The New York Times
The 10 Commandments of Money: Survive and Thrive in the New Economyby Liz Weston
For previous generations, living within your means was a simple formula. Now, with the staggering rise in education, health care, and housing costs, millions of people find themselves skating from paycheck to/b>
From the #1 personal finance columnist on the Internet (Nielsen/NetRatings)-a clear prescription for financial health in the 2010s and beyond.
For previous generations, living within your means was a simple formula. Now, with the staggering rise in education, health care, and housing costs, millions of people find themselves skating from paycheck to paycheck with no idea how to move forward.
As the most-read personal finance columnist on the Internet, Liz Weston has heard the questions and has the answers. Her 10 Commandments of Money will help readers avoid critical mistakes, survive the bad times, and thrive in the good ones. Just a few of Weston's invaluable pointers include how to:
• Balance Your Budget
• Pay Down Toxic Debt
• Get the Right Mortgage
• Pay for College
• Save for Retirement
• Maximize Your Financial Flexibility
Liz Weston's goal is to provide THE practical guide to the brave new world of money. What Sylvia Porter's Money Book was to the 1970s, The 10 Commandments of Money will be for the 2010s.
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The New York Times
"A wonderful basic personal finance book [with] enough counterintuitive ideas to keep even people who know a bit about personal finance reading further."
"Where other authors often get it wrong, Weston gets it right. She digs into the data like nobody else."
"Where other authors often get it wrong, Weston gets it right. She digs into the data like nobody else." — Elisabeth Leamy, ABC News
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Create a Budget That Works in the Real World
THE OLD-SCHOOL RULES:
Live within your means.
THE BUBBLE ECONOMY RULES:
Live to the max, with easy low payments.
THE NEW RULES:
Use the 50/30/20 budget to know what you can really afford and what you can't.
The first step in creating a financial plan that works is to create a budget that works. But as the financial world has gotten more complex, so, too, has the budgeting process, and many people wind up flailing. People's situations vary so widely that there's no cut-and-dried answer to "How much should I be spending on X?"
THE TRADITIONAL ADVICE GOES SOMETHING LIKE THIS:
- Gather up your pay stubs and bill statements from the last few months.
- Carry a notebook and pencil for a few weeks so you can write down every expenditure that's not captured in your bill statements.
- Combine your notebook entries with your bills to see where your money is going.
- Don't forget to budget savings for retirement, college savings, emergency funds, your next car purchase, your next vacation . . .
- Slice and dice and tweak until you have a budget that matches your income—at least until the next expense comes along that you forgot to account for and that blows your whole plan out of whack.
This track, trim and retrench method actually can work if you're persistent about it and if your basic expenses are reasonable relative to your income.
If your overhead is too high, though, the hours you spend crafting and trying to follow a budget are going to be a huge waste of time. Now, frankly, there is so much more to keep track of than there used to be that formulating this kind of budget can also make you a little crazy. You simply won't have the ability to simultaneously
- cover your current bills,
- pay off your past (your debt),
- save for the future (retirement, college, emergencies) and• enjoy your life today.
One or more of those four categories will wind up getting sacrificed, no matter how good your intentions or how much time you spend fiddling with a spreadsheet.
On the other hand, I can't tell you exactly how much you should spend in any given category. A twenty-something with no debt might be able to afford a much bigger rent payment, relative to her income, than a family juggling car payments, student loans and child care. A homeowner in the Northeast will almost certainly spend more on utilities than his counterpart in California. People covered by traditional pensions can get away with saving less of their incomes for retirement than those who have a 401(k) with no match, or no workplace plan at all.
There is, however, a budget system that can work on just about any income and in virtually every situation. It will give you the flexibility you need to help you live your life while building financial security and minimizing the chances a setback will send you over the edge.
It was created by Harvard bankruptcy professor Elizabeth Warren, who based it on her years of studying families on the brink. The budget is simple, if not easy. It's the 50/30/20 budget. Here's how it works:
You start with your after-tax income. That's your gross pay minus any wage-based taxes, such as withheld income tax, Social Security and Medicare taxes and disability taxes. If your employer deducts other expenses from your paycheck, such as 401(k) contributions, health insurance premiums and union dues, add those back into your net pay to get your after-tax income.
401(k): A workplace retirement plan that allows employees to contribute pretax money to various investment options. The money grows, tax deferred, until it's withdrawn. Many 401(k) plans—and their cousins in the not-for-profit world, 403(b)s—offer a company match, where the employer also contributes money to the worker's account. Theoretically, a 401(k) can provide more money in retirement than a traditional pension plan, but many people mess up by starting too late, saving too little, cashing in their plans when they change jobs and taking either too much or too little risk with their investments. We'll discuss 401(k)s more in the chapter on retirement.
