Not enough to spend? Worried about paying off your bills? Wondering if you’ll ever have enough money to retire?

I believe most people in Singapore ask themselves these questions and what they find is themselves faced with ‘advisors’ who a) are clueless themselves or b) have a principal-agent problem (i.e. they know more than you do and it is not in their best interest to act in your interests). Cost of living issues are always a hot topic; hot enough to be included in a Post-GE 2011 survey at least (see here, slide 60).

I don’t have a magic formula. I’m still trying to work my own system out and so far, it’s worked very well for me but I suspect that most people won’t be able to live the kind of life I do so I like to introduce you to Elizabeth Warren. Or rather one of the books she wrote- All Your Worth.

The basic idea behind the book is to have enough to survive, have some fun and yet not worry about the future. The basic configuration is that your monthly salary goes towards three different accounts- ‘must-haves’ (50%), ‘wants’ (30%) and ‘savings’ (20%).

What are ‘must-haves’? The 3 guidelines used to determine that are:

  1. Could you live in safety and dignity without this purchase (at least for a while)?
  2. If you lost your job, would you keep spending money on this?
  3. Could you live without this purchase for six months?

A few categories are: housing, medical care, transportation, insurance, food, legal obligations. By extension, other things you spend on that don’t fall into ‘must-haves’ are ‘wants’ and anything leftover is ‘savings’. That’s pretty simple to understand right?

Now, the percentages given to each category are fixed as an upper-limit rather than a lower limit. That means, you DO NOT go over that amount. If you have less than 50% for ‘must-haves’, should you beat yourself up over it? I don’t think so, that sounds pretty ridiculous to me if you do. Imagine finding out that you could afford a mortgage twice as expensive as the one you service now, you wouldn’t run out and buy another right away right? You could but you don’t have to. After all, it’s about whatever makes you happy.

What happens if you’re already over the limit for a certain category? How should I grow my savings? What if I’m already up to my eyeballs in debt?

Go read the book. While the examples are US ones, the methods might prove instructive. For those up to eyeballs in debt, I’d say it’s time to seek help from Credit Counselling Singapore.

Here’s a money-saving tip- Go borrow the book from our good ‘ol NLB. Reservation fee’s only $1.55.

Disclaimer: I’m not a professional financial advisor. Anything said here should not be construed as ‘professional’ financial advice. If the advice here works for you then I’m very happy for you. If it doesn’t, I’m pretty sure the devil’s in the details. Leave a comment because I’d like to you what went wrong.