Every Sunday, The Simple Dollar reviews a personal finance book or other book of related interest.

One thing I often do when looking for books to read and review for The Simple Dollar is simply go to the “new releases” section of my local library and browse the personal finance new releases. That is exactly how I stumbled upon Your Money Ratios by Charles Farrell.

My usual method of deciding whether to review a book is to simply study the dust jacket for a moment, seeing if there’s anything there that gives me an indication I should stay away (like talk about “financial apocalypse” or something else wholly fear based). I usually then open the book to several random places and see if I find anything interesting, and if I’m still unsure, I’ll take the book to a chair and read the first chapter or so.

I popped this book open to the start of the first chapter and was immediately intrigued. Let’s see what exactly Farrell has to say in this book.

1 | The Capital to Income Ratio
Farrell opens the book by arguing that, by the time you retire, you need to accumulate 12 times your annual salary, which will put you in the position to live on about 80% of your annual income. The “12 times” number comes about from an assumption that your money will return, on average, 8% a year. Thus, if you feel like that return is too optimistic, you should have a higher “times” number.

Let’s say you make $50,000 a year – not in take home, but in total income before taxes. Farrell argues that you need to have $600,000 saved for retirement. Then, each year, you would withdraw $40,000 (80% of your salary) of that $600,000 and leave the rest invested. In order to maintain the same balance of $600,000, your investment would have to earn 7.15% – and, ideally, it would earn a little bit more than that to help you keep pace with inflation.

2 | The Savings Ratio
In order to achieve that goal, you need to be saving some portion of your income. In some form or another, Farrell argues that you need to be saving 12% of your income (if you’re 45 or under) or 15% of your income (if you’re over 45). This means savings that you’re retaining, not savings that you’re simply spending in a year or two. The most common place people put this is in their retirement savings.

3 | Social Security
Farrell makes an impassioned argument about the long-term stability of Social Security and argues that it will make up around 20% of the average American’s retirement income. I tend to plan for retirement assuming nothing from Social Security, as I intend to look at any Social Security checks I receive as icing on the cake.

4 | Where to Save Your Money
As you sock away money to meet that “twelve times” goal from the first chapter, your priority should first be to your 401(k), then to your IRA, then to other investing options. I think that’s reasonable, though I think there are some fair arguments one could have about a Roth IRA versus a 401(k). You need this savings to be automatic, so set up automatic deductions from your paycheck or automatic transfers out of your checking account to cover this savings.

5 | The Debt Ratios
This chapter looks at the simple question of whether debt can help you to move from being a laborer to a capitalist. In a narrow sense, yes, it can, as debt can reduce the monthly cost of your housing and other needs in the short term. However, if you don’t pay off that debt at a reasonable rate – or if you acquire high-interest consumer debt – your debt will hold you down. His big point is that borrowing for a mortgage is pretty much the only significant debt an adult should acquire and that it should at most be two times one’s household income.

6 | The Investment Ratio
If you’re under sixty, Farrell recommends having half of your investment in stocks and the other half in bonds. If you’re over sixty, it should move more towards bonds. This is a pretty conservative investment stance, one that would be a bit of a stretch to get the 7% return that Farrell claims you will need in the first chapter. I think it’s reasonable, though, to park your money in a target retirement fund, as these will provide the same “more conservative as you age” effect, but add more risk and reward when you’re younger.

7 | Stocks and Bonds 101
Two things are needed here: rebalancing and diversification. Your stock investments should be spread across lots of different companies, including international ones, big ones, and small ones. Your bond investments should largely be in government bonds, but should be diversified there as well. For rebalancing, each year you should move money between the stocks and bonds to restore the overall 50-50 balance described earlier.

8 | Ignoring Wall Street
Don’t spend your time worrying about what Wall Street is saying. They’re often worried about the short term – the next few years – while you’re not really that concerned about it at all. You’re worried about the long term, something rarely discussed on CNBC. Don’t let it worry you.

9 | The Disability Insurance Ratio
Farrell recommends getting coverage equal to 60% of your income, which will roughly amount to your current income after taxes. This payoff will largely replace your current take-home, which means your current standard of living won’t be significantly altered by a disability.

10 | The Life Insurance Ratio
Your life insurance should be a term policy that pays out 12 times your salary minus your capital-to-income ratio (discussed earlier). So, for example, if you make $70,000 a year, your total of your capital and your life insurance benefit should be $840,000 per year.

This, of course, means that as you save more, you should need less life insurance. Thus, a twenty or thirty year term policy might not have to be renewed at all once the term ends.

11 | The Long-Term Care Insurance Ratio
You should start looking into long-term care insurance in your mid-fifties, not before. Before that, the risk is so low as to not be worth the cost. After that, your risk goes up enough that the cost might be prohibitive. This chapter is easily the most complicated in the book, but it also has a fairly small target audience (people in their fifties).

12 | Health Insurance
Farrell’s argument here is that health insurance is going through major reform and thus the best thing you can do to insure yourself the lowest cost on health insurance is to simply focus on yourself. Keep fit. Eat well. Doing these things will keep your health insurance costs lower and extend your healthy lifespan.

13 | Getting Professional Help
If all of this is too complicated, Farrell advises seeking a professional financial advisor. The factors you should look for are competence and training, ethics, and independence. Beyond that, I recommend seeking a fee-based advisor who doesn’t have a financial stake in pushing you towards certain investments. Farrell offers a few warning signs of a bad advisor, particularly one who promises over-the-top returns or anything like that.

Is Your Money Ratios Worth Reading?
Your Money Ratios succeeds in setting up a handful of numerical “rules” for people to simply follow – and if they follow them, they will find themselves in a reasonably good financial spot. In places, the book does a good job of explaining the “why” behind the ratio and the numbers are largely based on good principles (though I think the predictions about future returns are a bit strong).

If you like numbers but are pretty uncertain as to exactly how to calculate what you’ll need for retirement and for other purposes, Your Money Ratios is an excellent book for you to read.

Every Sunday, The Simple Dollar reviews a personal finance book or other book of interest to readers of The Simple Dollar.

