All Your Worth: The Ultimate Lifetime Money Plan

Part One

6 Steps

to a Lifetime of Riches

1

Step One:

Count All Your Worth

Ah, to have enough. Enough money to pay the bills. Enough to have a little fun. Enough to put something aside for the future. Enough to feel some real confidence. Sounds good, doesn’t it?

Have you ever wondered why one person can manage just fine on $40,000 a year, while another person is in big trouble on $140,000? The second person isn’t spending wildly on trips to Vegas or bathing in grande lattes at Starbucks. And the first person isn’t wearing 20-year-old hand-me-downs. So what’s up?

The difference comes down to one simple, but very powerful, idea: Get your money in balance.

What is balance? You’ve heard of a balanced diet, with enough of each of the basic food groups. Balancing your money follows the same general idea. The right amount of this, the right amount of that, and not too much of any one thing—and you have the formula for a sustainable, lifetime plan. When your money is in balance, you spend just the right amount on each of your major expense categories. You allocate a certain amount to what you need, like your house and your insurance. That’s a little like the meat and potatoes—the stuff that fills your belly and keeps you from going hungry. You also allocate a certain amount to savings, so you can get ahead, each and every month. That’s like your vitamins and your exercise program—it’s the stuff that helps you get stronger and healthier, so you’ll be better off tomorrow than you are today. And last comes the money that’s just for fun. This is for a trip to the movies and a new set of speakers (and an occasional ice-cream cone!), because life is about more than just boiled vegetables.

All Your Worth balances your money into these three categories:

Your Must-Haves (the things you need)

Your Savings (the money you save)

Your Wants (the stuff that’s just for fun)

This is just like a diet where you look at your carbs, your protein, and your fat intake. In fact, it is even simpler than a diet, because we won’t get into complex versus simple carbohydrates or polyunsaturated fats. There are just three categories, and every dollar that you spend falls into one of these three categories.

We’ll explain each category in more detail later on, but for now understand this: Getting these three categories right will be the key to getting your money into balance. It’s that straightforward.

If something gets out of balance, you can spot the results pretty fast. If you start to go hog wild on potato chips, the effects will show up on your hips. Likewise, if you blow too much on designer clothes or a brand-new luxury car, you’ll feel the pinch in your wallet right away.

When you get your money into balance, your money worries fade away. It’s like a balanced diet: If you know you should have four servings of meat, you don’t worry about whether it’s okay to order the roast chicken. Likewise, if you know it’s okay to spend a certain amount on fun stuff, you don’t have to constantly ask, Can I really afford this? You already know what is okay, so you can relax and enjoy your money.

Balancing your money

is the key to having enough.

Step One will help you master the principle of financial balance. By the end of this step, you’ll know where you’re starting from and where you need to go. As any good general will tell you, knowing exactly where you’re headed is half the battle—and this is only Step One! So let’s get started.

The Must-Haves:

Why the Old Advice No Longer Applies

You may already have a sense of where your spending is out of balance, in which case this will be pretty easy. On the other hand, you may not have a clue—and that’s okay too.

Later in this chapter we’ll use a step-by-step process to help you determine your exact financial balance. For now, let’s get a quick sense of your starting point.

Self-Test: Are You Heavy on the Must-Haves?

We start with the Must-Haves, which are the heart of your Balanced Money Plan. Later on, we’ll give you exact guidelines for figuring out what counts as a Must-Have, but for now, just think of these as the basic bills you need to pay each and every month like your mortgage and your car payment. Respond with True or False to the following statements:

How many statements did you agree with? If you marked True more than once, you are probably heavy on the Must-Haves. For you, the old financial advice no longer applies.

