Your Money Ratios: 8 Simple Tools for Financial Security

by Charles Farrell

A troubled economy calls for answers. Forget complicated, abstract philosophy-people need sound financial advice that's easy to follow and can be implemented immediately. For the first time, a leading financial adviser has developed a remarkable set of guidelines to give individuals the same kind of objective insight into their personal finances that successful businesses have. Your Money Rations will help readers effectively manage debt, invest prudently, and develop a realistic and effective savings plan to ensure both financial success and security. Readers need only plug their income and age into Farrell's rations in order to get an instant picture of their savings status and overall financial health, as well as a roadmap for the important choices they must make in the future. Some key rations include: ·The Capital-to-Income Ratio: how much capital (savings) you should have if you plan to retire at 65 ·The Mortgage-to-Income Ratio: The maximum mortgage debt you should carry and still have sufficient capital left to save and retire comfortably ·The Education-to-Average-Income Ratio: The amount of education-related debt you can safely incur based on anticipated average earnings after obtaining your degree

Genres: Finance, Personal Finance, Nonfiction, Self Help, Business

274 pages, Kindle Edition

First published January 1, 2009

Reviews

[Michael · Rating 4 out of 5]

A well-written and easy-to-follow book on personal finance based on a unique angle. It presents 8 ratios, or "rules of thumb" that you can follow to know where you stand financially, and to answer questions such as: Am I saving enough? Is this mortgage too much for me to afford? How much should I spend on disability insurance, or do I even need it?

The author has done a great deal of number crunching to present the ratios in the form of tables, where you simply look up your age and income to get a benchmark to compare yourself with. The discussion surrounding these ratios is equally fluid and easy to follow; the author crafted the examples well so they are easy to understand.

But beyond the ratios, the real value of this book is the insights it provides into personal finance, and how you should think about important expenses such as mortgages and student loans. Everything is judged against the question, "Will this help me move from laborer to capitalist?" - i.e., will this help me get to the point I am able to stop working and live off the returns on my investments?

My big concern with the book is that sometimes it simplifies things too greatly. The ratios themselves are geared around everyday middle-class Americans; adjustments are covered in a too-short appendix. The chapter on investing oversimplifies the options to S&P 500 stock fund and an intermediate-term Treasury bond fund; other options are not explored. Similarly, some important options to fund your retirement expenses, such as SPIA annuities, are not discussed.

Another big concern is that one focus of the book is to steer you into the arms of a for-pay personal finance adviser. While the author goes to great lengths to help you pick a capable and trustworty assistant, most other books I've seen, especially those covering investing, are grounded on the notion you can (and should) manage your finances yourself.

Read this for some excellent rules of thumb and some really valuable insights on how to think about money. But by no means should this be the only personal finance book you read.

[William Schram · Rating 4 out of 5]

Americans are living longer. The unfortunate part comes from when you run out of money in your old age. People I know don't want to work at the same job for their entire lives, so retirement is a goal for many.

"Your Money Ratios" is both simple and practical. Everything is a percentage of your gross income based on your age. The book provides a target. If you want to retire at age 65, you should have twelve times your gross income saved.

The one significant expense to prepare for is medical care. The author discusses Medicare and Medicaid and points out their advantages and disadvantages.

I have no prominent issues with the book. My only problem was the amounts used as examples, but I think they were to make the calculations easier.

[Jamie KP · Rating 5 out of 5]

"This book, 'Your Money Ratios,' was a pleasant surprise from my backup reading list. I usually need to be in the right mood for self-improvement books, but since I'm into finance and simple formulas, I had a feeling this one would click. And it did! The book surpassed my expectations, starting from page 4 where it tackles the top five finance questions. This got me curious about what else the author had to offer.What stood out were the clear financial examples, breakdowns of topics, and formula charts, all without unnecessary chatter. It's like the hard work was done for you. 😊 However, I wish it related more to the struggles faced by the Black community in finance. Despite that, this book earns a spot on my shelf, packed with valuable advice I can revisit anytime."

[Madalena · Rating 3 out of 5]

This gives a really good basic overview of personal finance and how to save and invest for a stable future and retirement. If I weren’t so lucky to have others who already knew this stuff guiding me, I would definitely have wanted to read this at least a decade ago. The author also provides some online ratio calculators but they don’t seem to work. This is not a problem because the ratios are really straightforward to do by hand. Even though this is for all ages, I would think it best to read this in your early 20s when you’re starting to save.