If you’ve been reading The Simple Dollar for a while, you know that I love the “Little Book” series by Wiley Publishing. It’s a book series of small, relatively short hardbacks with about twenty short chapters. Each book in the series focuses on a specific personal finance or investment topic, striving to spell it out in plain English. Often, it’s written by a leader in the field, particularly by someone who believes deeply in the methodology being described. Almost unanimously, the entries in the series have been well worth reading, particularly if you have even a minimal interest in investing. The books do a fantastic job of breaking down ideas into little, comprehensible nuggets.

The most recent book in the series that I have yet to review (there are actually two more that have been published very recently that I’ve not even laid eyes on yet) is The Little Book of Behavioral Investing by James Montier, a renowned value investor. This entry in the series focuses on how normal human behavior often works against us when it comes to investing, a phenomenon that’s been covered in other personal finance books. Unfortunately, those other books have often been dry ones, often failing to relate the concepts they talk about to your day-to-day behavior.

Does The Little Book of Behavioral Investing succeed where the others fail? Is it a book worth reading? Let’s dig in.

One – In the Heat of the Moment
Poor decisions are made in the heat of the moment. Just think of impulse buying at your local supermarket. Montier proposes, sensibly, that the route to financial success is almost always preparation of and pre-commitment to a detailed, clear plan. Spend some time figuring out exactly what you’re going to do, what your goals are, and what your parameters are before you even dive in. It’s no different than writing a grocery list before you go to the store – you’re curbing impulse buys.

Two – Who’s Afraid of the Big Bad Market?
When people experience financial loss, they often react much in the same way they do when they’re bitten. They retreat. They certainly don’t want to invest more. Yet, quite often, the correct response to a loss in a stock investment is to invest more because you’re essentially paying a sale price on the same exact company that cost quite a bit more just a month ago. If your fundamental gameplan hasn’t changed, don’t react to a downturn by selling – react to it by buying.

Three – Always Look on the Bright Side of Life
On the other hand, when people see a positive trend, they tend to get overoptimistic. They believe that it’ll continue on forever and they dive in like crazy – often when things are hitting their peak. This is why bubbles form – a good investment reaches a reasonable peak, but keeps on going because the blind optimists dive in, driving the price far above what it should be rationally. When the blind optimists then try to sell, there aren’t enough buyers and the price collapses.

Four – Why Does Anyone Listen to These Guys?
Experts are not perfect. Although they might be more knowledgable about the market, they also tend to be overconfident, as they believe that they know more than the other investors. That’s a bad mix that often causes investment experts to do worse than the average person on the street. Overconfidence can completely ruin any advantage that you might have.

Five – The Folly of Forecasting
No one can predict the future, but lots of people certainly try. Unfortunately, past performance is never an indication of future results. The best thing an investor can do is understand where they are right now. Have they met their goals? If you create a plan in advance and stick to it, you don’t have to try to predict the future.

Six – Information Overload
There’s an overabundance of information available for investors. While on one level that can seem like a great thing, the truth is that it can actually be a terrible thing. People can get lost in the data. They can get sucked into “analysis paralysis,” where they won’t take action until they can analyze all the information – and by the time their analysis is done, the situation has changed. The key here is to focus your analysis on very specific elements that you understand.

Seven – Turn Off That Bubblevision
Many people obsess and stress over every little fluctuation in the stock market, and channels like CNBC fuel the obsession. Unfortunately, such obsession often leads to oversensitivity to little fluctuations and thus causes hair-trigger responses that are usually poor. Turn off the bubblevision and seek out real, hard information that matters to you instead.

Eight – See No Evil, Hear No Evil
Most people look for evidence that confirms the ideas they already have (think about talk radio, for example). However, doing that will often be disastrous for your investments. You should instead constantly look for information that disproves your assumptions. If you think a company is successful, for example, you should seek out signs that indicate that it’s not successful.

Nine – In the Land of the Perma-Bear and the Perma-Bull
Some people believe the stock market is always headed in the right direction (”perma-bulls”). Others believe that the stock market is always headed in the wrong direction (”perma-bears”). Obviously, neither one is right and, obviously, neither one of these folks can ever be a truly successful investor. Every market has ups and downs – if you constantly believe one or the other is about to happen regardless of what’s happening now, you’ll always make mistakes.

Ten – The Siren Song of Stories
A good story is incredibly appealing to us because it makes things that seemingly don’t make any sense make, well, sense. We do this all the time – our memories are a perfect example of this. We take random events in our lives and polish them until they make a coherent story. The problem is that with investing, the data rarely tells a simple story like this. When we try to mold it into a simple story, we overlook big parts of the picture and often end up making poor choices. Don’t worry about the story.

Eleven – This Time Is Different
All markets have bubbles – and those bubbles eventually burst. Every time, though, as people are buying in like mad, you hear stories about how this one is different than the rest because of some reason. That’s basically never the case. What happens, inevitably, is that too many people buy in because they believe they’re going to get rich. Suddenly, there are too many people holding the things they’ve bought and no one’s around to buy them. Every time a market begins to seriously diverge from long-established fundamentals, there’s usually a bubble involved and you’re better off avoiding it.

Twelve – Right for the Wrong Reason, or Wrong for the Right Reason
As was mentioned earlier, we tend to gloss over the past to create nice stories about it. That glossing, mixed with our optimism, often results in our blaming others for the mistakes we made in the past. The truth is much harsher: whenever we lose money, we’re at fault, and there are valuable lessons to be learned from figuring out what exactly went wrong.

Thirteen – The Perils of ADHD Investing
If you’re an attentive investor, it’s often tempting to jump in and make changes all the time. We hear some good or bad news and we want to react quickly to it by buying or selling. Unfortunately, our snap decisions are often absorbed right into the market and the only person that makes money is the stockbroker. If you have a plan in place – and you certainly should – stick to that plan. Don’t let a sudden piece of news or a sudden impulse steer you off of that plan.

Fourteen – Inside the Mind of a Lemming
It often can feel very uncomfortable to zig when others are zagging, particularly when we have money at stake. If we see lots of people doing a certain thing, it’s easy to convince ourselves that it must be the right thing to do. The key here is to step back and look at it objectively without the influence of other people. Make your decision based on the information, not on what everyone else is doing.