What do we mean by the old advice? We bet you have heard it before. Your mother-in-law, some expert on TV, or your significant other says something along the lines of, You’re in trouble because you buy too much stuff. If only you wouldn’t buy those designer jeans (or restaurant meals or satellite TV) all your problems would go away. The advice is nearly always followed by that self-righteous little shrug, the one you can see even over the telephone, the one that seems to say, If only you weren’t so superficial and silly. Oh well, I guess not everyone is as enlightened as I am. Sound familiar?

We’re going to let you in on a secret. For an awful lot of folks, that old mother-in-law advice is just plain wrong.

But before we explain why the old advice is wrong, we need to start by saying that it used to be right.

Remember how we told you back on the very first page of this book that the rules have changed? This is one of those rules. Back when your parents were young, it was a pretty reliable rule that if they held regular jobs and lived regular lives, their money was pretty much in balance. Why? Because your parents just couldn’t spend all that much on their basic monthly bills. If they earned a middle-class income, the odds were good they could afford a middle-class home without much stretching—and they could buy that home on Dad’s salary alone. Your folks didn’t have to hire a whiz-bang accountant to figure out what they could afford. All they had to do was walk down to the local bank to apply for a mortgage. If your parents tried to buy a home that cost more than they could manage, the bank just wouldn’t lend them the money. Mom and Dad and their friends didn’t have to worry too much about getting in trouble because it just wasn’t possible to take on a mortgage that was more than they could afford.

The same held true in other areas. If your dad wanted to buy a car that was more than he could really afford, he couldn’t get the car loan. If your mom wanted to rent an apartment that was out of balance with your family’s income, the landlord wouldn’t rent it to her. If your parents wanted to take out a loan—say, for an addition on the house or just to make ends meet for a while—they had to meet with a banker, face-to-face, to explain why they wanted the money. The banker would have asked for pay stubs, tax returns, and all kinds of financial records, so he could evaluate the prospects for repayment. And if things looked out of balance, the banker would have rejected the loan.

As a result, in those days it was really, really rare to spend too much on the basic monthly bills. Why? It’s not because your parents’ generation was smarter or thriftier or more in touch with what matters. No, things were different in your parents’ day because the rules were different. Your parents lived in a time when the government strictly regulated the banking industry. The amount of interest a lender could charge was tightly limited, so banks had to be very careful to lend money only to people who could comfortably pay them back. As a result, in your parents’ generation there were no zero-down mortgages. Almost no one was house poor, spending too much on a home or apartment. There were no offers on TV to cash out your home equity. No one had a car payment the size of Texas, and car leases hadn’t even been invented.

The rules were different in other ways. Tuition at State U was less than $1 a day, so no one started out life with a six-figure student loan. Once someone found a job, if they worked hard, they could pretty much count on keeping that job until it was time to collect a gold watch at retirement. No one trembled in fear over the prospect of mass corporate layoffs that swept out even the hardest-working employees, and downsizing referred to the size of a lady’s dress, not the size of the workforce. The boss generally picked up the tab for health insurance and a pension, so no one spent half their salary on medical care, and not too many people fretted about getting by after retirement.

So when your parents say that all you need to do to be secure is to work hard and lay off the T-bone steaks, keep in mind that they were once right. When they got married, it was a pretty safe assumption that if someone earned a decent living, drove a typical car, and lived in a regular neighborhood, then the money would work out just fine. Back in their day, if someone was struggling financially it was probably because they were blowing too much cash on silly stuff.

But the rules of the game have changed.

The old guarantees no longer exist. In today’s world, you can get a mortgage that is too big for you—and the banks will help you do it. You can get a car lease that chews up half your income. You can wind up with a student loan bigger than some home mortgages. And as sure as the sky is blue, you can rack up credit card debt without blinking an eye, even if you don’t have 50 cents to make the payments.

Does that mean it’s impossible to keep your money in balance today? Of course not! But it means that you can’t take things for granted the way your parents could. You have to understand the new rules. Because unlike your parents, you can’t count on the mortgage lender, or the car dealer, or the landlord, or your boss, or even the so-called financial experts to protect you. You have to protect yourself. And that starts by getting your money in balance.

