Review- Your Money Ratios
Have you ever read a book and thought not only “This is a great book” but “I wish I'd WRITTEN this book.” That is how I felt about reading Your Money Ratios. This is a relatively quick 250 page book on personal finance that was published in 2010 by Charles Farrell, an investment adviser in Denver.
The book is designed to answer the important questions in personal finance. Questions such as:
- How much should I have saved already?
- How much should I be saving each year?
- How much will I need in retirement?
- How much of that will Social Security provide?
- How much of a mortgage should I get?
- How much educational debt is “worth it”?
- What should my asset allocation be?
- How much disability insurance should I get?
- How much life insurance do I need?
He does this by using ratios. Mostly, the ratios use your income and your age to help you know if you're on track. He has charts that allow you to see where you stack up compared to where you should be on each of these financial subjects. The book is not physician-specific, so a few allowances need to be made, but he is quick to point out that his student loan debt ratio could be stretched upward for those going into a high-paying career such as medicine and that your annual income (an important number in each of the ratios) should be averaged over the last few years if you have had a recent, significant pay increase. The typical doctor also needs to adjust for the fact that he has a 30 year career, instead of a 40 year career like most. Another adjustment that a doctor needs to think about is that the number he needs to retire and be financially independent is NOT based on his income, but on his spending, as I discussed here.
For the most part, his advice is spot-on. For example, he suggests a savings rate of 12-15% and a mortgage to income ratio of no more than 2. He advocates paying off all your debt before retirement, limiting student loan and car debt as much as possible, rebalancing the portfolio periodically, and diversifying widely. There were a few small things I had a quibble with, such as the 5% withdrawal rate in retirement that he advocates (I think 4% is smarter) but he does allow for reduced withdrawals in down markets. I would have also liked to see a plug for a simple index fund portfolio rather than “Go see an advisor to understand how your money is allocated.”
The part I liked the best about the book (and actually made my wife read) is about the importance of moving from being a laborer to being a capitalist. In fact, I liked it so much I'm going to dedicate an entire post just to that idea. I'll also have a couple of posts about some of these ratios, and how you can tell how you're doing in your journey toward financial independence.
This book deserves a place on the list of classics. At less than $10, picking this one up is a no-brainer.