Financial Problems Solved In All Your Worth (Monday Musings 75)

Posted by iNoticiero on jueves, 20 de febrero de 2020 0

I've read a lot of personal finance books over the years, and Warren and Tiyagi's All Your Worth is undoubtedly the best one. Warren and Tiyagi's (W&T) book was written for the average American who lives paycheck to paycheck. When our car breaks, or any unforeseen emergency such as hospital bills occur, we're thrown in for a loop, and then barely struggling to pay crushing high interest credit card debts as a result.

Indeed, other personal finance books I've read are for those who are already doing well and they suggest how to increase your retirement funds. Or even worse, books that report you can do extremely well if you rely on royalties instead of salaries. I'm sorry, but how many of us can be a Stephen King or a member of the Beatles? Other books would discuss coupon clipping (who has the time?) and laud people who cook their eggs while their dishwasher is running, to save on electricity.

All Your Worth discusses the above issues, and W&T are not exaggerating at all about the other finance books, since I've read them myself as noted above. The other encouraging thing about their book is that they're very empathetic as to why you're struggling financially.

They explain that Americans today are struggling paycheck to paycheck in depth, as opposed to in the past. Back then, credit cards aren't handed out like candy, so you can't overspend, and you can only rely on cash. If there's no cash in your wallet, you can't buy.

Further, back in the day, you can't overspend on auto loans and mortgages if you don't have enough income and cash down. Banks wouldn't allow you to buy too much house or car, unlike today. So Americans today can easily overextend themselves by buying too much and living beyond their means, inadvertently.

After empathizing and acknowledging why Americans are struggling today, they then go into the basic tenants of why their plan works, using the analogy of having a balanced diet.

You don't want to be so strict with your diet (i.e the penny pinching route) because you may binge on doughnuts due to deprivation, or if you have very strong-will, you don't want to be miserable for the rest of your life. Nor should you expect to lose weight or be healthy if you eat whatever you want, calories and poor nutrition be damned (i.e. spending all your money on wants, and neglecting crucial bills and savings).

Therefore, W&T's balanced formula is simple:

1. 50% of your after tax salary should go to must-haves (mortage, rent, utilities, food), things that you will continue to pay for even if you lose your job.
2. 20% goes to savings (that includes money paying off credit card bills, retirement, emergency fund).
3. A whopping 30% goes to whatever you want, whether it's something lofty like giving to charities, or superficial such as cat figurines.

They explain why this formula works, because if you're laid-off, you're entitled to unemployment income which is 50% of your paycheck, though I believe the US government is trying to get rid of this "entitlement" (this should be a basic right especially as you paid into unemployment benefits, per the mission of the US's "pursuit of happiness"). Because your basic necessities are 50%, your unemployment can cover until you find work.

W&T recommend that you pay for things that you want in cash because of the physical reminder (it's amazing how much you can rack up using credit cards). Therefore, if you find you can spend $100/week on whatever you want, you will bring the $100 with you.

The cash only plan worked when I used the book about 5 years ago. I recall wanting a Godiva chocolate shake but since it was at the end of the week, I only had $3 left in wallet, so I had to wait until next week to get the shake. When next week arrived, I no longer had this craving, and spent the money on something else that I wanted.

By carrying cash in that way, it prevents you from going over your budget, making sure that your must-haves and savings are intact. Because you're sticking to the formula as described, you will never have to worry about money again! Of course, financial situation changes, and W&T cover emergency scenarios in their book.

However, most Americans won't have financial emergencies on a weekly basis (i.e. that's why we have the cliche of the daily grind where nothing ever changes), so most of the time, you'll find financial peace following this balanced formula. Further, in the savings portion of the book, you will put aside for emergencies to mitigate any issues that may arise.

W&T include worksheets where you plug in the formula and see how close you are to a balanced budget. If you're not within the 50% of must-haves, they troubleshoot in the book, which goes beyond the scope of this review. If you fall outside the 50%, the book can help you be in balance.

Does this plan work though? For the average Millenial income of 24K (after tax total is around 21K), it seems to only work if you live with your parents and pay minimal or better yet, no rent. Perhaps paying rent by doing all the chores in the house. I included $300/month for college loans, which is the average Millenial debt. Please see the Millenial worksheet here for details. 

However, if you make the average American salary of the alleged 50K (after tax is around 31K per tax calculator), this book works, as long as you don't buy too much house or car.  You have enough savings, and your wants are $37/week, though it's not a balanced formula. The average 1 BR apartment nationwide is $1000/month. Please see the Avg US Salary worksheet here for details.

On the average American salary, if you live on your own, you can spend $37/week on whatever you want, as opposed to around $126 if you're a Millenial living with your parents (pay no or minimal rent). Even with the average American salary, you will NOT be in a balanced formula range, unless you live with parents.

In other words, I was 100% right that even on average American salary, you should NOT be ashamed about living with your parents as discussed here (pats myself on back). Even though I conflated Millenial income as the average American income, you'll still struggle living on your own on the average 50K gross tax income because of the imbalance skewing towards the majority of your income going to must-haves.

