Once again, the advantages of being a semi-famous blogger have come to light, as I have the opportunity to review another personal finance book and give a copy away to a lucky reader. This time, the book in question is Your Money Ratios by Charles Farrell, which seeks to break all those complex financial questions down into simple ratios in order to give us an answer in plain English. Does it succeed? Well, we’ll just have to find out…
Your Money Ratios starts with an introduction that lays out the areas of finance that the book will cover (savings, debt, investment, and insurance). It also provides a brief introduction to some of the particular topics that are covered in each of those areas, as well as the unifying theory of book: trying to move you from laborer (who is paid for the service you provide) to capitalist (who is paid for the use of your money).
The first chapter introduces the capital to income ratio, which is of prime importance in determining when (if) you will be able to retire. The goal to shoot for is capital (the total of all your investments) that is 12 times your salary, which should allow you to retire at 65 with 80% of your pre-retirement income (when Social Security is added in). Chapter two covers how much you need to save in order to reach that point, the percentages you should save at each point in your life to end up with 12 times your income at retirement time. It also provides two alternative scenarios in case it proves impossible to meet the requirements to make it to 12 times savings by age 65.
Chapter three provides a discussion of Social Security, including what it is, how it works, and why it most likely will still be around when it’s time for you to retire (rhetoric to the contrary aside). It also covers a few of the problems that the plan faces, and how to adjust your savings goal if you want to exclude Social Security benefits from your calculations (basically, shoot for 16 times your salary). Once you know how much you need to save, chapter four discusses where to save it: in descending order of importance, 401(k) plans, IRAs, and then taxable accounts. The characteristics of each are discussed, as are the differences between Traditional and Roth style 401(k) and IRA plans.
Chapter five is a long one, covering the amount of Income Producing (reasonable housing, education, and transportation) debt you should take on. It provides a Mortgage to Income ratio to determine how much you can afford to borrow for a house (if taking out a mortgage is your best move, another issue that is discussed), an Education Debt to Average Annual Income (with said education) ratio to determine the maximum amount to take out in student loans, and a discussion about how much to spend on getting an automobile (basically, as little as possible to get a reliable car, emphasis on reliable). The chapter ends with a brief discussion of credit card debt, stressing the importance of keeping the amount you owe to nothing (or the smallest balance possible) and paying it down as soon as possible.
Chapter six covers how to divide up the money you’re putting into your investments between stocks and bonds. Farrell suggests a 50-50 split for most of your investing lifetime, moving to 40% stocks, 60% bonds within five years of retirement. More over, he also clarifies what he means by stocks (a S&P 500 index fund) and bonds (an Intermediate US Treasuries fund). Chapter seven delves deeper into the world of stocks and bonds, providing some introductory information to help better understand these investments. It also shares Farrell’s recommendation to re-balance your portfolio when stocks go up, but not when they decline. The shortest chapter, chapter eight basically comes down to its title, ‘Ignoring Wall Street’, and providing several reasons why you should do just that.
Chapter nine is the first of several chapters that cover insurance, in this case disability insurance. The suggestion is to have sufficient disability insurance to cover the bulk of your income for most of your working life, so you have a back up source of income should something happen to you. Chapter ten covers life insurance, suggesting that you need enough term life insurance that when combined with your savings thus far, you’ll reach 12 times your salary, allowing your survivors to generate enough money to live off once you’re gone. Chapter eleven looks at long term care insurance, how to determine the amount you need, and how to choose the best policy. (The basic rule of thumb being to get the longest term you can afford, preferably a lifetime policy, but otherwise the term that provides the most years of benefits at lower rates rather than higher benefits for fewer years.) Chapter twelve rounds out the discussion of insurance by looking at health insurance. There is no ratio for health insurance; instead, the advice is to get the health insurance policy that best balances cost, quality care, benefits, and good customer service.
Chapter thirteen is ‘Getting Professional Help’ (of a financial, not psychiatric, nature…mostly), providing some of the things to look for in a financial adviser. It particularly recommends looking for advisers designated as Registered Investment Advisers or Certified Financial Planners. Chapter fourteen is a brief one that directs you to go online and use the Money Mass Calculator there to see how your progress stacks up (I’m currently ahead of the savings game, which is nice). The appendix covers a few situations where you might need to make adjustments to the provided Capital to Income and Savings Ratios, from being one of the lucky few who still has a traditional pension to having a wide difference in ages between you and your spouse.
Your Money Ratios is very straightforward and easy to follow. If you can do some fairly simple math, you can determine if your savings, investments, insurance and debts are all on track for you to retire on schedule. The suggestions provided are pretty solid for the most part, and are presented in a straightforward, fairly humorous manner.
The suggestions presented are quite conservative, from keeping half of your investments in bonds at 25 to using only Treasuries for your bond investments. The black box design of the book, not providing the background calculations that go into figuring out your ideal ratios, does make it harder for you to figure out how to modify your ratios if you want to make any changes to your goals. (Although, that might not be too bad if you’re not a money wonk like me and don’t want to play around with figures and calculations.)
Your Money Ratios is a pretty solid introduction to personal finance, albeit a bit on the simplistic side. If you want a simple answers to questions about how much to invest, how much to save, and how much insurance to have, you’ll find them here. It’s a good place to start your financial research (although, I would suggest you continue on, and read some additional sources of personal finance information, to expand the perspective you have on the subject of money).
Thanks to the generosity of the publisher, you have the opportunity to win a copy of Your Money Ratios, and find out for yourself how helpful it can be for a beginning investor. We’re going to make it pretty simple one this time around; simply leave a comment telling me how close you are to reaching a Capital to Income Ratio of 12 (and thus, to having enough to retire, when Social Security benefits are factored int) and you’ll be entered for a chance to win.
My own ratio stands at 0.67 (at least, if you use my ‘desired’ income of $40,000 per year, rather than my actual income of $12,000 per year as a grad student, where it’d be something like 2.25), which puts me ahead of the game for a 28-year-old. You can get your own ratio by dividing your investment totals by your income (either actual income or desired income, if you, like me are making a much lower amount than you want to make). Let me know what your ratio is by next Saturday, January 29th, and you’ll have a chance to win your own copy and learn more about where your finances currently stand.