A Road to a Better Personal Finance
This article is based on Ask
Slashdot: Personal Finance Book Suggestions (http://ask.slashdot.org/article.pl?sid=03/04/17/1932234). Someone asked for an
advice on good personal financial books, but received more than that: a
huge list of books and a plethora of excellent advice. I've compiled a
digest of the suggested advice and the books.
By Stas Bekman.
Published: June 27 2006
The thread contains a plethora of excellent advice. Here is a digest of
- Make no conclusions based on one person's or book's advice. Read
several books and talk to lots of people and you'll start to get a feel
for what the right thing to do is. Ask someone, family/friend, that you
- No need to hire a money manager. Having someone else
handling your bills may be alright, but no one is going to be as
conscious of your situation as you are. And if you don't have a good
eye on your finances, don't be surprised if you run into problems that
could have easily been avoided.
- As for preparing for
retirement, don't trust your money with any manager, plan it out
yourself. Brokers are salesmen. There are few industries that are as
fundamentally at odds with their customers as the finance industry.
They make money by getting you to do things with your money that will
give them slices of your money.
- Stay away from mutual funds (and in fact the stock market as a
unless you are willing to spend a lot of time researching individual
companies, etc.). The market is still
way over it's long term base line, and with a glut of baby boomers just
waiting for the prices to rise a bit so they call sell (they're hitting
retirement soon, if they haven't already), we aren't going to see a
bubble like the 90's for another 20+ years--or if we do it will burst a
lot worse than this one did at which point having your cash
in a jar will turn out to have been the smart move.
- The best advise about the market: ignore press
releases. Turn off the sound and watch the money. No matter how
rosy a picture a company paints, if they are burning money fast enough
to be broke in six months, they're in deep do-do. But you won't see
this by reading the one line summary of their annual report. You need
to read the report, and then research it (where does this
number come from?), to figure out what they aren't telling you.
- Many successful investors are very frugal, you don't have to
spend more money if start making more of it - instead invest the
difference. And if you don't have money to invest start spending less.
- Set your goals. If your
goal is to make a billion dollars in order to become a patron of the
arts, that's a completely different strategy than to save two million
dollars by the time you are 65, so you can go on a permanent RV camping
trip driving between your children's homes. Set goals down on paper ("I
want to go on a nice vacation every year",
"I want to retire in 20 years", "I want to buy a house in 3 years", I
am getting married in a year", I want to buy a new computer in 6
months", "I will spend $300 on Christmas gift this year", etc. Put down
a time frame and guesstimate money cost.
- Don't buy investment books, instead borrow these from the
library, and invest that money instead
- Pay off your credit card debt first, since the interest on those
is usually much more than you can ever make investing
- Pay off your other loans (e.g., college loans) & move the
most aggressively towards the highest interest ones first.
- Avoid bad debts. If the thing you went into debt to get will
still have value after the debt is retired, that is good debt.
If the thing you went into debt to get will be worthless after the debt
is paid off, that is bad debt. Houses are good debt. Generally,
cars and computers are bad debt. Incur good debt as needed. Avoid
incurring bad debt. And make sure you can pay off your debts.
- Put money away pre-tax. Invest in your 401k (or its equivalent if
not in USA). Good for two reasons -- first companies usually
match you contributions (or a portion thereof), so hey, free money is
always a good thing, and secondly the earnings aren't taxed. If you
haven't learned the evils of the taxman yet, you're about to. Hiding
from the taxman, with his huge take of the pie, leaves more money in
- Open an Individual Retirement Account (IRA (http://www.ira.com/)) (Roth (http://www.rothira.com/)
if possible, Traditional if not) (In Canada this is RRSP (http://www.rrsp.org/)). Another great way
to hide from the tax man. Basically another way to get free $$ from the
government. A Roth IRA is worth more than
conventional IRA because withdrawals from it are forever tax-free... If
you are self-employed, maximize your SEP-IRA.
- Don't count on a company pension or Social Security for
you get that stuff, think of it as gravy, but don't depend upon it.
- The best way to find out how recreational investing works is to
a online account and start
investing. Face it, you're never going to learn or care about how a
Margin account works until your deep in the margin and your online
you pay money... or when euro options expire until you've bought some
and forgot to sell them in time.
- "Pay yourself first" Probably the best line of advice. That means
put money either by direct deposit or manually
into a separate checking account just for your everyday things like
rent, food, utilities, etc. Then figure out how much you have left for
beer & porn. You don't really have to have a separate account, but
if you have monetary discipline problems, this will allow you to eat at
the end of the month. Invest at least 10% of what you make.
- Don't bounce checks. It amazes me how many people I know will
check knowing that they don't have the money in their account. Would
you burn a $20 bill for fun? Why?
