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Book Review – Your Money Ratios: 8 Simple Tools for Financial Security
Posted By Ron On February 9, 2011 @ 7:45 AM In Book Reviews,Personal Finance | Comments Disabled
If you’re like most people, including me, money can be an intimidating multi-armed animal. There’s so many working parts: savings, retirement, investing, credit, insurance. Seriously, there are a lot of different functions to making money  and understanding it.
 Even though money is complicated on many fronts, on a personal level, Charles Farrell has made personal finance much more understandable with his book, Your Money Ratios: 8 Simple Tools for Financial Security . This book is, in a word, awesome.
I’ve read hundreds of financial books over the past few decades, but this book is perhaps one of the very best at simplifying personal finance. Farrell’s writing is clear and direct as he explains even the most complicated financial situations in terms than anyone can understand. This book is full of sheer common sense and is exceptionally well written, even enjoyable to read. Few financial tomes can reach that level!
Let’s take a look at the individual chapters.
Farrell starts the book by arguing that we need to save at least 12 times our annual salary so we can live in retirement on 80 percent of our annual income. He assumes an annual return of 8 percent so if you think that’s a little generous, you should increase that number to perhaps 15 times or more.
If you make $75,000 per year before taxes, you would save $900,000 and after retiring, withdraw $60,000 each year in retirement. In order to maintain your retirement nest egg at $900,000, you’d have to have returns at 7.15 percent – assuming no inflation. In reality you’d need to average quite a bit more than that to accommodate taxes and inflation.
In order to hit that proper capital to income ratio, you’ll have to save 12 percent of your annual income if you’re under 45 years of age, and 15 percent if your over 45 like me. This money cannot be touched!
The author is pretty adamant about the long term viability of Social Security  (personally, I’m not convinced), and he believes that it will make up about 20 percent of the average retiree’s income.
All your retirement money shouldn’t go into a savings account , some of it should be in a 401(k)  or a Roth IRA (mostly for the tax advantages). You should also consider a brokerage account . The main thing is to make any savings as automatic as possible.
Can debt be something that elevates you from laborer to capitalist? Perhaps, but debt can be a two edged sword and high interest debt should always be avoided. He argues that a mortgage  should be the only debt anyone incurs and even then it should only be two times your annual income
If you’re under 60, Farrell recommends 50 percent of your investment in stocks and the other 50 percent in bonds. If you’re over sixty, invest  more heavily in bonds. Too much in bonds and hitting that 7% plus return that Farrell claims you’ll need in the first chapter might be out of reach. One alternative is to invest  your retirement money in a targeted fund that is aggressive while you’re young and slowly becomes more conservative as you get older.I
Rebalancing and diversification are the two keys to investing properly. Just like Alan Roth explained in How a Second Grader Beats Wall Street , your stock investments should be spread across lots of different companies, preferably using index funds. Your bond investments should largely be in government bonds, but you should be diversified there as well. Annually you should rebalance your portfolio, moving money into your asset classes according to your personal risk tolerance.
Forget Wall Street, CNBC, and the financial media. They’re in it for the short term but we’re in this for the long haul. Don’t let little blips in the Dow Jones frighten you, it’s temporary and you’re not a temporary investor.
You’ll need to insure your income through disability insurance to the tune of 60 percent of your pre-tax income. That’s about what you bring home anyway.
Your life insurance  should be a term policy with a benefit equal to 12 times your salary minus your capital to income ratio (from chapter one). So, for example, if you make $75,000 a year, your total of your capital and your life insurance  benefit should be $900,000 per year. This, of course, means that as you save more, you’ll need less life insurance. As a result, your twenty or thirty year term policy might not have to be renewed at all once the term ends.
Personally, I think 12 times isn’t nearly enough and since life insurance  rates are so low, I carry 20 times my salary.
Wait until you’re in your mid 50’s before looking into long-term care insurance. Prior to that, the cost isn’t worth the benefit but wait too long and the cost will be prohibitive. This is the most complicated chapter in the entire book, but Farrell does a good job of explaining this type of insurance.
With so much up in the air, it would be best to find the lowest cost health insurance  that meets your needs and stick with it until things settle down. Keep yourself fit, eat well, and keep your health insurance  rates low as a result.
If all of this is too complicated, Farrell advises readers to find a professional financial advisor, one that’s competent, ethical, independent, and highly trained. Farrell points out a few warning signs of a bad financial advisor, particularly one who promises unbelievable returns, never asks you about your goals, or constantly only recommends one company’s products.
Your Money Ratios: 8 Simple Tools for Financial Security  is an unqualified BUY from my perspective. This book is so clearly written, so … common sense, that it’s not only a buy but a MUST BUY. This is a book that everyone needs to read and put into practice. Had we followed the advice Farrell gives in Your Money Ratios  over the past few decades, this past financial crisis would have been just a minor blip on the radar. Let’s put these principles to work NOW so we can avoid the next crisis.
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