Brett and Brandi: Never Enough

Just ask Brett and Brandi Caldwell. The day I (Elizabeth) met Brandi, I thought she would wear a hole right through her shirtsleeve where her right hand kept rubbing her left arm. She explained that she and Brett both work hard—really hard. Brett takes overtime whenever he can. They don’t go to movies, and they never eat out. They haven’t taken a vacation since their honeymoon in Mexico, which was nearly five years ago.

They were desperate to get out of debt, but whenever they started to pull out of the hole, something always went wrong. The baby got another ear infection that she just couldn’t shake. Brett’s car broke down. The insurance came due. Every month, the credit card balance got a little bigger, as they fell a little further behind. Confused and hurt, they found themselves feeling a little suspicious of each other. If they weren’t spending extravagantly, what in heaven’s name was wrong?

They tried scrimping even more. Brandi started cutting the kids’ hair, and Brett climbed up on the roof to replace the flashing around the fireplace. They turned down the heat and told the kids to put on sweaters. Brandi scoured the newspaper for coupons, joking that she would make a casserole out of three-day-old roadkill if it were on sale at the grocery store.

Nothing seemed to help. There was never enough.

When their 4-year-old was invited to a birthday party, Brandi cruised the aisles at the discount store. But Tessa was desperate to have the $18 princess tea set for her best friend ever. In the car on the way home, the little girl refused to look at the $4.88 plastic doll that Brandi had bought over Tessa’s tearful protest. After a long silence, she asked her mother quietly, "Why can’t we ever do anything nice?" Brandi later told me:

That’s when I lost it. I was bone tired. Tired of always coming up short. Tessa is such a good kid, and she just wanted a stupid birthday present for her best friend and I didn’t have the money. I started to cry and I couldn’t stop. It was so bad I had to pull off the road…I’m not a crier. I’m really not. But she’s just a little girl.

Brett and Brandi came to my office laden with files and bills, ready for a marathon session of let’s-figure-out-the-money. After we went over some numbers, I leaned back and told them they were spending too little on the extras. They were stunned. I explained that their real problem had nothing to do with birthday presents or haircuts; their real problem was that they were spending way, way too much on their basic monthly bills. Brett and Brandi had bought a starter home, even though they didn’t have two nickels for a down payment, which meant they were paying for two mortgages (to make up 100% of the home price). Then there were payments on the new SUV, which Brett had bought to replace the pickup when the transmission died. They had signed up for the most expensive health insurance that Brett’s company offered and they were still making payments for a new washer and dryer. By the time they were finished covering the things they had to pay for, there wasn’t enough left over for a trip to Baskin-Robbins, let alone savings for a rainy day.

The key for Brett and Brandi was to focus on the big picture and to figure out where their money was out of balance. They needed to concentrate their energies on the big-ticket items, and to forget about the little things for a while. It took some coaxing, but Brett finally agreed to sell the monster SUV, replacing it with a six-year-old Taurus. Brandi buckled down and reshopped the homeowners’ insurance and the car insurance, and she signed up for the lower-cost HMO. Brandi laughed that she got so carried away with shopping for insurance bargains that Brett started calling her the Money Queen. Brett jumped in with, Seriously, this is hard work and Brandi is the best. They aren’t in the clear yet, but Brett and Brandi are sleeping well for the first time in years—and they have enough for a nice birthday present every now and then.

Does Brett and Brandi’s story sound familiar? Maybe you never spend a nickel on anything you don’t absolutely need, and yet you barely make ends meet. If that’s where you’re starting from, don’t worry—you are not alone. In the new rules of money, millions of people have gotten caught in the same situation. Keep reading; we’ll show you the way out.

In the Hole: Too Much on Wants

Of course, maybe your problems are nothing like Brett and Brandi’s. You may be one of those people whose basic costs are pretty well under control, but you still find it tough to put anything away at the end of the month.