- If you can, buy a residence. If not, put money away so you can
down payment in a few years. Now, instead of paying your landlord every
month, you're investing in yourself. And, mortgage payments can be
tax-deductible. Best long-term thing to do.
- Don't forget about the power of compound interest. Investing
is really slow. Putting $1000 away for a year at 2%
will give you a whopping $20. But put it away for 10 and you get $219.
5% will get you $628, and double your money in 13.6 years. $100
a month for 10 years at 5% gives you $15,528. Change that to 40 years
(work from age 20 to 60) and you get $152,602 (40*12*$100 = $48,000),
or about triple your investment.
- How's your emergency fund? Have a pile of money for the next two
or three months of expenses
(rent, food, beer, entertainment, etc). Just have this in a checking
account. Get you checked directly deposited into this.
- Have a pile of money to cover minimal living expenses for six
a year (think of this as your "oh shit I have been fired" emergency
fund). This money should be liquid and safe. Think Money Market, CD's,
Savings Account, maybe US Savings Bonds. If you can have some of your
paycheck automatically deposited into a money market, go for it.
- Have a pile of money for short-term expenses and capital expenses
within the next few years (think next used car, house, vacation, etc).
This money should be liquid and safe, but don't intermingle it with
your oh-shit contingency pile. Try to automate the deposits into this.
- Magic words: automatic investment plan. The best thing you can do
your money is to invest small *now* and automatically invest a constant
amount in the future, such as $100/month. This is called "dollar cost
averaging" and is about a zillion times more valuable than just taking
$5000 and throwing it into a single fund or stock all at once.
- Stocks are fun if you have a strong heart. Something a little
rollercoastery is mutual funds. Go to Morningstar and work with their
risk assessment tools to decide what you might want to invest in.
- Be careful that you know the target audience for the material you
reading. Some of the Canadian material doesn't apply to Americans and
- Have a garden, grow a lot of your own food, you'll save money at
the grocery store and also with doctor visits in the long run.
- Hard currency. If you want to gamble in the market, go ahead, but
large portion of any "extra" you have into hard metals. Don't listen to
the nay sayers, it preserves wealth. It's a long term deal, just get
some coins once in awhile and forget about them.
- "Get into" alternative energy. Obviously you'll probably start
"normal" grid supplied electricity, but make a concerted effort to
start making *some* of your own power while learning to use less power
overall by wise decisions in purchases and how you use power. Keep
adding to both sides of that equation, eventually you'll be
independent, and have one more major important "bill" paid off rather
than "financed" all the time.
- Pay cash for used car, and keep
it maintained well. Skip the flash, cars are transportation. One of my
vehicles has well over 300 thou now on it, I changed the oil a lot,
- Keep in mind anytime you can eliminate the transfer of "dollars"
what you want it means less taxes and more of those dollars you get to
keep, and less you have to make just for your day to day living. NEVER
assume your "job" will always be there. Swell if it is and you keep
getting "more", but it's nice to make that first layer of living as
inexpensive as possible and as paid off as quickly as possible. In the
long run then all you'll really have to sweat is property taxes and
normal maintenance. Some of the exposure and risk can be mitigated by
using what is called a family trust for that property,look into it, and
a lot of the maintenance costs can be mitigated by building an
INTELLIGENT home in the first place.
- Don't forget the other monthly "bills", another random example,
wood for heat (primary or very decent auxiliary) in the winter that
comes off your own woodlot, starts to add up after a few years in
savings and will always be there for you.
- Have a will made.
- Make sure you have the proper (not too much and not
too little) insurance (auto, renters/homeowners, life, medical,
- Shop around for good prices) and remember insurance
salesmen are trickier then car salesmen.
- Stick to your plan, but to not obsesses about it. Don't worry how
people are doing relative to you. All that matters is meeting your
plan's goals. Don't spend all of you time counting change or reading
- Beware of funds that claim a lot of performance one year. Many
some gimics to get good results one year, at the expense of results
latter. Most funds do not beat the market. Most don't even beat the
simple index they most closely matches how they should invest. (The
S&P index is the most common benchmark, but it doesn't apply to
small cap stocks for instance).
- Beware of fees. Those in the financial world are really good at
charging you money. NEVER go to a advisor who offers you free advice,
you will pay for it dearly! Get a "fee-only" advisor if you want
professional help. The "no fee" ones still get paid, but they get the
money elsewhere, often by taking 5% of whatever you invest. That is a
lot of money, and those who charge it better make that money up faster
than the fee-only advisor. They won't though. Watch the yearly fees.
- Even though funds are where all the action is, don't be afraid
to invest a little money into "hot tips" that you have done your
homework on. Not easy, and for most people this should be a small
amount of the money you invest, but it can be fun, and nothing
encourages paying attention to how a company is doing like owning it.
And as an owner you can vote on what the company does. Your small voice
might make a difference.
