My Favorite Personal Finance book

I’ve been asked many times to share my favorite finance book, especially for beginners.  Until today I have struggled to say what it was, but I think I have cracked it.  The book I recommend is 7 Habits of Highly Effective People by Stephen Covey.  This post will explain the reason why I found it such a hard question to answer, and why my recommendation as of today is Covey’s book.

First, the difficulty is two fold, for one I don’t read a lot of finance books.  They tend to bore me, and the reason they bore me is the second problem – such books need to match the ability and knowledge of the reader while being delivered in a manner that they can comprehend.  I’ve found that it is best to explain the same thing in many different ways in order for people to understand it.  Simply producing a fixed format and forcing a reader to conform to its structure is not a good way to convey a concept.  For example, some people are very analytically driven and require hard data in order to trust a perspective.  Others are very emotionally driven and require explanations that will resonate with their understanding of other concepts. Some are visual and require charts to understand concepts, others don’t trust charts and want to see the numbers.

As such, I don’t think it is possible to recommend a one size fits all book for finance.  And what’s more, what is finance even?  Some people ask about personal finance books, meaning they want budgets, others mean they want to understand investing, where as others are thinking about the overall financial plan.  And then within those groups of people you have different people with the different learning methods.

So I recommend Covey, because reading it and internalizing the principle driven concepts really will make people very successful, and in doing generate a lot more money, which then can be invested with ease.  The bigger issue (that I may be beating to death) is that people don’t want to earn more money because that seems like hard work.  Instead they want to find the next big investment, get rich and live the life of their dreams.  Again, I call upon the 7 Habits to help see through this approach.

From a ‘finance’ perspective, the basics are really simple: don’t over pay for the privilege to invest.  Overpaying comes in two forms, visible and invisible:

• Visible: Buying a stock market mutual fund sold by some sleazy broker who takes percentage points of your money every year vs buying a low cost fund.  Same product (essentially) you can see a higher cost.
• Invisible: Earning a lower rate of interest than you could, they say you get X but you can get the same features with an alternative account- EG comparing something like Citigold with a Credit Union.

The problem with both of these is that you need perspective to know when you are overpaying a fee, or “under receiving” a payment due to fees being baked in.  The solution is easy though, and doesn’t require a lot of reading.  All you need to know is what market rates are both from the high street banks, and the alternative options.  Same for investments.  You don’t need to read a dozen books on the matter, you just need to keep costs low and diversify risk while focusing on earning more money.

If you want to understand the difference between funds, just use the Finra fund analyzer.  Plug in your fund and compare it to something similar by one of the low cost firms – that could be Vanguard, or one of the low cost ETFs offered by companies like Fidelity, TD Ameritrade, Schwab etc.  But if I could give generic advice, just slam your money in a target date fund with an expense ratio less than 20% and focus on earning more money via Covey’s approach to work and life.

As I mentioned at the start, everyone needs different ‘proof’, presented in different ways, to make a decision.  But really, I think anyone who has even thought about improving their financial position has heard the following:

• Max out 401(k)s especially when they have employer match
• Reduce Debt
• Diversify

Really, there isn’t much more magic to it than that. Once you start increasing your salary to over 6 figures then you can start thinking more about tweaking your financial plan.  That is a much more successful strategy than trying to learn how to trade binary options while working as a janitor.