Self-Test: Do You Overspend on Wants?

Respond with true or false to the following statements:

How many of these statements did you agree with? If you marked True more than once, you are probably overspending on your Wants.

You may have stumbled into another new rule of money: Even as it has gotten easier to get in trouble with your basic monthly bills, it has also gotten easier for your spending on extras to get out of control.

In your parents’ day, when your mom wanted to buy something she didn’t really need, like going out for dinner and a drive-in movie, she had to wait until she had enough to pay for it. Why? Not because she was especially prudent or thrifty. She had to wait because she had no choice. If she didn’t have the money, she couldn’t buy what she wanted. No cash, no movies. Period. When your mother was young, Visa and MasterCard were not flooding mailboxes with preapproved sky’s-the-limit credit cards for every man, woman, child, and family dog. There were no all-purpose credit cards for ordinary middle-class folks, so your mother bought only what she could pay for on the spot.

Today it is so amazingly easy to get out of control with the stuff you don’t really need. Your mother probably kept all her spending money in her wallet. If she wanted to know if she could afford to see the new Charlton Heston flick, all she had to do was open her purse and start counting. But in this age of plastic, you need a calculator just to figure out whether you can afford a hamburger. How much did you charge on the Visa? How much on the MasterCard? How much did you put on the debit card or the gas card? And how much did your mate charge? Sheesh! Who can keep up with all that? It is so much easier just to slap down the plastic, and wait until the end of the month to find out how it all adds up. And that’s when the worry creeps in. You hope you will be able to pay it all off, but you fear there just may not be enough.

Monica, a 26-year-old native of Birmingham, Alabama, knows what that worry tastes like. She would shake her head at a story like the one Brandi and Brett tell. She lives in a modest apartment—comfortable, clean, and cheap. She has the usual things—cell phone, DVD player, two cats who think they own the apartment. Nothing exotic. She’s a dependable person, the kind who holds the door for strangers and works late at the office when a deadline hits. She sang in choir throughout high school and college, and she still loves to sing at church and in community groups. A bit insecure about her weight, Monica dresses carefully and has her hair professionally cut and colored. She remembers everyone’s birthday, and she gives little presents in between times to co-workers, to family, to neighbors—small, funny things that made her think of them. She’s a soft touch for kids selling stuff for school fund-raisers, and she can always be counted on for a donation to an animal refuge or a homeless shelter.

Monica tried budgets, the same way she tried diets. She would keep track of every nickel and cut out all the extras, but it never lasted. Something always came up—a friend from college came to town, her brother’s car broke down. Besides, she could never quite figure out the point of writing down everything she spent. What was she supposed to do with all those lists? So Monica rocked along, never taking more than a nervous sideways glance at her bills.

On Mother’s Day she bought her mom a corsage and made reservations at a nice restaurant. Her mom and dad had a great time, and when the bill arrived, Monica snapped it up with a flourish—for all you’ve done for me. Her mother smiled and patted her hand. A few minutes later the waiter returned, the corners of his mouth turned down. Perhaps there has been a mistake, but the card was refused. Monica jerked the offending piece of plastic out of his hand and dived back into her purse. As she fumbled through her wallet, more than half a dozen credit cards spilled across the table. Her dad was dumbstruck by the number, but her mother was quicker. She reached out and picked up the Visa that had landed closest to her, and handed it to the waiter. No, not that one! Monica almost shrieked. Monica’s mother looked stunned—why on earth was her daughter yelling at her? And then the realization hit her like a slap in the face—this card was also over the limit. Everyone was quiet as Monica paused and looked intently at each card, almost as if she were considering which tooth to have drilled. After some hesitation, she handed a card to the waiter. It passed, and the family filed out in silence. When they got into the car, her mother began tentatively, Monica, I don’t want to interfere— Monica cut her off quickly. Don’t. Just don’t. I’ll work this out.

