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The Problem With Money Ratios

I recently finished reading Your Money Ratios: 8 Simple Tools for Financial Security and I wanted to follow up with an article on some of the issues I see with some of Dr. Charles Farrell’s conclusions.

For the most part, I really enjoyed the book. It details 8 ratios that will help turn us from laborers to capitalists. These ratios include the Capital to Income Ratio, which he argues should be 12 times your annual salary at retirement, and The Savings Ratio, which should be 12% of your income if you’re under 45, or 15% if you’re over. He lists several other ratios, including Debt Ratios and Investment Ratios to help us benchmark where we should be at different points in our life.

My problem is that this book is geared more toward people in their 40s and beyond. The ratios work really well for people later in their lives because more people have found their comfort zones by that point and know what their typical expenses and income are and will be for the next several years. In contrast, people in their mid-20s to 30s have constantly changing lives and it’s hard to project our incomes or expenses (which can change rapidly) very far in the future.

Those in their 40s can benchmark their financial situation and see how they’re doing in regards to savings, debt, investment, and insurance. Those in their 50s will receive a realistic assessment of their ability to retire.

For people in their 20s and 30s, Your Money Ratios will tell you how to get started and stay on track over the next 30+ years. It helps see where you need to be at different points in your life and it’s possible that the book will help you reach your goals 5 or 10 years down the line, but if you’re reading it at a young age, you’re almost sure to miss your targets and most of it isn’t even relevant.

Here are a few examples:

  • There are no ratios for people who are under 25. This makes sense because most people younger than that are really just starting out. However, it means that there’s no benchmark for me yet and I have to use the 25-year mark as my benchmark.
  • The capital to income ratio is really hard to attain for most young people. At age 25, who doesn’t have a lot of student loan debt? The capital levels should be really low and likely negative for a few years (and the debt may still be growing), so achieving 0.1% ratio at age 25 is really hard.
  • Mortgage to Income Ratio? Please. The vast majority of 25 year olds are just starting their careers. This is pretty useless for 25 year olds.
The savings ratios are the only ones that are achievable at a young age. A 12% savings ratio is very doable for young people. Even those just out of college. The key is simply to keep living like a college kid! I was more than able to achieve this goal, but the others are simply out of reach.
Readers, do you think the money ratios are relevant to young readers? Should they just be living like a college kid and saving as much as possible without worrying about savings rates and these ratios?


  1. I think for young people ratios may be the wrong view. In your early 20’s I think the emphasis should be on making decisions which will

    a) maximize lifetime income
    b) minimize lifetime expenses (location, avoid debt etc.)
    c) put you on a life path that’s a good fit for you.

    Obviously there are tradeoffs there, but if you do those three things you’re in good shape. I think that’s true even if your savings rate is zero or negative while you accomplish it. You’re in good shape down the road. If you fail to do any of those things, but manage to save 25% of your McDonalds paycheck by living like a hermit, you’ve probably still failed.

  2. The Money Ratios are exceptional tools because they pack a great deal of information into a very simple format and allow you to benchmark your situation against the ratios.

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