Book Review and Giveaway: Your Money Ratios
Personal finance money ratios is something that you may have seen from reading other personal finance blogs. Basically, common stock ratios like current ratio (assets/liabilities), debt to equity ratio, income to debt, or cash flow are applied to personal finance instead of companies.
Although I haven’t calculated money ratios for my finances, I’ve always had a curiosity as to how effective they are in helping achieve financial goals. An indicator is one thing, but used in context of the bigger picture is another.
The book “Your Money Ratios” does just that, it basically shows you the ratios that you should have at certain age levels to achieve your financial goals. Although this book was written for an American audience (social security etc), the theme is relevant for everyone. I’ve written a money ratio’esque article in the past where I calculated how much you need to save for early retirement, but perhaps I’ll do more Canadian relevant stuff in the future.
About the Author:
According to the book:
Charles J. Farrrell is an investment adviser with Northstar Investment Advisors, in Denver. He writes the “Retirement Roadmap” column for the CBS Moneywatch site and contributes a monthly retirement column for advisers to InvestmentNews. His research is frequently cited in The Wall Street Journal, SmartMoney, the Chicago Tribune, and many other consumer and professional media outlets.
About the Book
As you can probably conclude from the book title, the content focuses around personal finance money ratios for different age groups. What I like about this book is that it shows the ratios that you should aim for to reach certain financial milestones. It’s one thing to say to save 10% of your income, but what does that really mean during retirement? Other questions that the book answers is how much mortgage debt is acceptable at certain age groups? How much capital should I have relative to my age (net worth)?
The 8 Money Ratios covered are:
- Capital to Income Ratio – How much capital do you have relative to your income? How much do you need to retire? The author does not include principal home equity as part of the calculation, but states that a 30 year old should have a ratio of 60% of income in capital. For example, if a 30 year old was making $100k per year, he should have at least $60k in capital not including his home equity.
- Savings Ratio – How much of your income are you saving to reach your desired capital to income ratio? The author recommends saving at least 12% of gross income starting at age 25, increasing to 15% at the age of 45. Of course, the higher your savings ratio, the earlier you can retire.
- Mortgage to Income Ratio – How big is your mortgage relative to your income? The author and I have the same beliefs about this one, the mortgage size should not be greater than 2 times family income.
- Education to Average Earnings Ratio - This ratio indicates how much student debt you should take on to obtain a degree.
- Investment Ratio – How to grow and protect the capital you have accumulated.
- Disability Insurance Ratio – As a big believer in disability insurance, I believe that enough disability should be obtained to cover expenses, and not to simply replace income. The book describes how much disability insurance you need at each age group.
- Life Insurance Ratio – As another pillar of personal finance, term life insurance is a must. The author explains how much life insurance you need at each age group. To me, it’s a factor of your dependents and how much assets you have already accumulated.
- Long Term Care Ratio – This helps determine if you need long term care insurance. Personally, I haven’t given much thought to this one.
Final Thoughts
I enjoyed this book as it provided hard numbers and facts that show the path to financial freedom. As well, the author had a part on retirement withdrawal rates. I’ve written about these before, but he explained that a 5% retirement portfolio withdrawal rate is perhaps a bit aggressive, but a 4% withdrawal rate should work 95% of the time.
Although all the ratios may not be completely accurate to Canadians, most of them are pretty close as Canadians have CPP and OAS instead of Social Security.
Want a Free Copy?
The book publisher was generous in offering Million Dollar Journey readers the chance to win 3 copies of the book. The details are below:
- New and existing MDJ Money Tips Newsletter Subscribers get an entry. You can sign up here (it’s free).
- Tell me what your favorite book is in the comments for an additional entry. It doesn’t need to be finance related.
- Only those with a North American mailing address may enter (publisher rules, sorry).
- Contest will end Sat 5pm EST Jan 16, 2010 and the winner announced shortly after!