Fifteen – You Gotta Know When to Fold Them
A big part of your overall plan – remember, the one you decided on before you started investing? – is when to sell. You should decide before you even begin how much volatility you’re willing to accept and how big the losses have to be before you would sell. The decision needs to be made before you even put a dollar in so you can react in accordance with your plan, not in accordance to your nerves.

Sixteen – Process, Process, Process
What does all of this add up to? You need to always be examining the world around you and, most importantly, you need to try to remove the human element from your investing decisions. Come up with a plan, refine the plan, invest, then stick to the plan. Don’t let your nerves or the actions of others get in your way.

Is The Little Book of Behavioral Investing Worth Reading?
For the most part, The Little Book of Behavioral Investing reiterates much of the basic material on behavior and personal finance that can be found in other books. The Little Book of Behavioral Investing works, though, because it’s written in such plain language and, perhaps most importantly of all, it includes a lot of very vivid explanations and illustrations of our behavioral quirks.

A book on behavioral investing should be something that everyone reads before they jump into the investing pool. The Little Book of Behavioral Investing is as good a place as any to pick up that information. It’s approachable, clear, and, dare I say, fun.

If you’re interested in my reviews of earlier books in the “Little Book” series, here’s a list of those reviews. I’ve almost universally enjoyed them.
The Little Book of Bull Moves in Bear Markets
The Little Book of Common Sense Investing
The Little Book of Main Street Money
The Little Book of Safe Money
The Little Book Of Value Investing
The Little Book That Beats The Market
The Little Book That Builds Wealth
The Little Book That Makes You Rich
The Little Book That Saves Your Assets

Every Sunday, The Simple Dollar reviews a personal finance book or other book of interest to Simple Dollar readers.

The entire argument of Seth Godin’s book Linchpin is that there are no longer any great jobs where someone tells you what to do. That’s not to say there aren’t great jobs out there – there are many – but they now require the ability to basically blaze your own path, creating things and building connections that are indispensable to those around you. That person, in Godin’s terminology, is a linchpin.

I think, to a degree, this general argument is spot on. We live in a globalized world where most jobs can be shipped anywhere, from Mexico to Indonesia. Jobs in which people are merely following instructions all day are among the easiest to ship and the few that remain in America aren’t going to be strongly financially rewarding. Success comes from making yourself essential to the operation – and simply following orders, even if you do it well, keeps you firmly in the “replaceable cog” camp.

How do you stand out? What kinds of choices can you make to turn yourself into someone indispensable? Let’s dig in and see what the book has to say.

The New World of Work
Most jobs where you simply follow instructions and do a faceless job demean the real value you provide. They’re faceless jobs, but you’re not a faceless person. You’re not merely a cog in the machine of capitalism – but your job might be. The biggest difference between a follow-the-instructions job and a linchpin is that a linchpin creates his or her own value, whereas an instruction follower doesn’t add any value beyond a specified task that’s completed. A linchpin works in ways that improves those around him or her, while an instruction-follower simply follows the tasks at hand. I like to think of it this way: what’s the difference between a mediocre administrative assistant and the best administrative assistant you can imagine? That’s roughly the difference between a person who is a linchpin and a person who is not.

Thinking About Your Choice
The choice that’s on your plate is simple: do you keep merely following instructions and counting the days until Friday or do you look for ways to make yourself transcend those roles and become a linchpin? This is an urgent question, because a global marketplace makes the instruction-follower role more dispensable than ever. Some people are content to fill the role of instruction-follower – and that’s fine. However, the career opportunities for such people are simply shrinking – that’s a fact of life.

Indoctrination: How We Got Here
Most of what we learn in school serves one purpose – to make you an effective person at filling an instruction-follower job. Schools do not encourage creative thinking (which is an invaluable part of being a linchpin) – instead, they encourage lots of rote memorization and repetitive tasks which are scored on standardized tests. It’s a pretty neat trick to make school funding tied to these standardized tests, isn’t it?

Becoming the Linchpin
Every workplace has a few people that are simply indispensable. They take very challenging situations and make them work. They seem to solve tons and tons of problems. They’re the ones everyone goes to when there are crises. Those people are the indispensable ones – if you’re not one of them, you’re a lot more dispensable than they are. The question really is whether or not you’re willing to work to become one of those indispensable folks.

Is It Possible to Do Hard Work in a Cubicle?
Being a linchpin means a lot of hard work. The biggest part of it is being willing to give all of what you have to doing a great job. This does not mean just filling your hours with whatever task you’re assigned. It means bringing all of your passion, your ideas, and your creativity to the table whenever you work. It means taking on the hard problems that might scare you a little bit (or more than a little bit).

The Resistance
Our brains typically work in resistance to those kinds of tasks – we’re biologically wired to look out purely for number one. We avoid risk. We avoid anything that might be perceived as a threat. We avoid generosity. However, all of these things – risk, taking on threats, generosity – are key parts of being a linchpin. We have to work hard to overcome these resistances in order to become something greater.

The Powerful Culture of Gifts
Giving of yourself to others opens countless doors. Our brains often expect immediate reciprocity – if we give something, we want something in return and soon. The world rarely works that way. Our generosity – going above and beyond the expectations of others – builds a strong reputation for us, one that secures our work and builds positive relationships and interactions for us in ways we often never directly see. Quid pro quos rarely work – but building a strong reputation for great work and generosity certainly does.

There Is No Map
How do you do this? Unfortunately, there is no road map – and that’s a big part of the difficulty of it. You have to seek out the challenges in your own situation and take them on head first. You have to seek ways to up the quality of whatever it is you’re doing. In other words, you have to go off the instruction sheet – and that’s the real challenge.

Making the Choice
Linchpin value is created by what you choose to do, not by what you’re born with. Anyone can become a linchpin – it’s not an inborn trait, it’s a sequence of choices to step beyond the instructions and do things that improve everyone around you. It’s a scary choice, but it’s still a choice, one that offers a lot of rewards if you’re willing to take the leap.

The Culture of Connection
In order to succeed as a linchpin, you have to build a lot of connections with the people around you. Indispensable work is work that’s connected to the work that others do. You build on their work and they thrive on the work you’ve done. A big part of this is personality and attitude and a big first step is to recognize that negativity towards others will never, ever get you to being a linchpin. Positive relationships are the ones upon which you can build great things.