[Jeff Pavlick · Rating 3 out of 5]

I would recommend this book to people who are looking for a quick, simple overview of finance… particularly when it comes to debt.

I believe the chapter about debt ratios could help a significant amount of people.

The over arching concept of this book is to understand how much to save and to spend. The book talks a lot about which specific areas in life to spend and save on. Everything is done in percentage format, which is very digestible for me.

[Esteban Aguilar · Rating 5 out of 5]

Wish I read it when I was younger, great advice!

This is an awesome book. Simple, concise, thorough and the advice given is superb. I’m already analyzing my position to make the adjustments to align with these ratios. If you want to have a good, financially independent retirement: get this book!

[Jim · Rating 4 out of 5]

Interesting book which simplifies finance. Accumulate 12x of your final salary on the day you retire (the ultimate goal), earn at least 8% annually over the lifetime of your investments, withdraw 5% of that every year, and live on 80% of what you earned at retirement. Simple.

[Lance Petrillo · Rating 5 out of 5]

This book gives concrete goals to shoot for and explains mathematically why these individualized goals work. The question, “how much do I need to retire?” is everywhere. This is the best answer out there.

[Kiona Meade · Rating 4 out of 5]

Generally good and covers the basics but I don’t know people would enjoy this book if they didn’t like math. And I feel like, if you enjoy math, then you may not need as much of the advice generally. Just my two cents.

[Vinit · Rating 4 out of 5]

The book describes important ratios wrt your income, savings etc and provides you a simplistic approach to manage your finances.

[Jack Marinelli · Rating 4 out of 5]

Great useful tools for all stages of life.

[Sofia · Rating 3 out of 5]

Nice, but plain.

[Andrew Mutch · Rating 5 out of 5]

Of all the personal finance books that I've read, this has been one of the best. The ratios described help you track your progress towards securing your financial future. Elegant in their simplicity, they rely on a hundred years of financial data to provide a reality check that ensures that you'll have enough money to provide for a secure retirement. Just as important, the author explains the steps you need to take to protect your financial resources through prudent investing strategies, using insurance to protect your personal and financial resources and using strategies that avoid the emotions that come with the ups and downs of the economy and the stock market. Where other books rely on complex or gimmicky strategies that rely on your emotions to get you to do the right thing, the author boils it down to simple numbers that can be easily understood.

The only weakness in the book is that it doesn't really address credit card debt, which many people struggle with, other than to say "don't have it". Sounds great but people who do have it need strategies to pay it down. Also, this book is about financial planning. While the author spends a lot of time on smart strategies for investing, you may want to talk to a personal financial adviser about the actual details about investing. Or read a title more focused on investing. But keep the key concepts from the book in mind as you move forward with your investments.

Also, if this is your first book on personal finance, some of the topics may be unfamiliar to you. You may want to start with a more basic introduction on personal finance to get more familiar with some of the terms and concepts used in the book. But then come back and read this book. After the financial collapse of 2008, the author's realistic and unblinking assessment of how to plan for your personal finances in the real world is a must-read for anyone from the age of 18 - 60.

[Sarah · Rating 4 out of 5]

He approaches personal finances like a business and using ratios as a tool to measure wealth accumulation. Stresses the importance of taking emotion out of finances. His basic theory is that your decisions should move you from being a laborer ( being paid for your work) to being a capitalist (being paid for your money). The application is to ask "Will this debt/investment/insurance move me from laborer to capitalist?"
He did an excellent job explaining insurance. Many people don't understand that portion of money management and his explanation is straightforward and simple.
Some of the items are dated as far as insurance or new regulations for investments. But that's kind of the norm with this genre.

[Lil' C · Rating 5 out of 5]

I stumbled upon this book on the "new books" shelf at the library and I'm so glad I did. It gave me a whole new perspective on finances. Prior to reading this book, the how-to of retirement planning was a very nebulous concept in my mind. But after reading the book, I feel like I now have a very good road map for approaching retirement, as well as other tools for financial security. This book is very practical. Farrell teaches you what you need to know about social security, investing, health insurance, disability insurance, etc., and all in plain language that anyone can understand. Even though we're about 10 years late on an ideal savings plan for retirement, I'm very glad we read this book when we did, while we still have time to catch up. This book is very clearly written and keeps your attention. I highly recommend reading this book. You will feel empowered to take control of your finances.

[Jack Cheng]

This is a good beginning financial book for anyone who needs one, and a good check in for anyone further along in their financial life.