103 Comments, Comment or Ping
1. George
So far my favorite personal finance book is Your Money or Your Life. I’ve been meaning to read the revised/updated edition for a while now. Your Money Ratios looks like something I’d enjoy reading – count me in!
Jan 11th, 2010 @ 10:12 am
2. Pat
My favorite book remains The Millionaire Next Door. So many things you wouldn’t expect.
Jan 11th, 2010 @ 10:57 am
3. Moira
I think my favorite financial book is the Millionaire Next Door. I could never name a favorite book in general: I love just too many.
This book looks very interesting to me.
Jan 11th, 2010 @ 11:02 am
4. cbez
I really like “Total Money Makeover” by David Ramsey.
Jan 11th, 2010 @ 11:12 am
5. RI
I second Pat, my favorite book is “The Millionaire Next Door”. Recently, I also like “Enough” by John Bogle.
Jan 11th, 2010 @ 11:18 am
6. 2 Cents
My favourite book so far is “All Your Worth” by Elizabeth Warren and Amelia Warren Tyagi. I’ll have a complete review of it up on Wednesday. I really do think it covers the basics of personal finance better and more simply than anything I’ve read thus far.
P.S. – I would love to read a future post from you on Canadian-relevant ratios and retirement planning!
Jan 11th, 2010 @ 11:31 am
7. Aaron
My favourite non-finance book is “Chaos: Making a New Science” by Gleick. (I”m a math geek!)
On the finance side, my favourite book has to be “Unveiling The Retirement Myth” by Otar. (Lots of math in this one too.)
Jan 11th, 2010 @ 11:35 am
8. Ramona
So here’s a sillier response to my favourite personal finance book – Confessions of a Shopaholic by Sophie Kinsella. I just find it so amusing to see how she justifies her spending excesses. It reminds me of many people I know. But on the more serious side, as a Certified General Accountant, I am always relying on ratios to tell me a story, so I’d love to throw my hat in the ring for this generous freebie. Thanks FT!
Jan 11th, 2010 @ 11:39 am
9. Asher
My favourite non-finance book is probably The Wolf of Wall Street.
Favourite finance book would be The Wealthy Barber – David Chilton is a fellow Laurier BBA grad and I heard him speak there when I was in first year.
Jan 11th, 2010 @ 11:56 am
10. Returns Reaper
My favourite book is David Swenson’s Unconventional Success.
This book sounds like a pretty handy book that covers a broad spectrum of PF issues. Thanks FT for a chance to win a copy.
Jan 11th, 2010 @ 12:07 pm
11. tom
My favourite book is the Intelligent Investor by Benjamin Graham
Jan 11th, 2010 @ 12:22 pm
12. Dana
So many books…it’s hard to choose just one…but I will say “Richest Man in Babylon”. It is a classic and the lessons are always timely and universal.
Hope I win the book!
Jan 11th, 2010 @ 12:31 pm
13. Barry
I just started to clean up my finances and The Wealthy Barber helped reinforce my knowledge of personal finance.
Although I don’t agree with everything Chilton has to say the majority of it is pretty solid. The only real issues I had with the book are some parts are dated e.g. homes being $100K in Kitchener. Or expecting mutual funds to average 10-12% returns.
Still an excellent book to get you started.
Jan 11th, 2010 @ 12:49 pm
14. Debbie
My favourite book is completely non-financial, it’s My Sister’s Keeper, a story of the struggle of a mom raising a daughter with cancer. With two young children, it’s an eye opener of how fast life can change and how all financial plans can quickly change. A motivation to ensure you do your best to manage finances while life is on track, just in case….
Jan 11th, 2010 @ 12:52 pm
15. Joel
Four Pillars of investing
Jan 11th, 2010 @ 12:53 pm
16. Carter
best book ever: The ultimate gift – a must read for everyone!
Jan 11th, 2010 @ 12:54 pm
17. ryan
Buffett, by Roger Lowenstein.
The principles taught are epic.
Jan 11th, 2010 @ 12:59 pm
18. Matthew Gip
Catcher In The Rye, classic novel about a boys mental problems.