The Seven Abilities of the Linchpin
Here are the seven abilities, in a nutshell, from page 218:

1. Providing a unique interface between members of the organization
2. Delivering unique creativity
3. Managing a situation or organization of great complexity
4. Leading customers
5. Inspiring staff
6. Providing deep domain knowledge
7. Possessing a unique talent

Linchpins provide at least one of the things on this list and often provide more than one. It’s key to remember that these things are there to provide value to the people around you and make their work better, because in doing so you make yourself indispensable.

When It Doesn’t Work
If you’re trying to be a linchpin and it isn’t working, blind persistence is usually not the way to go. The value of a linchpin isn’t in repeating things that aren’t clicking or working. Instead, they constantly seek out new approaches and ideas and try them, instead. No one has a 100% success rate with their endeavors and ideas, but it is the successful ones that provide so much that they more than make up for the failed attempts.

Is Linchpin Worth Reading?
If I were to hand a recent graduate or a twentysomething a book on modern careers and how to succed in them today, I’m pretty sure that Linchpin would be the first book that I would grab.

The ideas in this book are reflected in virtually every workplace I’ve ever been a part of, from entry-level work to highly technical work. The people that stepped up to help others and solve problems were the ones that were indispensable, while the others merely hoped to hold onto their jobs. I also noticed that the people who stepped up to the challenge tended to be a lot more positive about their job, whereas the people who were dispensable were negative about their job and the people around them.

There are a lot of great ideas about the modern workplace in this book. If you’re struggling in your career, Linchpin is probably well worth a read.

Every Sunday, The Simple Dollar reviews a personal finance book or other book of interest. You can check out my reviews of hundreds of personal finance books (and other related books of interest) all on one page.

Bargain Junkie is an unabashed frugality book, focusing mostly on maximizing your “bang for the buck” when spending money.

The book itself is broken down into a large number of very short sections covering specific frugality issues, often written in a humorous and often self-deprecating tone that’s pretty appealing.

Obviously, when you read a lot of frugality books, you begin to recognize that some of the central points in each book appear in all the books – which is fine, since there’s a very good chance that this is the first book on frugality that the person has picked up and many of the repeated ideas are the very good ideas that a person should use. Bargain Junkie follows this pattern and spends a significant number of its pages on what I would call Frugality 101, which makes it an equally good “starter” book as many other frugality titles out there.

What sets it apart, though? Instead of doing a section-by-section review of the multitude of short pieces in the book, I picked out ten short sections that really stood out to me.

Television Is A Model For How Not To Live
Instead of looking at how people live on television as something to strive for, use it as a guide for something to avoid. After all, do you want a unique and wonderful life or do you want to just be a pale imitation of that guy in the television commercial? Do you want to live by your own rules, or merely imitate the crass consumerism of The Real Housewives of East Overshoe?

Extended Households
Living quarters are one of the biggest expenses in our lives. Yet, quite often, large portions of our living quarters go completely unused as we often get into the routine of using just a room or two in our home for most of our activities. So why not share that extra space? Consider a more communal living arrangement, where you actually live with friends and family and split the housing cost appropriately. It works surprisingly well and it can save a truckload of money.

Collecting
Collecting can be a worthwhile venture for frugal people provided two things are true. First, you’re quite willing to sell off what you’ve collected. Second, you’re willing to keep up with the hobby and stay abreast of prices and information about it. If you do both of these, you can often find a very lucrative hobby from hitting thrift stores and the like. I actually have a friend who buys and sells vintage video games who claims to have bought games at many thrift stores for fifty cents and resold them for hundreds (think Chase the Chuck Wagon). I’ve even done it myself with trading cards of various types.

Try It Yourself Before Paying an Expert
Home repairs? Try it yourself by reading documentation online and giving it a shot. Exercise? Try home exercise before buying a gym membership and paying a trainer. Virtually everything you do that you hire someone else for can be done yourself. So why not try it and make sure you actually need to shell out the money for someone else to do it? Exercise at home first and make sure you’re willing to keep up some routine before hiring a trainer, for example, and you might find you don’t even need one.

Go Monastic
Why do you have to live the same life everyone else does? If you live cheap and build up a bankroll, there’s no reason you can’t sell everything and live out of your kayak for a couple of years. The only thing keeping you from doing something completely different in your life is your own fears. Most of the big dreams people have are usually really cheap when you get right down to it, so it’s rarely the cost that keeps us from doing something like driving around the country in a solar car talking at public libraries.

Buy Your Own Presents
Quite often, gift-giving occasions come down to giving other people stuff they don’t want and you receiving stuff you don’t want. Why? Sit down and have a heart-to-heart with the person and, instead of just exchanging gifts, pledge to do something fun and unique together that you both want to do. You’ll probably save money and almost always wind up doing something much more memorable, enjoyable, and long lasting.

Craigslist/Freecycle First
Whenever you need anything, it’s usually worth your time to check the local Craigslist or Freecycle before going out and buying it. You can often find great stuff for pennies or for free. Heck, I’m learning how to play the keyboard on a free Craigslist item. Similarly, if you have something you’re getting rid of, put it up on that list with a low price tag. Quite often, it’ll be off your hands without breaking a sweat.

Large City Travel
If you’re traveling to a large city, study the public transportation information for that city online before you go. In many large cities, you can have a wonderful trip there without renting a car or paying for a taxi by simply knowing and using their public transportation system. My wife and I spent a week in London several years ago without renting a car or taking a taxi, even from the airport.

The Biggest Element of Dressing Well
The biggest element in dressing well isn’t buying clothes from the expensive stores. It’s self-confidence. You have to be proud of yourself no matter what you’re wearing. If your confidence is the same no matter what you’re wearing, then it really doesn’t matter much at all what you’re wearing. A person’s confidence and personality always comes through.

I used to be fairly nervous wearing things bought at thrift stores. “Won’t people look down at these secondhand clothes?” I would think. I’d be more self-conscious and then I’d find that people did think less of me than I would have liked. But it wasn’t because of the clothes – it was because I was so self-conscious, nervous, and shy. The clothes don’t make the person.

