I’m always on the lookout for great books on financial planning and investing. There are literally thousands of books on these two topics and that makes it hard for many people to figure out where to start.
I recently read Your Money Ratios: 8 Simple Tools for Financial Security by Charles Farrell and think that this is one of the best books on financial planning that I’ve ever read. If you don’t feel confident in how much you should be saving, can afford to spend on housing and other financial planning decisions, start by reading this book.
Before I continue, I do want to make an important point: This is a book about financial planning, not a book about investing. To further explain: financial planning is about figuring out the “big picture” issues, including how much you need to save and invest. Investing is about what you do with the money that you save. Obviously, these two topics are closely related and you cannot discuss financial planning without some reference to investing. That said, this book does not really discuss investing, beyond the assertion that a good baseline asset allocation (without knowing anything about a specific person’s risk tolerance, wealth level, etc.) is probably 50% equities and 50% in fixed income (bonds).
Simple-to-Follow Financial Ratios
There are no hard and fast rules for financial planning, which is part of what makes planning so hard for most individuals. What Mr. Farrell has done with his book, however, is to bring together some solid and simple rules-of-thumb for planning and related these in terms of simple ratios. His overarching point is that a great deal of financial success is determined by some very simple ratios. While there is no way to”prove” that these are correct, Mr. Farrell is drawing on his years of experience and his estimates are consistent with the best research that I’ve seen.
For a very quick run through of one “big picture” concept, take a look at the book’s online retirement calculator where readers can enter a few numbers to get an assessment of how well they are doing in saving for retirement. To really understand the ratios in the calculator, however, you will need to read the book.
Staying Financially “Fit”
Farrell emphasizes that his approach, based on a substantial number of simplifying assumptions, is an estimate. He draws a particularly apt metaphor to the Body Mass Index (BMI).The BMI is a simple ratio of height to weight and is used to provide a very simple metric of whether a person is overweight or not. Yes, the BMI is far from perfect. For example, I know some athletes who have so much muscle that they are rated as “overweight” on the BMI. However, the BMI is simple approach to getting a fast estimate on whether someone is overweight or not.
Farrell’s approach is the same idea, just for your financial “health.”