Jan 11th, 2010 @ 1:00 pm
19. Stephanie
My favorite book is “To Kill a Mockingbird”
Jan 11th, 2010 @ 1:18 pm
20. Steve Zussino
I agree with the others, The Millionaire Next Door. My wife told me a story from the beginning of the book (rock climbing) and it is very memorable.
Jan 11th, 2010 @ 1:27 pm
21. Josh
Not finance-related: Carl Sagan’s Demon-Haunted World.
Jan 11th, 2010 @ 1:38 pm
22. Florence So
favourite non-finance book: Seven habits of highly effective people.
favourite finance book: The Wealthy Barber
Jan 11th, 2010 @ 1:42 pm
23. Eric
My favorite book, without hesitation, is “The Alchemist” by Paulo Cohlo. The book is inspirational.
Jan 11th, 2010 @ 1:46 pm
24. Julie
Not finance-related: Microserfs by Douglas Coupland.
Jan 11th, 2010 @ 1:47 pm
25. Maiku
I don’t know if it is my all-time favourite but a really great one that I read recently was “Filthy Lucre: Economics for those that hate Capatilism” by Joseph Heath. He pointed out a lot of things that challenged somewhat naive assumptions that I had.
Jan 11th, 2010 @ 1:49 pm
26. nobleea
i’d say my favourite finance book is Smart couples finish rich, by david bach.
favourite non finance book is the timothy zahn star wars sequel trilogy (geek alert!)
I think the topics in this post should be a seperate post (the ratios) open for discussion. it’s tough to talk about them when there’s a book contest.
Jan 11th, 2010 @ 1:52 pm
27. James
A recent favorite of mine is Outliers by Malcolm Gladwell.
Jan 11th, 2010 @ 1:59 pm
28. Millionaireby45
Favorite Financial Book – The Intelligent Investor
Favorite Fiction – Lovely Bones
Jan 11th, 2010 @ 2:03 pm
29. Chris
This isn’t a personal finance book but definitely one of my favorites on the subject of money. “The Ascent of Money – by Niall Ferguson”.
Jan 11th, 2010 @ 2:08 pm
30. Saver
My current favorite is Rich Dad, Poor Dad… Haven’t finished yet though!
Jan 11th, 2010 @ 2:09 pm
31. Sampson
On The Road – Jack Kerouac
Jan 11th, 2010 @ 2:17 pm
32. Daniel
I enjoyed reading Smoke and Mirrors as it gave some insight into what the banks and advisors are pitching.
Jan 11th, 2010 @ 2:19 pm
33. andrewbpaterson
I enjoyed Tim Ferriss’ The Four-Hour Workweek.
There are many useful tidbits:
- how to increase productivity and efficiency at work (and how to use that efficiency to get a work-from-home arrangement);
- how to start a business that is both scalable, and one which removes the owner from being the go-to decision maker for EVERYTHING; and also
- the ins and outs of taking mini-retirements which open up the world in a cheaper and more intimate way.
Jan 11th, 2010 @ 2:28 pm
34. Matt Tucker
I enjoyed the Tipping Point by Malcom Gladwell.
Jan 11th, 2010 @ 2:40 pm
35. Jen Moore
I recently read “Boy in the Moon” by Ian Brown. This was an extremely moving true story of Ian’s family’s stuggles and triumphs in their lives with their severely disabled son. It will make you laugh and cry as you relate to their experiences. It’s a must read for any parent and I can tell you that as a financial planner, this has inspired me to find ways that I can be of assistance to families of children with disabilities. This family was relatively “lucky” because they speak english, have good educations, have stable incomes, group benefits and an incredible ability to advocate for themselves and their son in the government/health system. I just know there are families that are lacking in one or all of those things that I hope I can help! Having a child with a disability is difficult enough as it is, but the financial difficulties that go with that situation are huge!
Jan 11th, 2010 @ 2:55 pm
36. birdiegirl
My favorite fiction novel is Pillars of the Earth by Ken Follett.
