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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

Financial Advice

The thread contains a plethora of excellent advice. Here is a digest of it:

  1. 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 trust.
  2. 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.
  3. 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.
  4. Stay away from mutual funds (and in fact the stock market as a whole 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.
  5. 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.
  6. 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.
  7. 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.
  8. Don't buy investment books, instead borrow these from the library, and invest that money instead
  9. Pay off your credit card debt first, since the interest on those is usually much more than you can ever make investing
  10. Pay off your other loans (e.g., college loans) & move the most aggressively towards the highest interest ones first.
  11. 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.
  12. 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 your pocket.
  13. 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 a conventional IRA because withdrawals from it are forever tax-free... If you are self-employed, maximize your SEP-IRA.
  14. Don't count on a company pension or Social Security for retirement. If you get that stuff, think of it as gravy, but don't depend upon it.
  15. The best way to find out how recreational investing works is to open up 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 broker makes you pay money... or when euro options expire until you've bought some and forgot to sell them in time.
  16. "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.
  17. Don't bounce checks. It amazes me how many people I know will write a check knowing that they don't have the money in their account. Would you burn a $20 bill for fun? Why?
  18. If you can, buy a residence. If not, put money away so you can make a 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.
  19. 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.
  20. 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.
  21. Have a pile of money to cover minimal living expenses for six months to 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.
  22. Have a pile of money for short-term expenses and capital expenses for 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.
  23. Magic words: automatic investment plan. The best thing you can do with 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.
  24. Stocks are fun if you have a strong heart. Something a little less rollercoastery is mutual funds. Go to Morningstar and work with their risk assessment tools to decide what you might want to invest in.
  25. Be careful that you know the target audience for the material you are reading. Some of the Canadian material doesn't apply to Americans and vice-versa.
  26. 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.
  27. Hard currency. If you want to gamble in the market, go ahead, but put a 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.
  28. "Get into" alternative energy. Obviously you'll probably start with "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.
  29. 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, that's it.
  30. Keep in mind anytime you can eliminate the transfer of "dollars" to get 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.
  31. Don't forget the other monthly "bills", another random example, burning 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.
  32. Have a will made.
  33. Make sure you have the proper (not too much and not too little) insurance (auto, renters/homeowners, life, medical, disability).
  34. Shop around for good prices) and remember insurance salesmen are trickier then car salesmen.
  35. Stick to your plan, but to not obsesses about it. Don't worry how other 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 investing books.
  36. Beware of funds that claim a lot of performance one year. Many manage 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).
  37. 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.
  38. 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):

  • "Making the Most 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.
  • "Your 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".
  • "A 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.
  • "Motley Fool Money Guide" by Selena Maranjian
  • "How to Make Money in Stocks" by William J. O'Neil. William is the guy behind IBD and investors.com.
  • "Money Game" by Adam Smith
  •  "Beat The Street" and "Beat the Street II" by WetFeet
  • "Rich 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, this 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.
  • "The 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:
    "Options, Futures and Other Derivatives" byJohn C. Hull this one is THE classic) and
    Willmot's  "Paul 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 investor.
  • "The 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.
  • "Richest 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.
  • "The 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.
  • "The Intelligent Investor" by Benjamin Graham
  • "Get 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/).
  • "Personal 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.
  • "Live Rich, Die Broke" by Stephan Pollan and Mark Levine. An interesting whole life approach.
  • "Common Sense on Mutual Funds" by John Bogle, founder of Vanguard and big-time advocate, of no-load, low expense mutual funds.
  • "Stocks 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 industry insiders, but makes a good point about why humans mistake luck for skill, broadly.

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previous page: New Micropayment System: Do To Others What You Want
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