In the book Your Money Ratios, author Charles Farrell lays out a blueprint for your entire financial life through your working years. If you’ve ever wondered if your debt repayment and retirement savings are on track for your age, this book provides an answer.
The book’s publisher, Penguin Group, has graciously offered an extra copy of the book as a giveaway for my readers. To enter, just send an email to the contact email address in the upper right corner of my blog with the subject “Book”. Readers who subscribe to my feed will have to click through to my web site. Another benefit of going to my site when reading a post is to see the comments other readers leave on that post. All entries received before noon on Sunday, January 30 will be considered for the draw. I reserve the right to eliminate entries that I judge to be outside the spirit of the contest.
The word “ratios” in the title might scare off some readers who think there will be a lot of math. There are numbers, but not too much math. The ratios come from the fact that almost everything in the book is scaled to your income. For example, rather than recommend that you save a particular amount for retirement, Farrell suggests that you should have 12 times your salary saved by the time you’re 65.
The core of the book focuses on your total retirement savings, yearly savings, and mortgage size. For example, by age 40 Farrell says that you should have 2.4 times your salary saved for retirement, you should be saving 12% of your salary during the year to add to your savings, and your mortgage should be at most 1.8 times your salary. These numbers change for each age from 25 to 65.
This blueprint of financial progression through your working career is like a pace runner letting you know whether you’re ahead or behind the pace you want to maintain. Farrell’s blueprint may not exactly fit your plans, but you can start with one of the blueprints in the book and modify it to create your own pace runner. The appendix covers situations that call for a different plan (like having a pension) and how to modify your blueprint appropriately.
Other sections of the book cover student loans, life insurance, and other types of insurance. Much of this material is specific to the U.S., but the general advice concerning student loans and life insurance is definitely relevant to Canadians.
I particularly liked the first part of the “Stocks and Bonds 101” section that explained what drives stock prices. I didn’t much like the section on financial advisors. It’s not that I violently disagree with it, but I can’t see how it would be much help to a novice investor out looking for a good advisor. One quote that I don’t agree with is “Most advisors work very hard to take care of their clients and treat their money with the utmost respect.” I think this is only true for a small minority of people who serve as financial advisors.
One claim that I can’t understand is “your odds in a given year of being disabled and unable to work are one in eight.” This seems way off. Perhaps one in eight people become disabled some time during their careers. However, one in eight each year for 40 years gives a 99.5% chance of becoming disabled at some point.
Some of Farrell’s Specific Advice
Save 12% of your income in the first half of your career and 15% in the second half.
In retirement you can spend 5% of your savings each year as long as you can cut back if the market has a bad period.
Limit your mortgage size to double your income.
Limit student loan debt to 75% of your expected average salary in the first decade of your career.
If your stock run up in value, rebalance some back into bonds, but if your stocks drop in value, don’t rebalance some bonds into stocks. (This one is too conservative for me, but it is worth thinking about.)
Ignore most financial “innovations” and most of the financial press.
Some Good Quotes
On being rational about money: “When it comes to your money and your future, you want to be Mr. Spock, not James T. Kirk.”
On creative mortgages: “’Negative amortization’ is just finance-speak for ‘stupid.’”
This is a thought-provoking book that provides an answer to the question “Am I on track for retirement?” Readers are likely to find that the book’s life-script doesn’t fit them in one way or another, but the lesson on how to create a financial life script is useful.