Jan 11th, 2010 @ 3:11 pm
37. Benjamin
My favourite book is Good to Great by Jim Collins. I like its hedgehog concept
Jan 11th, 2010 @ 3:16 pm
38. Sam
A fascinating non- fianacial book to read is “Iconoclast: A Neuroscientist Reveals How to Think Differently” by Gregory Berns.
Jan 11th, 2010 @ 3:24 pm
39. steve
Currently reading The Intelligent Investor – too heavy for me, but slogging through.
Non-finance, Tale of Two Cities by Dickens. Farewell to Arms was good – ending was incredibly sad. Grapes of Wrath was good – ending was the best in literature.
Jan 11th, 2010 @ 3:27 pm
40. Michael
The book that I just finished reading and loved was Freakonomics. It really made you think about things outside the box.
Jan 11th, 2010 @ 3:41 pm
41. Chris
The Millionaire Next Door was a great read for me.
Jan 11th, 2010 @ 3:42 pm
42. Chris Watts
Sounds really interesting; as someone who has minimal life or disability insurance, I’m curious to read what he has to say on that score.
As for books, anything by John Irving.
Jan 11th, 2010 @ 4:20 pm
43. Caitlin
Sounds like an interesting read! I’d love to read it.
I love too many books to have a favourite, but I adore anything by Robert J. Sawyer, and most urban fantasy.
Jan 11th, 2010 @ 4:29 pm
44. Neeraj
My favourite is Freakinomics
Jan 11th, 2010 @ 4:44 pm
45. Kevin
Smart Couples Finish Rich by David Bach.
Jan 11th, 2010 @ 5:01 pm
46. Nick
My favorite book is Blink by Malcolm Gladwell.
Jan 11th, 2010 @ 5:03 pm
47. jason
Complexity and Contradiction in Architecture by Robert Venturi
Jan 11th, 2010 @ 5:13 pm
48. Bryce
This book sounds like a good read.
My favorite has to be Moneyball by Michael Lewis.
Jan 11th, 2010 @ 5:13 pm
49. Henry
Fooled by Randomness by Nassim Taleb.
It was very interesting and philosophical. A must read for anyone who wants to think from a perspective of uncertainty.
Jan 11th, 2010 @ 5:14 pm
50. wrc
Almost a tie for my favorite book, “For Whom the Bell Tolls” (Hemingway) edges out “The Razor’s Edge” (Maugham)
Jan 11th, 2010 @ 5:17 pm
51. John
How to win friends and influence people – weird title, but really cool book.
Jan 11th, 2010 @ 5:18 pm
52. Mike
Favorite Book I’ve read in the last two months:
The Dip by Seth Godin.
Smallest book but packed with great messages.
Jan 11th, 2010 @ 5:27 pm
53. Gerry
The intelligent investor, by Benjamin Graham
Jan 11th, 2010 @ 5:27 pm
54. Mike
@andrewbpaterson
I haven’t read the new edition but supposed to be just as good as the original. Definitely recommend to everyone who frequents this site. My fave book of 2008 for sure.
Jan 11th, 2010 @ 5:30 pm
55. Money Lover
Personal Finance is hard enough for some people to deal with never mind creating a bunch of ratios that wouldn’t mean much to them. Keep it simple.
Jan 11th, 2010 @ 5:41 pm
56. Money Lover
Favorite finance book… One Up on Wall Street by Peter Lynch. Well written and practical. Fave Fiction would have to be Count of Monte Cristo.
Jan 11th, 2010 @ 5:45 pm
57. Xenko
My favourite book it Lord of the Rings.
Jan 11th, 2010 @ 6:14 pm
58. Mark
“One up on wall street” Peter Lynch.
Jan 11th, 2010 @ 6:15 pm
59. Kelly
It’s hard to pick a favourite book, but one of my favourites is What Men Don’t Tell Women About Business.
