M is for Money

Recently I had the opportunity to review a new personal finance book, Your Money Ratios by Charles Farrell. Finance books like this one exist because everyone has questions when it comes to money:

How much should I be saving?
How much insurance do I need?
What is a reasonable amount of mortgage debt?

Mr. Farrell attempts to simplify financial planning by laying out appropriate ratios that can be used to answer each of these questions and more. It’s a one size fits all approach to finance since a ratio can be applied to any situation, whether you are a low paid wage slave or CEO of the company. So does this approach work and where does this book fit within the pantheon of personal finance?

Overview

Your Money Ratios is written for those with no financial acumen, it is a basic book appropriate for beginners who have no idea where to start. Mr. Farrell’s approach is logical and linear, he lays out the big four of personal finance – savings, investments, debt and insurance, and gives appropriate ratios for each based on your current age. How much mortgage debt should a 40 year old have? Based on Mr. Farrell’s ratios, no more than 1.8 times your salary.

The entire book is based around one goal, getting you to a comfortable retirement. The assumption is that you will retire around age 65 and will need approximately 80% of your pre-retirement income. Mr. Farrell’s ratios are meant to guide you along that path, no other. His suggested savings and debt ratios are tailored with that goal in mind, follow the steps and it should be an easy journey to retirement.

The Positives

This has to be one of the easiest personal finance books to read, it is simple to understand and logically written. Even an elementary school child can grasp the financial concepts that Mr. Farrell presents, so this book is accessible to anyone, especially those with no interest in personal finance. Mr. Farrell’s suggested ratios are also attainable, no need to eat ramen everyday and save 50% of your salary. The savings ratio is rather modest in fact, so you can balance today’s needs with tomorrow’s goals. I also like that Mr. Farrell addresses the least fun part of personal finance – insurance. It’s easy to overlook insurance and the role it plays in protecting your finances, Mr. Farrell makes a convincing case for why insurance is an integral part of your plan, not just another bill to pay.

The Negatives

First, a one size fits all approach to personal finance is rather limiting. It’s impossible to encompass each individual situation in one number, hence some sections of the book may not apply well to your life. Personally I exceed both the debt and savings ratios, perhaps because my above average income makes it easier to have high debt and still have enough left over for savings and expenses. My biggest beef though, Mr. Farrell takes an extremely conservative approach to finance. I need to repeat that, Mr. Farrell takes an extremely conservative approach to personal finance. For example, the investment section recommends a 50/50 stock bond split for everyone except near retirees, even 25 year olds with decades to go in the workforce. I understand his reasoning, a conservative approach is easier on casual investors who aren’t savvy enough to understand the risks they are taking. But this approach will alienate some readers, especially young workers who need his advice to get on the right path. They aren’t likely to listen to someone who recommends an investment split usually reserved for people their parent’s age.

Sections I Especially Enjoyed

There is an entire section of the book devoted to Social Security and the myths surrounding the future of the program. Generally young workers think that social security is going broke and won’t be there when they retire. This may be true, but it is an unlikely scenario. More likely, the program will still exist in a diminished form and you will only get a portion of the money promised to you. Unfortunately there are those with agendas on all sides helping to propagate these myths, a little reality is nice for a change.

Is Your Money Ratios for You?

In general, readers and followers of personal finance blogs are more money savvy than the rest of the population. For you, this book may be too elementary. It is really aimed at those with no money knowledge whatsoever, people like my dad! For the average American this is a great book to get introduced to personal finance. It’s easy to read and even easier to understand.

Check back tomorrow for more with Your Money Ratios and M, a look at how I stack up against the money ratios in Mr. Farrell’s book.