Great news for busy people! Being literate on personal finance and developing good money habits doesn’t require a lot of time. Just one book is more than enough (for example, the two at the top of my list below) and the main principles could easily be summarized in a concise blog post.
Actually, they have been famously written on a single index card. This index card summary of personal finance principles inspired my post “Thoughts on Keeping Fit (on a Vietnamese Noodle Shop Napkin.” I think health and fitness is another topic that a lot of people vastly overcomplicate. Seeing how much people overthink weight control and fitness on Facebook and the like, I decided to go eat a popular Vietnamese noodle dish, which is overall quite healthy because of the low volume of noodles and meat, and large amount of green leafy vegetables. As an homage to the personal finance index card (and more generally to the feeling that things like health, money and happiness are often made way more complicated than they need to be), I wrote out the basics of staying thin and healthy on the noodle shop’s napkin.
Personal finance is a really important area of our lives and it can be much simpler than most people make it. You can learn everything you need from a single book or even a good blog post on the subject. Frankly, I think at least 80% of the benefits could be achieved by just doing these two things – 1) pay off your consumer debt and then 2) invest the highest proportion of your monthly income that you can in low-cost, highly-diversified index funds and hold them for a long time.
If you don’t have the time or the motivation you don’t even need to pick individual index funds. With one of Vanguard’s Target Retirement Funds you can have a well diversified portfolio with a single fund. These Vanguard products are meta-index funds composed of Vanguard’s main US stock, international stock, US bond and international bond indexes. The asset allocation depends on the target retirement year and is automatically adjusted each year as investors age. My own portfolio is slightly more involved than these one-stop products (and includes things like REITs and emerging market stocks, for example) but I still spend just 3-5 hours a year on this. For people who are extremely busy though I think these Vanguard products are an excellent option.
For people who have the interest and time here are the books and blogs that have most influenced my own thinking. The first two are mainstream, bestselling personal finance books. The third is the leading blog in the financial independence and early retirement (FIRE) community.
Personal Finance Book and Blog Recommendations
A Random Walk down Wall Street: The Time-tested Strategy for Successful Investing by Princeton finance professor emeritus Burton Malkiel.
This book, which I read in a single afternoon at a Starbucks in Tokyo, literally changed my financial life. For the first two of the 20 years I’ve invested I believed that I could pick individual stocks and “time the market” – ie, choose ideal times to buy and sell. I lost money in this early period (though relatively small amounts as I was still a graduate student then).
These sorts of illusions are widespread among individual investors and are extremely costly – there’s a mountain of finance research demonstrating that people who pick individual stocks and buy and sell often significantly underperform long-term index fund investors.
In this lucid, entertaining classic, Malkiel convinces readers to let that shit go – ie, the belief that any of us are smarter than the market. Securities markets are in a sense vast distributed super computers that calculate prices with elegant efficiency and blinding speed. At each nano-second length instant, the market price includes all known knowledge about a stock. The idea that any one of us can consistently beat that is an exercise in vanity and self-delusion.
Unless your name is Warren Buffet, let me get down on my hands and knees and beg you not to pick “hot”(aka “overpriced”) individual stocks and buy and sell a lot (aka “give your retirement money to brokerages by paying excess commission”. (And day trading, Forex and Bitcoin, like regular casino visits as a financial strategy, are even worse). Malkiel’s entertaining and elegant argument makes it clear that day to day market fluctuations are essentially “random walks” and almost no one can profitably pick individual stocks and time the market, and we’ll be better off if we stop trying and put our excess income into index funds (heavily weighted toward stocks, asset allocation depends on age). Reading this book was my financial meridian – in the 18 years since adopting this approach I’ve had great investment returns with stocks and other securities.
I Will Teach You To Be Rich by Ramit Sethi.
Sethi started a popular personal finance blog with the same title when he was a student at Stanford University and published this best-selling book a few years after graduation. He’s seen as the leading personal finance guy for 20 and 30 somethings but all that means is the book is highly readable and fun with not a trace of fuddy-duddiness – people of any age who need help getting their money and retirement planning in order would benefit from this book.
While the conclusions are similar to A Random Walk…, I Will Teach… is more purely practical. (A Random Walk… includes a detailed practical strategy but it also explains lucidly and in a highly entertaining way why stock picking and other short term approaches don’t work.) Sethi skips much of the “why” behind good financial practices and gets right down to telling you exactly what to do.
In spite of the title, it’s great advice for people of any income level (though frankly if everyone followed all of his advice from their 20s, almost everyone would be millionaires (or much better) by the time they retire). If you don’t believe me use this investment growth calculator with completely average values for income and growth rates ($60,000/year income, 20 % of annual income invested, 6% annual investment growth, 40 years of investing between age 25 and retirement). Through the power of self-discipline and compound growth these completely ordinary numbers yield a retirement net-worth of close to 2 million USD!
My one small reservation in recommending Sethi’s book – this is one of those global best sellers that is written as if everyone reading it were American. Almost all the content is relevant for people anywhere in the world but non-Americans should skip the small portion of content that is only relevant to the US (for example, chapter 3 about 401Ks and Roth IRAs).
This is probably the most influential of many blogs in the FIRE (financial independence, early retirement) movement. It’s so rich in content about how to cut your living expenses in painless, creative ways; practical ways to plan for early retirement; and enjoy life to the fullest by spending your time and money on what really matters that I’ve barely scratched the surface. The tag line is “Financial Freedom Through Badassity” and the posts are as entertaining as they are informative.
The author and his wife retired at around 30 with about $500,000 in retirement savings. While saving up that much by age 30 puts them in the top few percentile of Americans, it’s of course a small amount of money to fund a couple’s retirement that could last 50-60 years. And they have a child! Still, through a great deal of creative frugality the family manages to live on $20-30,000/year and still have lots of fun. I’m thoroughly enjoying exploring this blog and from what I’ve seen so far they take a lot of bike rides and enjoy a lot of family picnics and hikes in the beautiful area of Colorado they live in.
The blog is quite famous and the mustachioed one is featured in countless media sources, both in the US and around the world. Some of these sources criticize his lifestyle as “extreme”, a view which I think reflects the insanity of conventional American financial practices (very low retirement savings, excess consumption and use of credit to buy shit they don’t really need, sky high levels of consumer debt etc.).
The FIRE subculture is really rich and elaborate and apparently there’s “skinny” and “fat” FIRE. My own retirement is a bit “fatter” than the above numbers (in spite of living in a really cheap country and being single with no kids), though the difference is mostly because of all my travel. I also worked until 40 and still have full income from three mostly passive income sources. This isn’t a contest, of course, and there’s no one right solution here – the important thing is to have a plan for this and other important areas of our lives.
There’s a question of degrees of course but anyone who wants to improve their finances and retire earlier than the norm, all while having fun and getting in touch with the things that really matter, could benefit from this blog. Haters are gonna hate but I think this guy is extreme – as in EXTREMEly awesome!