Jan 11th, 2010 @ 6:22 pm
60. Mockingbird
I would say “The Wealthy Barber” is my favourite finance book. Read it during the university days and still holds true.
Jan 11th, 2010 @ 6:43 pm
61. Erick
Blink by Malcolm Gladwell
Jan 11th, 2010 @ 7:08 pm
62. Lori
I like The Wealthy Barber.
Jan 11th, 2010 @ 8:10 pm
63. Chantal
I’m another big fan of The Wealthy Barber. I first read it in the early ’90s and then recommended it to my brother when he finally got interested in finances about a decade later. He enjoyed it every bit as much as I did.
Jan 11th, 2010 @ 8:18 pm
64. RetirementInvestingToday
If you want a very early retirement saving 12 to 15% of gross earnings won’t be enough. With a lot of focus and attention I’m now achieving 60% of gross earnings. I’m just over 40% towards financial independence and at my current rate work becomes optional in about 7 years.
Jan 11th, 2010 @ 8:26 pm
65. M
My favourite book is “The Iron Dragon’s Daughter”
Jan 11th, 2010 @ 8:26 pm
66. chris
‘wealthy barber’ great book that got the money sense wheels turning! made investing and saving sound smart and savy
Jan 11th, 2010 @ 8:44 pm
67. Adam
Your Money and Your Brain – Jason Zweig
Great book about how your brain interprets financial decisions and the biological effects money has on your body. enlightening.
Jan 11th, 2010 @ 9:26 pm
68. Jonathan
in defense of food by michael pollan
Jan 11th, 2010 @ 10:26 pm
69. Dane
This one looks really interesting. Definitely a different take on finances! So far, I think my favorite has been Your Money Or Your Life. Gave me some real food for thought!!
Jan 11th, 2010 @ 11:00 pm
70. Lyne
Thank you for the review, very interesting. I am currently reading The Four Pillars of Investing and it’s definitely the best finance book I have read so far :-)
Jan 11th, 2010 @ 11:36 pm
71. Brian
Favourite book overall is the Lord of the Rings trilogy. Favourite finance book is The Investment Zoo by Stephen Jarislowsky.
Jan 11th, 2010 @ 11:39 pm
72. Darryl
My favourite book right now is Freakonomics – an interesting look at real life scenarios from the view of an economist.
Jan 11th, 2010 @ 11:55 pm
73. Michael
Favorite book, “Summer of ‘49″ – by David Halberstam. Excellent read on the pennant race and life in 1949
Jan 12th, 2010 @ 12:14 am
74. JFG
The Wealthy Barber
Jan 12th, 2010 @ 12:32 am
75. Terri
Thanks for the contest!
The Lovely Bones by Alice Sebold.
Jan 12th, 2010 @ 12:44 am
76. Greg
I’ve read a few finance books, but the 2 that I actually enjoyed reading were:
- One Up on Wall Street
- Beating the Street
Both by Peter Lynch
Jan 12th, 2010 @ 1:09 am
77. Iamphysio
The Wealthy Paper Carriers by Cimmer. Excellent book for anyone who knows kids age 10+ who are starting to show interest in finances and a great one prior to reading the Wealthy Barber.
Jan 12th, 2010 @ 1:12 am
78. cannon_fodder
Favourite book? That’s a tough one. When I was a kid it was “My Side of the Mountain” followed closely by “Call of the Wild”.
But, maybe my favourite is “I, Robot” which is a collection of stories. I love science fiction whether it is in books or movies.
Jan 12th, 2010 @ 1:45 am
79. telefantastik
Wealthy Barber by David Chilton
Thanks!
Jan 12th, 2010 @ 3:37 am
80. Rob Anderson
The Blessing of a Skinned Knee: Using Jewish Teachings to Raise Self-Reliant Children by Wendy Mogel
Jan 12th, 2010 @ 5:16 am
81. Link Wheels
Rich Dad, Poor Dad has to be my favorite financial book.
Jan 12th, 2010 @ 7:38 am
82. Patricia
The Guernsey Literary and Potato Peel Pie Society by Mary Ann Shaffer & Annie Barrows is my choice.