You aim to limit your "must-have" expenses to 50 percent of that after-tax figure. "Must-haves" include all the basic expenditures you really need to make each month: outlays for housing, utilities, transportation, food, insurance, child care, child support, tuition and minimum loan payments. Not sure if an expenditure is a must-have? Here's the key: If you can delay a purchase for a few months without serious consequences, it's not a must-have. If you're contractually obligated to pay something (a credit card minimum, child support or a cell phone bill), then it is a must-have, at least for now. I'll go into this in further detail later in the chapter, but here is how I would break down the basic must-haves:
ExpenseConsequence of not payingRent or mortgageEviction or foreclosure process beginsUtilitiesNo water, heat, electricityCar payment; transportation costsCar is repossessed; you cannot to get to work Child careYou cannot leave home to get to workChild supportChild's welfare is threatened; possible legal actionTuitionEducation at riskFoodHunger; medical problemsMinimum loan paymentsCredit score damage; possible legal actionInsurance premiumsLoss of insurance, which can lead to debt or bankruptcy in the event of illness or accident
Your "wants" can consume 30 percent of your after-tax pay. Vacations, gifts, entertainment, clothes, eating out and other expenses are all "wants." Some bills you pay might overlap the two categories. For example, basic phone service is a must-have. But features such as call waiting or unlimited long distance are wants. Internet access and pay television are two other expenditures that can feel like must-haves but usually are wants, unless you're on some kind of long-term contract. Remember, if you can put off the expenses without major fallout, or you can find a substitute, it's a want rather than a must-have. You may really love your broadband connection, for example, but if you had to live without it you could still access your e-mail at the local library or coffee shop. You may find your smartphone to be an incredibly useful and handy device (I sure do), but that doesn't make it a must-have unless you're on a contract. If you're paying month to month with no contract, it's a want.
Savings and debt repayment make up the final 20 percent of your budget. To achieve financial independence and minimize the chances of disaster, you need to get rid of consumer debt, save for retirement and build your emergency fund. Any loan payments you make above the minimum belong in this category, as do contributions to your retirement and emergency funds.
On my Web site, AskLizWeston.com, you'll find a link to a calculator that can help you create your 50/30/20 budget. But here are some theoretical examples to give you an idea how this might work.
Jamal is fresh out of college with an after-tax income of $3,000 amonth. He has a minimum student loan payment of $200, his employer-subsidized health insurance costs him $75, his bus pass to work costs him $100 and groceries set him back $225. So far, his must-have expenses add up to $600 a month, so he should spend no more than $900 a month on rent and utilities if he wants his must-haves to equal no more than 50 percent of his after-tax income.
Under the 50/30/20 plan, he'd have $900 a month to spend on eating out, clothes, vacations and other wants. The remaining $600 should be earmarked for retirement savings and debt payoff. Since Jamal has no other debt and his student loan rates are low, the entire $600 can be devoted to savings.
Maxwell and Minnie are in a whole different boat. They bring home a lot more—their combined after-tax income is $8,000 a month—but they have more bills, including a mortgage ($2,400, including taxes and insurance), credit card bills ($150 minimum payment) and a car loan ($400), as well as more insurance needs (life and disability coverage that costs $300 a month, as well as health insurance that costs about the same). They spend another $450 on basic groceries and utilities (lights, water, gas, sewer), bringing their must-haves to the 50 percent mark of $4,000. They spend $2,400 on their wants—everything from their cable TV subscription to holiday presents—and the remaining $1,600 is split between retirement savings and extra payments against the credit card debt.
Now let's change the scenario a bit. Let's say Max and Min didn't know about the 50/30/20 plan. They just signed a $450-a-month lease on a new car and bought smartphones that lock them into a two-year contract at $150 a month, bringing their must-haves to about 58 percent of their income.
There isn't much wiggle room in their other must-have expenses. They may be able to bring down their food and utility expenses a bit, but not enough to compensate for the $600 in additional costs to which they've committed themselves.
On the car lease, they're pretty much stuck. It's tough to get out of one of those without a serious black mark on your credit. Max and Min could back out of the cell phone deal and pay the early termination fees, which as of this writing range from $150 to $350 per phone. When money is really tight, that can be the best of bad options, since returning to basic phone service or a prepaid plan can save you enough to offset the fee within a few months. But Max and Min might decide the phone service is something they want to keep.
Meet the Author
Liz Weston is the most-read personal finance columnist on the Internet, according to Nielsen/NetRatings. Her twice-weekly columns for MSN Money generate 10 million page views each month. Millions more read her Q&A columns that appear in newspapers including the Los Angeles Times and the Cleveland Plain Dealer and she is now writing a regular column for AARP. She is a regular commentator on American Public Media’s “Marketplace Money” and frequent contributor to National Public Radio’s “Talk of the Nation” and “All Things Considered.” Her television appearances include “Dr. Phil,” “Today Show,” “NBC Nightly News,” Fox Business and CNBC’s “Power Lunch.” In addition, Weston has a highly interactive following with readers engaged in multiple venues: her blog, her fan page on Facebook (17,000 fans and building), her followers on Twitter, and her readers on the Your Money message board, MSN’s most active with thousands of daily postings.
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