Improving Your Odds for Financial Stability

In The Two-Income Trap, Amelia Warren Tyagi and Elizabeth Warren delivered sobering news about the financial state of middle-class American families. But when readers asked the authors to recommend a practical financial-planning book, Warren and Tyagi couldn’t find one that reflected the new economic reality they described. So they decided to write one themselves.

Read more about
The New Money Rules

  • Improving Your Odds for Financial Stability
  • If Financial Disaster Strikes …
  • The Truth About Getting In & Out of Credit-Card Debt
  • My Generation: Risk, Security and Savings
  • Now, this mother-daughter team has produced All Your Worth: The Ultimate Lifetime Money Plan. In it,
    they offer advice for navigating the new financial reality – some of which flies in the face of conventional wisdom.

    “The idea that you can always boil your own pasta and you’ll be OK is really reassuring,” says Tyagi, “but it’s an illusion.”

    Parents of this generation “need to know the new rules of money,” she says. “They need to know how to make the best of the situation.”

    le="FONT-SIZE: 10pt; FONT-FAMILY: Verdana">
    • Count the dollars, not the pennies.
    Pay attention to your big, monthly costs. “Most people choose an insurance policy or sign a lease and never look at those costs again,” Tyagi says. “But those expenses claim the biggest share of your paycheck, so you need to pay attention.”

    le="FONT-SIZE: 10pt; FONT-FAMILY: Verdana">
    • Don’t stretch. Whatever your salary, aim to get your fixed costs to 50 percent of your income. This advice contrasts with traditional financial planning advice, which suggests that a family should “stretch” for its first house.

    “Fixed costs have to be paid each and every month,” Tyagi says. “If somebody’s hours get cut, you can’t cut your mortgage.” In our high-risk world, it doesn’t make sense to take on more than you can afford right now in the hopes that you’ll be better able to manage later.

    le="FONT-SIZE: 10pt; FONT-FAMILY: Verdana">
    • Tailor your budget to the number of earners. Tyagi and Warren aren’t handing out advice about whether or not one parent should stay home. Instead, they emphasize that a two-income budget shouldn’t look like a one-income budget. “A two-income family can’t budget quite as tightly as the one-income family,” says Tyagi. “When you have a two-adult, one-income budget, you have a cushion. If one earner gets sick or laid off, the other adult can go to work.”

    “If you have two jobs, you have double the chance of layoff,” Tyagi points out. “And the number one reason people end up in bankruptcy court is when someone loses their job.”

    le="FONT-SIZE: 10pt; FONT-FAMILY: Verdana">
    • Plan for fun. If you can’t afford some fun, you can’t afford your life, according to Tyagi. “Traditional financial advice says you should cut your leisure expenses, such as eating in restaurants. I think you should eat out once in a while. If things are so tight that the only way you can make ends meet is to squeeze out all the fun, then you should make some bigger changes in your life.”

    • Plan for disaster.
    “You should be able to cover your fixed expenses on 50 percent of your income,” Tyagi says, “so that you’re positioned to cover your costs if disaster strikes. This also gives you the ability to put some money toward savings when times are good.”