Hit Ethnic Restaurants – Hard
This is something I did myself in college and still do on occasion. In terms of the quantity and quality of food you get for the dollar, few places beat ethnic restaurants. Go there, order something intriguing, and you’ll find yourself leaving with a doggy bag containing enough food for two more meals or so. I can’t tell you the number of times I’ve eaten leftover sauteed vegetables over rice where the price of each meal I actually got from the restaurant dish was cut down to the $2 level. I know some professors at my old college who almost exclusively eat (even to the exclusion of home food prep) at local ethnic restaurants.

Is Bargain Junkie Worth Reading?
Bargain Junkie feels very much to me like a collection of posts from a frugality blog with a very good writer and entertaining voice. The sections in the book are quick reads that usually each convey a central point or two or provide a checklist of highly specific tips and are packed with anecdotes that either make you laugh or breed familiarity with the reader.

Annie should start a blog, period. I would happily link to some of those entries and she’d probably end up earning more revenue from it than she would from this book over the long run. If you enjoy reading well-written, occasionally humorous blog post length articles about frugality and maximizing your buying dollar, you will enjoy this book.

My biggest problem with the book, actually, is in the design. To me, the design of the cover is poor to the point that I would have not picked up this book had I not had a vested interest in reviewing it. There are thousands of great books out there to read – I would probably walk on by this book on a bookshelf simply because there are so many other great books that I could be reading that didn’t give me a “go away, this book isn’t for you” vibe right from the cover. Yes, I know the cover was shooting for a certain demographic, but you can reach those people without giving a “go away” vibe to others outside that demographic.

Still, once I got past the cover, the book inside was quite worthwhile – an entertaining survey of frugal ideas.

Every Sunday, The Simple Dollar reviews a personal finance book or other book of interest.

A few years ago, I read and really enjoyed Phil Town’s first investment book, Rule #1 (you can read my review here). Town actually contacted me after reading my review and offered a few thoughts on my comments on the book and we exchanged a few emails over the years. Thus, when he finished his follow-up book, I was quite happy to give it a read.

Town’s basic ideas are pretty straightforward. He believes ardently in value investing, meaning that you look for good, healthy companies that are selling for much less than they should be when compared to similar companies. That requires a great deal of patience to do. In both this book and his last book, he goes over a straightforward formula for finding those companies and identifying whether they’re on sale or not.

So what makes this book different than the earlier book? Let’s dig in and take a look.

How the Wealthy Use Down to Go Up
Town opens the book by explaining the basic strategy Payback Time is focused on, which he calls “stockpiling.” To put it simply, a person buys stock in an individual company that they deeply believe in for whatever reason, then they just keep buying more and more of it. They then use the dividends from the stock to live off of or they reinvest them into more of the stock. So how does this strategy use “down” to go “up”? If you’re owning this for the long haul – basically forever – you actually hope for a down market so that the price of the stock you’re buying is lower. Price does not indicate value in any way – it’s no different than buying the same item at the store when it’s on sale instead of when it’s not on sale.

Mutual Fund Investing Makes No Sense
Here, Town basically writes off every kind of fund that’s not an index fund as junk and a waste of your money. In short, he defines such funds as being the bastion of the investor who really doesn’t have any idea what they’re doing with their money. Sometimes, that’s acceptable if people recognize that they truly don’t have the time to study such things with any detail. For those people, the only real bet is index funds, which are low cost and usually match the market. You can’t hit home runs with them, but you certainly won’t strike out by buying them.

Threee Ms Equal No-Risk Investments
There are a lot of traits that a “perfect” business would have, but there is no perfect business in this world – nobody’s perfect, after all. Instead, Town looks for wonderful businesses to invest in, and wonderful businesses are usually characterized by three criteria – they have great meaning to you (meaning you understand the company and fully approve of their business model), they have a big moat (meaning that it’s protected from competition in some key way, making it both durable and profitable), and they have great management (dedicated, passionate, and honest people running the shop). These are the kinds of businesses you should constantly be looking for and investing in.

Payback Time Means “No Fear”
Once you’ve identified businesses you want to invest in, you should wait until the time is right to buy – in other words, when they’re on sale. How do you know? It has little to do with what the overall market is doing. Instead, you want to watch the P/E ratio (price to earnings) of the stock. You can easily get this information online at pretty much any stock investment website. Just wait until that ratio is noticeably lower than usual without any real changes in how the company is performing (this often happens when it’s not being hyped up at all but is just trucking along, doing its business) and buy in. When the P/E ratio is high, don’t buy (and if you have a reason, it might be a time to sell). He goes quite in depth with this formula, but much of the information is very, very similar to his earlier book Rule #1, which I mentioned earlier and liked.

Eight Baby Steps to Wealth
What are the eight steps? Find it, value it, watch it, buy it, own it, stockpile it, sell it, repeat. In other words, look patiently for companies that meet your criteria (and never rush into buying). When you find the right one, buy it. Keep buying it whenever the P/E ratio (and other indicators) tell you to do so. Sit on the stock and collect dividends. When that ratio gets high, sell the stock. Then repeat. It’s pretty straightforward and actually makes a great deal of sense, particularly to a conservative investor like me.

Just the FACs, Ma’am
Here, Town talks about two methods for determining whether or not you should buy more of a stock once you already own some. He spends most of his time focusing on a method that centers on technical analysis (i.e., looking at charts), which is a method I find to be akin to voodoo. Instead, I prefer the other method, which basically means you pick one day a month to evaluate a stock. If it’s below the P/E ratio (or other similar indicator) you bought the stock at originally, you buy. Otherwise, you stick the money into a savings account and wait until a month when it’s low enough to buy.

A Tale of One Family
All of the information in the previous few chapters is combined together into a real-world look at how a family invests. Basically, it’s a series of real-number examples of the ideas from the book, showing how they all work together and click.