Therefore, I'm very worried for the vast Americans who are living on minimal wage. I can't think of any places where rent is zero, correct me if I'm wrong. The only answer is to live with family, a loved one and leverage at least a two person salary.

In fact, the last resort scenario, W&T recommended having a trusted person move in with you so you can share the costs of rent/mortgage!

As for food, since a lot of the food we buy are convenient (and hence more costly) and we sometimes splurge on junk food, W&T recommend that you put aside cash for food, so you can see how much you should spend, along with your fun money.

W&T do take into our fears of what if we run out of money at the end of the week, and there's no food for the next day or so until the next week cycle. They recommend that you sock away (pun intended) $50 in your sock drawer to be used in those situations, and to replace that $50 as soon as you can. If you notice that you're running out on food, you will soon make sure that you don't spend that food money on fun.

Because you're limited to a set amount for your wants, W&T go into the psychology of money, and making you think exactly what you want to buy with this limited amount, so that you can make a purchase that has meaning to you and provide maximum joy, as opposed to emotional spending. These include buying things to "impress others" that usually doesn't make you particularly happy, buying other people's love, paying the entire restaurant bill to look generous, spending to feel better because you're depressed, and so forth. They have a self-test that you can take to determine if you're an emotional spender on p. 125. I find these self-tests extremely helpful as it helps you to hone in where your vulnerabilities are in specific, concrete ways.

An extreme case I can think of is you buy a Rolex watch as that "is" impressive", come to find out you have contact dermatitis and exacerbates your carpal tunnel, so it goes into sock drawer. But you could've spent that money on something you truly enjoy such as (for us gamers at least) a highly anticipated game title. In other words, spend the money on something that you truly want, not out of emotional spending.

After doing the worksheets, and you find that you're within range, W&T then go into what to spend on your savings for the future. If you're in the balance, you have 20% to spend on savings. The first step is to save up $1000 for emergencies.

The next step is to pay off your debts as they sap your potential cash flow for the future. Imagine being debt-free, this is a future of freedom! 

W&T suggest that you look into how you got into debt in the first place, so in the future, you won't get stuck back in crippling debt. They include a self-test to see where your debt comes from on pp.139 to 140. Once you hone in on where you collected debt, you know what not to do the next time around.

Next is to write down a list of all your debts. If you have credit card debt of average 18%, it makes sense to drain your savings and liquidate your accounts except your retirement accounts due to tax penalties. The rationale is that your money in savings is only accruing 1% or less so by putting it towards credit card, you're in effect making 17% (credit card rate - interest you would've made in savings account).

In terms of debt, the first priority is to spend it on any back-payments on rent or mortgage (you need a roof over your head), car (you don't want your car repossessed) and child support (you don't want to end up in court). Once you clear that out, they recommend paying off the debt that bothers you the most.

For me, although it makes more sense to pay off the larger debt with higher interest rate than paying off the smaller debt with lower interest rate, paying off the smaller debt is psychologically freeing. You cross that debt off your list and you have a sense of relief since you're no longer beholden to that company.

Let's say that the small debt costs $20/month. Once you pay off that small debt, I then take that $20 that I otherwise would spend on that debt to the new debt that I want to tackle.  If this new debt costs $100/month and I complete that out, I now have $120/month free to put it toward the next debt. You can see how this snow-balls and you eventually pay off all your debts. 

After paying off all your debts, the next step is to create a security fund which is equal to your must-have expenses x 6 months in case you lose your job.

Now that you have a solid savings, you want to create a retirement fund and/or set aside savings for home, college for the kids, and so forth.

Sign up for a retirement plan at work; I tend to like the Retirement Funds because it does the diversification for you automatically. Barring that, you can set up your own IRA (Individual Retirement Account). I like the Vanguard Retirement Fund 2035 (or whatever year you're going to retire) as it balances your portfolio to stocks (more aggressive) to bonds (more conservative) as you get older. This is actually automated, so the expense ratio (how much they take out) is a mere 0.14% fee. It costs $3000 to set one up.

I was pleasantly surprised because during my residency and fellowship, I had 10% of my paycheck taken out toward the Vanguard Retirement Fund 2035, so I didn't miss this money, and yet I ended up with a small nest egg due to profits (i.e. well below a million that would be considered a nest egg, but a handsome amount).

The last chapters of this book cover issues that occur when you're in a relationship and how to deal with conflicts. The next chapter is how to go about the right way to buy a home. And the last chapter is about bankruptcy and getting back on your feet. In other words, the book is very comprehensive and indeed gives you a solid lifetime money plan.

I would borrow this book from the library, do the worksheets and take notes on the troubleshooting parts of the chapter. It helps to use an Excel-like spreadsheet as it can quickly recalculate the numbers for you - the example worksheet links that I included above, can be a basic template for you to follow.

Conclusion: If you make 31K after tax income or less, it's highly advised that you live with someone whom you can trust to leverage a two-person salary to live comfortably, as per All Your Worth.

Once you notice that you CAN live within these book's guidelines (i.e. you no longer have to worry about basic necessities or having financial stress, and you live in a safe environment), you can then move to working on Happiness as described in The How of Happiness!