your debt is paid off. If you are closer to retirement, suspending all retirement savings may be detrimental to your future.

After you decide how much you should set aside for emergencies and retirement, then decide on what your debt repayment plan will look like (see our recommended plan, Debt Rollup). While this modified plan differs from Warren and Tyagi’s recommendation and may take you longer and cost you more money in interest, we feel you will be much more secure. And as long as you stick to your repayment plan and stop creating new debt, you will still get to be debt free.

The rest of Warren and Tyagi’s “Savings” plan, “a lifetime of wealth creation,” we agree with. If you have already paid off your mortgage or don’t own a home, you can add the 5% designated to that category to either retirement or dreams savings however you want. Once you reach this stage of the plan, you will hopefully feel very little stress when thinking about your finances.

Again, we have condensed a lot of pages into a short summary of the ideas in All Your Worth. We hope that you have enjoyed this series and that we have convinced you that this book is worth the read!