Free Money with a Berky
The final chapter (or at least the last one that’s not functionally an epilogue) contains a brilliant idea that Town calls a “Berky” (short for Berkshire Hathaway) that answers the question of how people come up with the money to actually do this kind of investing. It’s actually simple: automatic savings. You should set up a savings account for the sole purpose of investing according to the ideas in this book (or your own principles). Have your bank put some amount automatically into this account each week (or each month). Then, invest solely from that account. This way, even if the investment tanks, it doesn’t affect your day-to-day personal finances – it’s just an exercise in building wealth. This is absolutely the way people should start investing if they’re tempted.

Is Payback Time Worth Reading?
As with many follow-up books, Town takes the content of his very good earlier book, Rule #1, and places it in a broader context. If you want to know more about the investing part of the book, I’d suggest reading the earlier book as well.

One common complaint about Rule #1 that I would anticipate with this book is that people ask where the details are on past results, as Town doesn’t dwell on this for any significant length. My thought is this: past performance is no indication of future results. Much like any other investment strategy book, it’s simply a tool in your arsenal, one you can use in your own investigations to figure out what works. There are lots of investment schemes that have great results for a period in the past but are awful today (that’s why fund managers never have long strings of success). The system that Town espouses is incredibly simple, can be easily tracked over a long period using pretty much any investing website, and is backed by a good idea (value investing). Does it mean it’s the be-all-end-all of investment strategies? No. But it has enough going for it (simplicity, logic, and clarity) that it’s worth at least paying attention to.

All of that being said, I did feel in the end that I learned more (or at least was provoked into more thought) reading Rule #1, but that may have been that the meatiest parts of this book often just rehashed that information. Both books are worthwhile reads, however, and present interesting ideas, which is all I can really ask for in an investment book.

Every Sunday, The Simple Dollar reviews a personal finance book or related book of interest.

For a long time, I avoided reading this book. The title seemed unnecessarily fear-mongering and apocalyptic to me and that’s a subgenre of personal finance books that I really have no interest in. Personal finance has such a profound power to improve people’s lives and give them hope that selling the ideas with a big spoonful of fear and paranoia is something I have no interest in.

However, the author, Ed Slott, has a point. Rather than focusing on a fear of the unknown, which is what many personal finance books do, this one focuses on a known concern. If you have a bunch of money stored away in your 401(k), it’s simply a fact that the government is going to take some of that in taxes. If you haven’t thought about that and planned for that, then, yes, retiring can be something of a time bomb.

Once I got past the overly dramatic title and actually read the book, I realized that there were a lot of good points in it. The entire focus of The Retirement Savings Time Bomb… And How to Defuse It is minimizing the tax impact on your retirement savings without giving up returns along the way. This way, you don’t have to worry about tax guesswork in your retirement planning, especially when taxes are very easy to miscalculate.

What does Slott suggest? The book boils down to a five point plan that focuses on the biggest objectives that people mention with their retirement money: protecting it from taxation, using it for emergencies without tax penalties, and passing on as much as possible to descendents. Let’s dig in.

The Crime of the Century
There are lots of horror stories of people attempting to make major moves and withdrawals, only to see them backfire in their face. Slott relates several of them here. The rule of thumb I learned from them is simple: if you’re going to make a move involving a large sum of cash, consult a tax attorney first. Most of these stories seemed to revolve around people simply making moves with a lot of money on their own because they seemed straightforward, then realized they hadn’t thought about the tax consequences of them.

What’s Your Risk IQ?
Here, Slott runs through some of the “mis-steps” that people make in their retirement planning that often creates a tax burden: putting most of their money into a 401(k), for instance, or not specifying an appropriate plan as to who actually is the beneficiary of the money once you pass on.

Roll Over, Stay Put, or Withdraw?
Whenever people leave a job where they have a retirement savings plan in place, they often have three choices: roll it over into an IRA, stay put in that plan, or withdraw it now. Each choice has benefits and drawbacks, but those benefits and drawbacks often shift based on changing tax rules. The best solution if you have a significant amount of money, from my perspective, is to consult a fee-based financial planner to make sure you’re not making a big tax mistake. Remember, all you’re trying to do is to maximize the amount of money you retain in your pocket from your savings.

Step #1: Time It Smartly
The focus here is the required beginning date (the date by which you must start taking money out of your retirement savings accounts) and the required minimum distribution (the minimum amount you must withdraw each year). Usually, the best method for minimizing your taxes on that money is to start withdrawing as close to the required beginning date as you can without going over and withdrawing just the minimum amount.

Step #2: Insure It
You should always back up your retirement plan with a healthy term life insurance policy. This way, if you pass away before you’ve spent your money, your family isn’t required to make a sudden decision to withdraw your retirement money in order to survive – a withdrawal that would cause a big, panful tax penalty.

Step #3: Stretch It
You should take the minimum distribution you can along the way, leaving as much as possible in the account. This way, the remaining amount has much more of a chance to grow and benefit from the power of compound interest, meaning it could last throughout your life and the life of your children, too.

Step #4: Roth It
A Roth IRA is a very strong place to put your money each year as the normal (appropriately timed) withdrawals from it have no tax penalty whatsoever for you. If you are eligible (if you earn under $100K a year, you likely are), a Roth IRA should be part of your retirement planning, according to Slott. I can say that I have one that’s fully funded and it makes me feel a lot more secure about retirement.

Step #5: Avoid the Death Tax Trap
In the end, though, it’s about your plans. Do you want to leave something long-lasting for your children and other descendents (or maybe for charities and causes that you leave your money to)? Or do you only care about covering for your spouse if you pass away? In each case, you should set up beneficiaries quite differently, and Slott walks through each of those options. For us, the biggest concern is to ensure that our partner is fine if one of us passes on later in life, so we’re planning for that outcome. Of course, a lot of these rules only apply if you have a reasonably large estate – for small estates, it’s much more straightforward.

What to Do When S[tuff] Happens
This chapter mostly covers a lot of the current loopholes for using your retirement money in certain situations (disability and so on) and how to handle mistakes you’ve made in your past with converting IRAs and the like. Most of this material is fairly complex – the average person would be well-served by consulting a fee-based financial planner if they’re in such a situation.

Is The Retirement Savings Time Bomb… And How to Defuse It Worth Reading?
If you focus on the core principles talked about in the book – save plenty, get life insurance, use a Roth IRA – you’re going to have a leg up in retirement. Those ideas are valuable parts of protecting your retirement savings from the taxman, regardless of whether you want that money for you or for your descendents.

