Tuesday, January 25, 2011

Book Giveaway: Your Money Ratios

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. (However, the giveaway is now over.)  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 stocks 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.


  1. Hi! Thank you for the article!

    Some of the questions I have about this type of work - starting with 'The Millionaire Next Door' so long ago... - are:
    - are the numbers, ratios, ... it provides are for the INDIVIDUAL or the FAMILY? I imagine the family, but it is never clear.
    - when talking about "saving x%", does it mean "adding to net worth somehow" or specifically "adding to a retirement account"? How does home equity gets computed?


  2. @Fernando: The book covers the issue of whether to focus on individual income or family income. In general they use family income unless one spouse is only employed sporadically. The book treats home equity separately. So, the saving is retirement saving.

  3. I like the idea of ratios to evaluate one's success at saving and investing. Fernando's reference to "The Millionaire Next Door" reminds me of a useful ratio from that book. An average accumulator of wealth will have a net worth of (age/10)*salary, prodigious accumulators of wealth would have at least twice that amount, and under-accumulators of wealth would have half that amount.

    Saving 12%-15% of salary sounds like a good strategy. I usually see on various forums everyone complaining there are unable to save any money because their expenses are too high. I don't think this is a reasonable argument, since we all must make the best financial choices possible. If we over-extend ourselves by overspending on housing, cars, cell phones, cable TV and Internet, that is the flip-side of foregoing these same expenses.

    When I was a boy (switching to Grandpa mode) cable TV, Internet, and cell phones didn't exist. How could these possibly be necessities now? I'm pretty sure my parents never had a car payment, though to be fair, the company provided housing for our family as part of my father's employment, at least by the time I was two years old. My age cohort wants everything, and I'm sure I would shudder when looking at some of their balance sheets. Can I hear an "Amen!" from the choir? Just kidding. Sorry, I kind of went off on a tangent here.

  4. @Gene: Apparently, I'm either a prodigious accumulator of wealth or terrible at negotiating my salary.

    When the government jacks up wealth taxes in the future you'll realize the foolishness of having saved money and see that spenders (who spent money borrowed from you) had it right all along. (I hope I'm wrong about this whole paragraph.)

  5. Hmmm, food for thought as usual, Michael. I never thought of that angle before: asking for a pay cut to improve the wealth accumulation factor. Good idea!

    Wealth tax would be horrible indeed. Not sure why they haven't implemented it yet. Must be enough wealthy politicians out there to keep it off the agenda. Danny Williams for PM! Reminds me of a means-tested speeding ticket Teemu Selanne got in Finland: $40,200.

  6. @Gene: I remember that speeding ticket case. Maybe everything should be means tested so that your wealth would be completely unimportant (and saving and working would be unimportant as well).

  7. Gene, that book (MND) had a profound effect on me. Along with Rich Dad, Poor Dad (not for the usual reasons), it got me on the path to sort out personal finances and good habits.

    Also, as per "cable, Internet, etc..." as need I can partially agree: cable TV is (to me anyway) pretty much worthless, and cell phones are convenient but not essential. For better or worse, though, being competent on using Internet resources is absolutely a must nowadays in many situations.

    As to what the future holds, wish I knews... best I can come up with is to make educated guesses on how things will work out and live according to those guesses...