The morning after Mother’s Day, Monica was ready to go on another crash diet—and she wanted our help with the details. We knew it wouldn’t last more than a week or two, and then she would be back in the same spot. We offered Monica something easier—and far more lasting. We offered to help her get her money balanced for life.

In a little over an hour, we helped Monica create a plan that would leave her with a sizeable portion for Christmas presents and movies with her girlfriends, while still making sure she had plenty left over to start paying off her credit card balances and building up some savings. When we checked in with Monica a few months later, she was still working her way out of debt, but she said she’d never felt better. I feel light as a feather now. I didn’t realize how much those bills weighed.

One Step Forward, One Step Back:

Not Saving Enough

Any rich person will tell you: It’s not how much you make, it’s how much you keep. Saving is what protects you from that rainy day, and it’s what makes your future brighter. Saving is the road to wealth creation.

Of course, you know this. And so you work hard. You don’t buy the designer coffee beans. Your house is not the finest in the city—or even on the block. And yet, does it seem that you can’t quite get ahead? Is your savings plan a next month we’ll do it because this month never works out?

Self-Test: Do You Struggle to Save?

Respond with True or False to the following statements.

If you marked True for more than one of these questions, you are struggling to save enough. Maybe you are putting something away, but you worry about whether it’s enough. Or maybe you’re caught on that endless get-ahead-fall-behind treadmill, where you never create any real wealth.

You may think that building savings is just a matter of buckling down and using your willpower. That’s certainly the impression you get from a lot of financial experts (and from your mother-in-law!).

But the truth is, having enough money for savings has little to do with willpower. Instead, it is about balance.

At the beginning of this chapter, we told you that there are only three categories for your money: Must-Haves, Wants, and Savings. If you spend too much on one thing, then something else will be short-changed. This leads to a simple but very powerful insight: If you aren’t saving enough it is because you are spending too much on your Wants or your Must-Haves (or both).

If you’re struggling to save, you should find this extremely comforting. Why? Because once you get your Must-Haves and your Wants into balance, you will start saving automatically. You can do it without breaking a sweat. No more worrying about whether you’re saving enough. No more buckling down. Just a simple, automatic plan for saving a certain portion of your paycheck, every single month.

Keep reading to determine exactly where your money is out of balance, so you can start developing your own plan to create some real wealth.

The Balanced Money Formula

For Brett and Brandi and for Monica and for everyone else who can’t seem to get ahead, the key is the same: Get the money balanced—enough for the Must-Haves, enough for Wants, and enough for Savings. Brett and Brandi and Monica were tilting in different directions, but they were all out of balance and in danger of crashing financially. No matter how hard they scrambled, they just couldn’t get caught up, couldn’t build toward the future, and couldn’t stop worrying. But once they saw what was wrong and brought their money into balance, they started to get ahead. They learned that they finally could have enough.

That’s how the Balanced Money Formula works. There is always enough for each of the three categories. Must-Haves, Wants, and Savings each follow a preset formula, so that they are always balanced against each other.

So what’s the formula? Here it is:

Must-Haves: 50%

Wants: 30%

Savings: 20%

The Balanced Money Formula

Simple, direct, and effective. Here is the bull’s-eye, the center of a lifetime plan for your money.

Testing yourself against the Balanced Money Formula is a little like checking your cholesterol against the recommended levels. It helps you flag when something is wrong, and it shows you where you need to take a closer look at your money choices. When Brett and Brandi compared their spending to the Balanced Money Formula, it became immediately obvious that they had a Must-Have problem. They were spending nearly 80% of their money on Must-Haves, so getting their Must-Haves under control was their path to balance. Monica was in a very different place. She had committed just 40% to her Must-Haves, but her Wants were eating up more than 60% of her income. For her, getting control of the Wants was the key to success. Different problems, but they both come back to balance for the solution.

Is it ever all right to deviate from the 50/30/20 formula? Yes, there