Book Review: Your Money Ratios – 8 Simple Tools For Financial Security

.

One Thing I Did Not Like. One thing that I did not like was the Investment Ratio. I am going to go ahead and spoil this one because I do not agree with it at all. Farrell is very conservative….very! He recommends in his Investment Ratio for everyone 55 years-old and below to have 50% of their money invested in stocks and mutual funds and the other 50% invested in bonds and bond funds. When the author says that a 55 years-old and below, he means everyone below the age of 55. A 50/50 stock and bond split for a 25 year-old investor is too conservative. Farrell seems to have been traumatized by the market’s recent collapse in 2008. The old rule of thumb used to recommend having 100 minus your age allocated as a percentage in stocks and the rest in bonds. So, for example under that rule of thumb, a 25 year-old investor would have 75% invested in stocks and 25% in bonds, not the 50/50 split that Farrell recommends.

401-k vs. Roth IRA. I have discussed before the pros and cons of investing in a 401-k or a Roth IRA and which one is better. A lot of investors are in a low income tax bracket when they first graduate from college or high school and then usually move into a higher tax bracket towards the end of their careers and in retirement. Because 401k money is taxed when you withdraw it, you would then end up paying more in taxes using a 401k retirement plan rather than a Roth IRA in most scenarios. There is a distinct tax advantage to maxing out your contributions to a Roth IRA first, and then investing in a 401k plan with any additional savings after that. Farrell makes the argument in his book that it does not matter which type of account you use. He says that there is no difference or benefits to picking one plan or the other. His premise is based on the assumption that your tax rates will be the same in retirement as they are in your working lifetime. You are only shifting when you pay your taxes. With a Roth IRA, you pay your taxes now but earn less money in total towards retirement. With a 401-k or traditional IRA, you are spared the tax when you start investing, the money grows to a large sum over the course of your working life, and then it is taxed when you withdraw it. He likens it to shifting numbers around in an arithmetic problem.  

“Your Money Ratios – 8 Simple Tools For Financial Security” is a great resource to help you learn how much you should have for total savings at each age, what tax and investments vehicles can help you maximize your savings, how much you should be saving each year, how much mortgage debt you should have, how much insurance you need, and other key metrics in your financial life. I would definitely recommend this book for those just starting out or those investors who want to reaffirm that they are heading in the right direction towards retirement. But, I caution readers to take some of the author’s recommendations with a grain of salt.

© Own The Dollar – This posting originally appeared on the blog, Own The Dollar. Visit the website for more great content.

Related posts:

1. Book Review: One Year To An Organized Financial Life By Regina Leeds My home office looks like a filing cabinet (or two)…
2. Book Review: The Citi Commonsense Money Guide For Real People The Citi Office of Financial Education has written a personal…
3. Crush It: Cash In On Your Passion By Gary Vaynerchuk – Book Review & Giveaway! There have been very few books that I have read…