These are the books that were suggested as a good read (listed here
in no particular order):
of Your Money" by Jane
Bryant Quinn. It is a good general monkey book
which is probably the place to start rather than diving into the
investing side of the equation.
Money or Your Life: Transforming
Your Relationship with Money and Achieving Financial Independence" by Joe Dominguez. It certainly
doesn't fall into the traditional
"more more more" mindset of most people - instead if focuses on "what
is enough" and making you happy. In the words of the late,
great Douglas Adams - "these people were extraordinarily unhappy and
attempted to correct their problem by spending all their time moving
small pieces of green paper around - which is odd because on the whole
it wasn't the pieces of green paper that were unhappy." Just a
different perspective from the norm - but one that may do more for you
than any book on the money markets ever could.
- Books by William Bernstein: "The
Four Pillars of Investing",
and if you want more math analysis, "The
Intelligent Asset Allocator".
Random Walk Down Wall Street"
by Burton G. Malkiel. If Wall Street, etc. seems dark & mysterious
(and even if it
doesn't) this is a great book. It starts by giving you a background in
some of the mania that has surrounded stock-markets, going all the way
back to the Dutch Tulip bubble of several hundred years ago. If you're
wondering how practical something like that could be, just think of the
dot-com boom of the late 90's. It proceeds to explain clearly &
elegantly various things such as technical & fundamental analysis,
the theory of efficient markets, and ultimately, the value of index funds
like the S&P 500.
Fool Money Guide" by Selena
to Make Money in Stocks" by
William J. O'Neil. William is the guy behind IBD and investors.com.
Game" by Adam Smith
The Street" and "Beat
the Street II" by
Dad's Guide to Investing" by Robert T. Kiyosaki can be
summarized up as work for yourself, not a company, invest in
sweetheart real estate deals, and don't put money into mutual funds,
just private companies. The author, has several books in this series,
one being the first. It's written in a non-intimidating way, with much
of book conveying ideas easily as conversations between the author
& his rich friend's father (aka Rich Dad). He compares his dad's
common viewpoint on financial matters (aka Poor Dad) to Rich Dad's
method, and hence the title. Also check Rich
Dad Poor Dad Classics set.
Only Investment Guide You'll Ever Need" and "My
Vast Fortune" by Andrew Tobias. Both are excellent for
people who have money, but don't want to spend a ton of time worrying
about it. The former book covers more then just the investing
stuff. Gets you in the right frame of mind.
- If you are inclined to try some simple
computer models to see what will happen to your portfolio on a
particularly volatile day, or what happens if interest rates move, then
the recommendation is:
Futures and Other Derivatives" byJohn C. Hull this one is THE classic) and
Wilmott on Quantitative Finance 3 Volume Set". Both of
these books lay out the basic framework for the savvy investor.
They both include examples for valuing the risk in your portfolio,
determining optimal prices of derivative options, modelling outcomes.
Many of the included models are shown in spreadsheet form and can be
instantly typed into excel. Both books would be understandable by
anybody who's taken college calculus (and they only briefly mention
calculus). Both books provide basic strategies for keeping your
portfolio hedged against various things. Both books give insight into
Risk neutrality which is a KEY thing to understand as an active
Wealthy Barber" by David Chilton - The main advantage of
the book, other than being told as a fictional
story, is that it assumes you're basically lazy and don't want to have
to be disciplined all the time. You don't have to.
Man in Babylon" by George S. Clason - Simple,
timeless ways for getting ahead. Originally written in 1926 and still
applicable. An easy read, and short to boot.
Millionaire Next Door" and "The
Millionaire Mind" by Thomas J. Stanley - The results of a
broad survey of millionaires. What they're actually like, how they got
there. They may not be who you think.
Intelligent Investor" by Benjamin Graham
A Financial Life" Personal Finance In Your Twenties And
Thirties by Beth Kobliner. Slim, readable, complete,
good advice. I believe Kobliner was a columnist for Money Magazine for
many years. She now has her own website (http://www.kobliner.com/).
Finance for Dummies" by Eric Tyson. Don't be put off by
the title, Eric Tyson is really good. His personal finance related
books are easy to read and thorough.
- Larry Burkett's books "Debt
Free Living", "Complete
Financial Guide for Young Couples", "Money
Matters Workbook for Teens", "Business
By The Book", "Family
Financial Workbook", "The
World's Easiest Guide to Finances" and others.
Rich, Die Broke" by Stephan Pollan and Mark Levine. An
interesting whole life approach.
Sense on Mutual Funds" by John Bogle, founder of Vanguard
and big-time advocate, of no-load, low expense mutual funds.
for the Long Run" by Jeremy J. Siegel - a top academic
perspective on investing
- For why not to confuse chance with skill, try "Fooled
by Randomness" . It has a lot of snide commentary at
but makes a good point about why humans mistake luck for skill, broadly.
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