The trickier part is the specifics. Right on the cover, it says “Revised and updated for the new tax rules” – and that’s the problem. You should never, ever bet on a specific minor rule or loophole to get you through your retirement, because such individual loopholes open up and close all of the time. Much of the content of this book is based on those individual loopholes.

Thus, the specifics of this book are bound to become dated quickly, and the more general advice is stuff that can be found in other very solid investment books that focus on more timeless advice.

That’s not to say there isn’t a role for this book. If you are thinking about retirement concerns in the short term, such as making withdrawals and the like, this can be a valuable read. It’s also a great primer on the things you’re going to need to think about as retirement nears.

I just wouldn’t bank a whole lot of money on the specific rules cited here, simply because such small tax law issues change so often. I’d read this book and know the scoop, but I’d talk to a fee-based financial planner who can assess your situation before making a move.

Every other Sunday, The Simple Dollar reviews a personal finance book of interest.

1/2 Price Living by Ellie Kay has a particularly noteworthy subtitle: Secrets to Living Well on One Income. A quick read of the back makes it clear who Kay is talking to – people who want to give stay-at-home parenting a go.

I picked up this book (off of PaperBackSwap) because my wife and I are discussing the possibility of trying out stay-at-home parenting for a year – the year in which we have three preschool aged children at home. According to our math, after all of the tax implications and the like, our finances would only slightly be better if my wife worked full time during that year. Of course, the math rebounds strongly after that one year (when our oldest goes to school) and the year after that (when our daughter goes) and, add on top of it the fact that my wife really loves her job, we’re still not fully committed to a plan yet.

Thus, as we often do when we’re piecing through such decisions, we turn to the books, and 1/2 Price Living was one of them.

Did the book provide any lasting value for us, or did it just repeat ideas found elsewhere? Let’s dig in and find out.

1. Mommy’s Gone Wild: Why Live on One Income?
An awful lot of parents wish they had the financial wherewithal to stay at home with their children, particularly when they’re young. Ellie quotes a survey by ClubMom that indicated that 89% of mothers would choose to stay at home if it was financially feasible for them – and there are an awful lot of dads who would do the same. Ellie doesn’t really dive into the issues of whether or not stay-at-home parenting is the right choice, instead focusing on making the book a guide for people who have already made that decision. This is a wise choice, because the actual decision-making process concerning stay-at-home parenting is fraught with a lot of emotion for a lot of people, an element that doesn’t belong in a book that needs to be breaking down some hard facts.

2. I Can’t Afford to Stay at Home: Working Girl vs. Girlie Mom
The big block that most people find in their way when they consider being a stay-at-home parent is the financial question. How can they possibly afford to stay at home? Two big factors pop out here. One, work is often not as lucrative as we think, once we subtract taxes, commuting costs, eating out costs, clothing costs, and so on. Two, staying at home trims your family’s budget substantially because of the home economics of it – meals are made at home, for example, and more planning and thought can be put into grocery trips.

3. Half the Income, All the Benefits: Seven Steps to Come Home
The big key to making all of that work, though, is to plan, plan, plan. If you don’t have a clear gameplan in place, it’s very hard to make the financial transition to one income successfully. Ellie has a nice set of worksheets in this chapter to help guide through the transition, but the big idea is that you need to do a before-and-after budget and carefully think about the real changes to each category. What will change? How can you make that happen?

4. The Family Meeting: Half the Work, All the Fun
One big part of this process is regular family meetings. There will be a lot of changes in your life if you choose to do this and many of them will involve all of the family members. Set aside a meeting time to discuss all of this stuff. Lay everything you can think of on the table and let everyone else do the same. Talk through this – it’ll help you see things you hadn’t thought of.

5. Chopping on a Chewstring: How to Cut Your Food Bill in Half
Ellie advocates “layering” for savings, using a large number of techniques to apply them all to the same item (store coupons, manufacturer coupons, store flyers, and so on). That works to an extent, but the real winners (in my experience) involve figuring out which store is the best to shop at and also, perhaps most importantly, using a grocery list.

6. Three, Four, or More: A Clotheshorse’s Guide to Outfitting Ponies
Start at the secondhand stores – and plan ahead. These are two key pieces of advice for dressing your family on a budget. We take these both deeply to heart already. Many of the clothes my family wears come from secondhand stores – in fact, my daughter’s favorite dress is a secondhand one. If you spend some time actually doing it, you’ll be amazed how many great items are stuck in there alongside the overly-worn stuff.

7. Scrambled Nest Eggs: How to Make Cake When Your Savings Takes a Beating
This chapter mostly just reviews various places families can sock away their money, from retirement accounts to certificates of deposit. Having a cash reserve can be a make-or-break thing for stay-at-home parents, so the advice in this chapter is useful in a very basic way, but it shouldn’t be substituted for any sort of thorough money management primer.

8. The Wednesday Factor: Half-Price Shopping to Maximize Savings
If you’re going to spend money on stuff – from amusement parks to travel to eating out – Wednesday is usually the best day of the week to do it, for several reasons. Many places cut prices on “hump day” to try to spur business in the middle of a work week. Similarly, many competitive businesses operate on a weekly cycle and Wednesday is usually the best day to jump in on that cycle. If you’re going to do something, do it on Wednesday.

9. Taming the 800-Pound Gorilla: Ten Steps to Simplify Home and Hearth Savings
The biggest step? Pay everything on time. After that, the keys to housing savings revolve around saving, saving, saving and spending as little as you can. Why? You are far better off writing a check for home improvements or other such big expenses than taking out debt for them. If you keep on top of the little things each day, it’s easier to stay on top of the big things.

10. That’s My Business: How to Own a Home Business That Doesn’t Own You
Many stay-at-home parents engage in starting a side business to fill in the time gaps they sometimes have during the day. This chapter provides a huge list of ideas for starting such a business and offers some general advice on how to make it work. It can work – among the stay-at-home parents I know, at least two of them have some sort of side business that they’ve started.