For me, I'm happy that it answers two questions that always nag me: do we have enough saved for retirement and how much should we save this year?

Farrell breaks it down into ratios: you need to save x times your income to maintain a good savings rate and you need to have x amount in the bank to retire comfortably at age 65. He also explains how he obtains these numbers (they are dependent on your age) and the (conservative) assumptions he used.

Other topics he goes into are insurance: life, disability, long term care -- what kind you need and how much, and general investment ratios (stocks vs. bonds -- he doesn't go much further than that; basically he suggests intermediate T bills and 500 index funds).

Worth reviewing

[Nathan Schwartz · Rating 2 out of 5]

Most personal finance is really simple, and I love to see books strip it down to the very bare bones, but here there were just too many places where there were total palm-to-the-face errors. He uses a 5.5% expected return for treasuries, yes this is what treasuries have yielded historically, but you can be assured that you’re not going to earn that with treasuries that you buy in 2015. He suggests a 50/50 stock bond split for people as young as 20 years old. He suggests that people not invest in any equities or retirement accounts until they have a 6 month emergency fund (this is fairly common terrible advice).

[Allison · Rating 2 out of 5]

I wanted to like this book, because the ratios seemed both conservative and easy to keep track of. However, the advice was just way too broad and simplistic (spend as little as possible on a car, for instance). When the author glossed over the differences between a 401k and a Roth IRA and implied that the tax advantages for both vehicles are pretty similar over the long haul, I stopped reading but did skim the rest of the book. If you're looking for a good intro to personal finance book, I'd suggest All Your Worth by Sen. Warren.

[Shayne · Rating 2 out of 5]

This book is one gigantic "rule of thumb", useful for people anxious about "how they're doing" financially. However, because it's set as a one-size-fits-all proposition, its utility is limited for anyone who "doesn't fit the mold" (e.g., retiring early, alternative retirement lifestyles, etc.). Seems to set a reasonable minimum bar for people who don't want to think too much about it; that's just not for me.

[Tie Webb · Rating 5 out of 5]

I have read a lot of personal finance books and this book is surely unique. It gives you perspective and helps you to keep the long view through out your career. Keep debt in check and don't over extend yourself. Just wish I would have read this book when I got out of college. Highly recommended.

[ilham.mukhtar · Rating 2 out of 5]

Quickly glanced the book. Capital to Income ratio, Savings ratio, and Investment ratio are recommended like it is cast in stone. not that it is particularly bad. It's rare that people would stick their neck out and firmly hold the magic number. In any case, worth to be considered in your personal finance implementation.

Not keen on the insurance section.

[TheLamboFlambo · Rating 3 out of 5]

Great for those who need a jumping-off point with finances, I would give this to my friends who aren't into personal finance. I don't have much knowledge of social services but I found that section very informative, though I do disagree with the author on social security he isn't technically wrong I just don't like relying on the government. overall 3 stars a good read for when you're bored.

[Christopher Obert · Rating 4 out of 5]

A very interesting book that will add valuable insight into your financial security. As the title states, the book is full of different ratios that will help you to better understand where you are, where you need to be before retirement. I found it to be most helpful…

[Sam · Rating 4 out of 5]

A useful introduction to all of the financial considerations (e.g., retirement savings, life insurance, health insurance, etc.) a young professional should start considering. I now know what a 401(k) is, and how it is different from a Roth 401(k)!

[Beth · Rating 4 out of 5]

I loved it. I have never seen a financial book that showed me how to balance what I might get in a pension-type funds with my style of living to find out how much I should be saving each year toward retirement.

[Tee · Rating 5 out of 5]

This is one awesome book. It gives a template on how to manage your financial life through simple ideas (ratios). The reasons for the ratios are quite good too. This will be one book I will go back to from time to time.

[Denise · Rating 3 out of 5]

Wish I had been given this book when I graduated college. Great basic rules for becoming financially a capitalist vs. a laborer.

[Robert Birnie · Rating 5 out of 5]

Very helpful and informative book. Not a one stop shop for all things financial but great overview of many topics and the ratios are great. I found it as a recommendation on the forums of mint.com

[Mark · Rating 4 out of 5]

I liked how the information was presented in this book. It was a very quick read that provided actionable advice to create a simple yet effective plan.

[Peter · Rating 4 out of 5]

Commonsense advice and easy-to-use tools for getting on track towards retirement. For actual investment allocation, I would look more to someone like Bogle.