Implementing a money plan

Not the type of person to plug all of your expenses into a spreadsheet? Amelia Warren Tyagi, coauthor of "All Your Worth: The Ultimate Lifetime Money Plan," advocates using a balanced-money formula to manage money, debt and savings.

"Simply spend no more than 50 percent of your paycheck on your 'must-have' expenses," she says. "'Must-haves' constitute your insurance, your rent or mortgage, your car payment, the food you put on your table -- basically, all the stuff you have to pay month-in and month-out.

"The 'wants,' all of the fun cash, should represent no more than 30 percent of your total paycheck, and this money should be spent without any guilt associated with it.

"'Debt-payment and savings,' finally, should represent the last 20 percent of your paycheck."

Don't think that formula will work with your expenses? "The balanced-money formula gives families a bulls-eye, a place to aim as they work out their spending," says Elizabeth Warren, a Harvard law professor who co-authored the book with Tyagi. The authors say that if you implement it gradually and systematically, the formula can do much to improve the fiscal situation of any financially challenged American family.

The balanced-money formula is based on research and a study of statistics gathered from the Federal Reserve, the Census Bureau, the Commerce Department, the Department of Labor, the administrative office of the United States Courts, and a number of other sources. All point to the same conclusion: Committing too large a fraction of income to big, fixed expenses is a high-risk move that will likely leave millions of U.S. families in financial collapse and millions more perennially worried about their fiscal situations.

According to Warren, too many Americans have already become house-poor in America. Fannie Mae defines someone as house-poor if they spend more than 34 percent of their income on total housing costs. In fact, four times as many families today are house-poor than was the case a generation ago. As a result, families have become over-stretched financially, and mortgage foreclosures and bankruptcies have more than tripled.

Warren says their book devotes an entire chapter to showing readers how to bring their expenses into line with the 50/30/20 approach. "We try to emphasize that budget categories help people understand competing demands. If someone is very heavy on housing, for example, then that person needs to go very light on cars -- used cars, cash only -- to keep monthly expenses manageable.

"Those who can't make it to the formula," says Warren, "need to re-examine their financial lives."