Jan 12th, 2010 @ 9:51 am
83. Marianne O
My favourite money book is definitely “The Richest Man in Babylon.” But my all-time favourite book is “Watership Down” — for me this book has it all — humour, adventure, mythology, strategy and tactics, etc. etc.
Jan 12th, 2010 @ 11:28 am
84. Jeff G
I love pretty much every book Robert Ludlum has written.
Jan 12th, 2010 @ 11:45 am
85. Sam Mak
I’ve enjoyed all of Malcolm Gladwell’s books recently. I’m only starting now to read into financials so this book would be a good starter. Here’s hoping!
Jan 12th, 2010 @ 2:40 pm
86. InstruMike
Money Ratios sounds interesting
Fav. finance book has to be the intelligent investor
Also anything by Ken Follet or Stephen Hawking
Jan 12th, 2010 @ 3:33 pm
87. tin
The Intelligent Investor by Benjamin Graham
Jan 12th, 2010 @ 3:57 pm
88. Rishi
My favourite book is Zero to Zillionaire by Chellie Campbell
Jan 12th, 2010 @ 4:24 pm
89. lb71
Rohinton Mistry’s “A Fine Balance”. It has nothing to do with finance, and I will probably never read it again since it is so emotionally gut wrenching, but it is one of the best books I have ever read.
Jan 12th, 2010 @ 4:31 pm
90. Shawn
Push by Sapphire
Jan 12th, 2010 @ 5:34 pm
91. Richard
My favorite finance book is The Wealthy Barber.
Jan 12th, 2010 @ 5:34 pm
92. Michael
My favourite book is Lord of the Flies.
Thanks for the contest MDJ
Jan 12th, 2010 @ 5:57 pm
93. TKO
I haven’t read too many finance books but I enjoyed Rich Dad, Poor Dad.
Jan 12th, 2010 @ 6:50 pm
94. Elbyron
I haven’t read a lot of finance books, but my favorite so far is John Bogle’s “The Little Book of Common Sense Investing”. It really opened up my eyes about the truths behind many mutual funds and the benefits of index funds.
Jan 12th, 2010 @ 9:24 pm
95. Catherine
Recently finished Lynch’s “One Up On Wall Street,” which I found both entertaining and educational. I also like “The Wealthy Barber.”
Jan 12th, 2010 @ 9:33 pm
96. NorthernAlex
Hmm. Looks like that I have to read The Millionaire Next Door after I read this one (after winning of course) :-).
Jan 12th, 2010 @ 9:36 pm
97. Fab
My favorite book is : “Pillars of the earth” from Ken Folett.
Jan 12th, 2010 @ 9:40 pm
98. as @ financial tactics
A favourite book: Speak, Memory by Vladimir Nabokov. Nothing about money in it.
Jan 12th, 2010 @ 9:45 pm
99. Jared
Getting Things Done is a great book
Jan 13th, 2010 @ 11:27 am
100. used tires
Some of these ratios have been covered in my Finance courses, good take on it by the author, I may have to see if this book is available at my local library to read up extra on it =D
Till then,
Jean
Jan 13th, 2010 @ 11:47 pm
101. NS
My favorite book is “The Day of The Jackal” by Frederick Forsyth
Jan 14th, 2010 @ 1:33 am
102. Lisamm
Thanks so much for the interesting review of Your Money Ratios by Charles Farrell. We really appreciate the time and effort that went into reading and reviewing this book!
I love books and would have a hard time picking a favorite, but if I had to I’d say Snow Flower and the Secret Fan by Lisa See. It has nothing to do with money or personal finance, though!
Jan 19th, 2010 @ 5:11 pm
103. Ed Rempel
Hi FT,
My favourite finance books are “Stocks for the Long Run” by Jeremy Siegel and “The Myth of the Rational Market” by Justin Fox.
Ed
Jan 22nd, 2010 @ 11:52 pm
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