Review: The 10 Commandments of Money

Each Sunday, The Simple Dollar reviews a personal finance book or other book of interest.

10cmI’ve been a big fan of Liz Weston’s writing, particularly her columns over at MSN Money. I’ve also communicated with her many times in the past. So, when I saw that she had a new book out, it was an immediate addition to my reading list.

This book, The 10 Commandments of Money, features a subtitle, Survive and Thrive in the New Economy, that left me wondering about the purpose of the book. It seemed a bit out of Weston’s wheelhouse to write a “buy gold and land” type of book – a particular subtype of personal finance I avoid.

Rather, this book is more about positioning yourself for success down the road as the economy rebounds from the downturn and opportunities come your way. That’s a solid perspective for anyone who is planning for a brighter future to have.

Unsurprisingly for a book of this nature, it’s divided into a series of chapters that each focus on one of the ten commandments, so let’s walk through them.

I: Create a Budget That Works in the Real World
What does Weston mean by a “budget that works in the real world”? Weston subscribes to the 50-30-20 model of budgeting. 50% of your take-home income should be spent on stuff you need, such as your bills. If your actual bills take up less than 50%, good job, but many people are over that 50% mark. If you’re over the 50% mark, the remainder comes out of the 30% slice – the money spent on stuff you want, such as entertainment and the like. The other 20% goes to savings of various kinds, like an emergency fund or retirement, depending on your needs.

II: Create a Survival Plan with Cash and Credit
Although the commandment somewhat implies it, Weston isn’t suggesting using credit as part of an emergency fund. Instead, the idea here is that having a strong credit rating and access to a significant line of credit is a useful complement to your emergency fund. An emergency fund should be cash, first and foremost, and Weston interestingly goes beyond that, arguing that another aspect of emergency funds that people overlook is the idea of multiple income streams. In other words, it’s always good to have some sort of side business or side job in place to provide income in the event that your main one fails. Consider it a different type of emergency fund.

III: Pay Off Debt the Smart Way
Weston’s plan for debt management is an interesting mix of elements. She distinguishes between “toxic” debt and nontoxic debt (toxic debt usually has very high interest rates and agreements that put you at the mercy of the lender, and lots of fees – think credit cards) and advises people to pay off toxic debts first, even if some of the toxic debts happen to have a lower interest rate (for the moment) than a secure debt (like a home mortgage). How do you prioritize? Focus on debts that have the potential to cause you even more heartache if you don’t deal with them as soon as possible – like a credit card very close to the balance. If nothing is in panic mode, let interest rates be your guide.

IV: Don’t Avoid Risk … Embrace It, but Sensibly
The best way to invest is to diversify as widely as possible. Don’t have all of your eggs in one basket. Own some cash, some bonds, some real estate, some domestic stocks, some international stocks, some treasury notes, maybe even some commodities or precious metals. This way, if one market tanks, you don’t lose everything. By diversifying like this, you’re essentially betting your future on the productivity of humankind – and if history has shown anything, we’re busy little bees.

V: Your House Is Not a Piggy Bank – Preserve It’s Equity
Weston really recommends not using home equity loans to buy the things you want. Why? When you take out a home equity loan, you increase the amount of risk on your home. If you lose your job or have other difficulties, a home equity loan simply means that you have a higher monthly threshold to leap over just to keep your home, and if you’ve got doubts that you could ever lose your job or face an economic hardship, 2008 should have alleviated those concerns. Similarly, if you’re in the market to buy, buy something smaller than you think you can afford, because the smaller it is, the more likely you are to be able to actually keep it in a downturn.

VI: Saving for Retirement Must Come First
For many people, the 50/30/20 budgeting mentioned in the first part of the book seems a bit much. Saving 20% of their take-home seems beyond the pale. It’s important to remember, though, that some of that 20% refers to saving for retirement. If you’re putting 10% of your paycheck into your 401(k) plan, you’re already halfway to that 20%. Weston strongly encourages everyone to do this, whether you’re three years from retirement or just starting out. Put as much as you can into retirement starting now and don’t let up. The specifics matter much less than the intense focus on saving.

VII: Get a College Education You Can Afford
Studies have shown that an expensive college education has minimal impact on your actual income over the long term as compared to the cost of an education at your local state university. If you get a full ride scholarship to Harvard, great, but don’t mortgage your future under the belief that an Ivy League degree means an instant mountain of cash as compared to the local schools. Stick to your in-state public universities for starters, and supplement even them with community college credits and CLEP credits, which are even cheaper.

VIII: Reserve Insurance for the Big Losses
If you have a healthy emergency fund, insurance should really only exist to cover the biggest losses. Raise your deductibles and lower your premiums, and then compensate for this by having a larger emergency fund. Remember that this is a calculated risk: yes, you’re taking on a bit more risk by doing this, but there’s also significant reward, and if you have a healthy-sized emergency fund, you’re protected against this risk.

IX: Treat Your Marriage Like a Business
The title seems cold, but the idea is good. A marriage is a partnership, and both partners need to agree on goals and how to achieve them. It makes sense for one person in a marriage to be responsible for the day-to-day work of paying bills, checking the mail, and so forth, but the bigger tasks such as evaluating major purchases, setting long term goals, setting budgets, and choosing among different priorities should be decided together and openly discussed. If you feel uncomfortable discussing matters like this, work through that difficulty. You need to be able to work through financial concerns together.

X: Defend Yourself in the War on Consumers
This chapter is a bit political, as it calls for more consumer protection laws and regulations (which some may disagree with). Weston’s idea here is that as an individual consumer, you should always be vigilant about making sure you get a square deal whenever you buy a product or make another personal economic move, but without adequate laws, you’re at the mercy of large businesses that are often in collusion with one another.

Is The 10 Commandments of Money Worth Reading?
I have a handful of books that I recommend to people who are having a money meltdown – The Total Money Makeover and Your Money or Your Life being chief among them. These books force you to take a serious re-evaluation of your entire relationship with money and start from scratch.

The 10 Commandments of Money takes a different approach. Clearly, the audience here isn’t someone who is in an apocalyptic money state, but someone who is simply cautious and concerned about the current economic situation. They’re not convinced that the end of the world is coming, but they’re gun shy enough to want to hedge their bets.

If that describes you, The 10 Commandments of Money is going to be a perfect read as a personal finance primer. Weston’s solid and occasionally humorous writing shines through as always, and it is her strength writing about these topics that takes this book from being yet another personal finance book to being an enjoyable read that I would recommend to someone in that group described above – cautious, but not desperate.

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