11. Fiesta or Famine: How to Finish Great, No Matter Where You Start
Here, Ellie goes down a spiritual path, citing how her faith played a central role in making stay-at-home parenting possible for her. While that’s admirable, the intense focus on specific Christian ideas and texts could be a bit alienating to non-Christian readers.

12. The Porpoise-Driven Life: How to Restructure Vacations and Build Memories
The good financial advice returns here with a detailed discussion of how to have low-cost vacations on the cheap. The biggest piece of advice in the chapter is to “double-up” – traveling with others can almost always drastically reduce the cost of a vacation, assuming of course that the people you travel with are of a similar mindset as you .

13. The Sowing Club: The Benefit of Sharing and Stewardship
The book closes with a discussion of the value of good character and being an active part of your community. I find that, time and time again, being involved in the community in a positive fashion goes a very long way toward building a successful financial life, because the support of others around you makes all the difference in the world.

Is 1/2 Price Living Worth Reading?
If you’re considering being a stay-at-home parent – and troubled by the financial and other personal implications of that – 1/2 Price Living is a really worthwhile read. It gave us quite a lot to think about as we puzzled through our decision. If you’re in a similar boat, I would consider this a nearly essential read.

I had one big quibble, though: most of the book assumes that it will be the mother that chooses to be the stay-at-home parent. I actually know more fathers who are doing the stay-at-home parenting right now. Assuming that the mother will be the one to do this is a bit… outdated, I think. If this book gets a revised printing, I would strongly suggest toning down the “mommies club” language in the book, as it could be pretty off-putting for fathers who are considering staying at home.

That’s not to say that the advice isn’t spot-on, useful, and thought-provoking, because it is.

Every other Sunday, The Simple Dollar reviews a book of interest.

Over the last few years, I’ve come to believe that the biggest key to personal finance success is controlling your own psychology and impulses.

Our entire lives are filled with quick decisions we must constantly make – and, for the most part, we’re good at it. We commute to work without getting in an accident. We make constant little decisions at work – and at home, too. We’re able to effectively take several pieces of information, combine them together, and make a pretty good choice based on the result – and we do it over and over again.

Unfortunately, that same ability often doesn’t serve us well at all when it comes to personal finance. The ultra-quick decision making process that leads us to making great little choices in everyday life often leads us to making disastrous financial decisions. Very rarely do snap decisions work out well in the financial world.

This concept is the central focus of Snap Judgment by David Adler. He makes a two-fold argument. First, such snap decisions fail us financially and, if we’re able to get control over them, we’re much more likely to find financial success. Second, understanding how people make such snap decisions can help us to predict and prepare for the choices that other people will make, pushing us to further success.

Sound interesting? Let’s dig in.

I: The Psychology of Financial Decisions
The basic rule of thumb for success in any financial arena is “buy low and sell high.” It rings true in everything from stock investing to grocery shopping. The problem is that most of our normal financial cues tell us to do virtually anything but that. For example, we often believe there must be value to be found if everyone else is buying something, but quite often that means that it’s the opposite of a bargain – the price is overinflated.

Similarly, we are often wired to overlook what we view to be small amounts of risk – if we didn’t, we’d never leave our house in the morning. However, when we apply the same philosophy to investing, we overlook those seemingly small risks and chase what looks like the biggest returns – and then we get bitten by those risks. That’s why so many people got caught losing big chunks of their retirement in 2008?

II: The Track, the Stock Market, and Other Types of Gambling
Our brains are wired to see patterns in our lives, from traffic to grocery shopping to financial markets. Most of the time, when we act based on how we think things will go based on those patterns, we guess right.

The problem is that the stock market and most forms of gambling present false patterns to us, ones that have nothing to do with what happens next. People stare at charts and sit at slot machines because our minds are convinced there’s a pattern in the chaos and that a big winner is about to emerge. Quite often, though, it’s not coming down the pipe.

III: Personal Decisions, Personal Safety, Personal Finance, and Health Choices
Another method in which people falsely assess risk is in our own health and mortality. Many, many people don’t have life insurance because they simply see the risk of their own death as being too minute to really concern themselves with, whether in a conscious or subconscious way. For the same reason, many people don’t bother with annual checkups at the doctor.

In each case, the concern isn’t the chance of the risk, but the severity of the event when risk comes to call. We assess the chances themselves quite well, but we’re poor at assessing the consequences of the bad event actually occuring and whether or not a small cost now is worth covering that big bill later on.

The latter three sections of the book are much shorter and focus on very narrow issues, mostly ones that have really popped up as a result of the 2008 financial crisis.

IV: CEO Behavior
CEOs rise to the top of the corporate ladder by taking risks and having those risks pay off. That’s how a future CEO stands out from the pack – they stick their neck out and succeed. When they get to the top, they often have huge confidence in their abilities, whether it’s warranted (Jack Welch) or not (Bob Nardelli). Often, one sign that a company is either going to succeed wildly or utterly fail is in the behavior of the CEO: are they full of their own hubris? Do they hold onto stock options too long? Good signs include a laserlike focus on their company. Bad signs include self-promotion, like writing books and going on book tours.

V: Psychology and the Credit Crisis
Investment bubbles happen for the reasons outlined above: people see others rushing in and making good money and decide to rush in themselves. Inevitably, though, any market eventually runs out of buyers, at which point the bubble pops and people lose big. The opposite is also true – think of someone shouting “fire” in a theater or a bank run. Quite often, that kind of trampling panic can cause far more damage than is warranted in the situation.

VI: Debiasing
How can you avoid all of this stuff? First of all, slow down. Very few financial decisions have to be made in a “snap” context. Second, communicate. Talk it over with others. Have a “money buddy” or even a group of people to talk decisions through with. Third, cover your risks. Don’t invest in stocks unless you can afford the losses and have insurance unless you’ll be fine without it.

Is Snap Judgment Worth Reading?
Snap Judgment is a thorough and interesting review of how psychology affects investment and financial choices. It’s written approachably and thoughtfully and does a good job of covering the 2008 crisis in the latter sections of the book.

The only real drawback with the book is that the topic area has been covered by a lot of other books, many of which are very, very similar.

If you’ve read a book on financial psychology, Snap Judgment probably isn’t a necessary read, but if you’ve never read one, you ought to, and Snap Judgment is a pretty fine place to start.