Everyone deals with stress in their own way, but there are certain things that just aren’t worth worrying about. If we concern ourselves with every detail, we add on unneeded stress and waste our times worrying when we could be doing a million other things that make us much happier.
Awhile ago, Financial Samurai reviewed Charles Farrell’s “Your Money Ratios,” a book detailing the different ratios we should pay attention to and how these ratios are better indicators of wealth and with the correct ratios, we will be able to retire comfortably and live a high quality life after cutting back on work.
While I love the idea of having a capital to income ratio of 12 by age 65 ($1.2 million in capital if you make $100,000), I think for some people, worrying about your ratios simply isn’t worth it.
There are two times when I think worrying about ratios is a waste of energy and we should be concentrating on other things. The first is if you are in young. For those of us in our 20s, we have been working for only a relatively short period of time, and are at a time when we are dealing with student loan debt.
Basically, we haven’t had enough time to build capital, and therefore, no matter how well we are doing in comparison to our peers, are ratio will be very low and thus a bad indicator. We are only at the beginning of our earning potential, but over time, it will become more apparent what our goals are and how much we’ll need in retirement.
The other situation in which it’s a waste of time to worry about ratios is when we are in debt. When our net worth is below 0, the ratios are thrown out of whack. If Bob were to make $75,000 a year but have $80,000 in debt, his debt ratio would be very high. Instead of worrying about his financial situation, he should figure out a plan to get out of debt as quickly as possible. Once he does that, he can start building wealth and his money ratios will start becoming more meaningful.
Readers, what are your thoughts on money ratios? Should we be concerned with them or should we relax and focus on our individual situations and the more important things?