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Basic Personal Finance Books
02 06 05  15  22
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Friends ask for recommendations about where to start learning about
finances. There are many books in the market, and I decided to
try two to find out if they where appropriate. Although I didn't
found all a person needs to start in the two books I am reviewing, I
did found valuable information, specially for young people. I do
believe they should make high school kids read at least one of these
two books. The two books I am reviewing today are:
- The Wealthy Barber, by David Chilton
- The Richest Man In Babylon, by George S. Clason
Both carry real life wisdom in an easy to read story/fiction
format. I would be willing to bet that anyone that follows the
advice in either book completely will be well ahead of the average
American. What neither book does is offer too much of specific
advice: it doesn't tell you to go to this particular site, download
this particular paper, and send a check. That is information
everyone has to find by him/herself and it is information I (and many
other article authors) try to do.
If you are financially illiterate I recommend you read Wealthy Barber on one of these summer days at the beach (as soon as possible) to improve your financial life, and save The Richest Man In Babylon
for a rainy day to read it for its entertainment value; as it doesn't
provide too much extra information, but reinforces the values on the Wealthy Barber.
If you are a financial expert, chances are you know everything they
discuss, but it may still be worthwhile to read them: it will give
you some ideas on how to convince your friends to handle their finances
better.
The Wealthy Barber, by David Chilton tries to make
you feel identified with one of the characters in the story.
There is a single teacher, a self-employed business owner, and the
regular married family guy expecting a child. The Wealthy Barber
offers advice and then discusses how it best applies to the different
friends visiting him. Every month the barber touches on a
different topic. The topics discussed are:
- Ten Percent Solution - Save 10% of all of your income. Invest it. A good choice: in an index fund.
- Wills, Life Insurance, And Responsibility - Be sure you and those that depend on you are covered.
- Planning for Retirement - On top of the original 10%. Make
best use of 401k, IRA, SEP IRA. Save separately if needed.
Be sure you can keep your standard of life even when you can't work.
- Home Sweet Home - Have your own home. An investment that
doesn't require too much effort (it replaces the rental expense
anyway). Don't buy more property than you need (buy an
investment property with the extra cash).
- Saving Savvy - Saving, spending, and credit. Saving for big
ticket items (the 10% fund, and retirement are investments). By
saving for items you receive a sense of accomplishment, and you save
yourself the headache of having to worry about the credit card
bills. Spending is purchasing goods (not investing). By
spending wisely, and studying your spending habits (budget, or spending
analysis) you can be more efficient and get more of life (plus you
avoid having to worry about the credit card bills). Credit refers
to short term credit, not mortgages. In this topic he stresses
avoiding carrying debt on credit cards, and advices against using them
if you are like most Americans that can't control their spending.
- Insights into Investments and Income Tax - Discussions on:
Disciplined investment. Paying off high-interest non-deductible
debt. Income and capital gains taxes. Itemized deductions
handling.
- Miscellaneous Topics - Emergency funds: have them, but
don't go overboard. If you have invested for retirement, have a house,
and are investing 10% of your income outside retirement accounts, you
are probably mostly covered. Children Education (college): Let them
learn responsibility by working through college and getting merit based
scholarships. Save for education, but after you maximized your
retirement accounts, and the 10% fund, and have your home -- worst
case, those assets can help you pay education. Health and Disability
Insurance: both MUST haves. Staying informed through accurate and
recent books and articles.
The Richest Man In Babylon, by George S. Clason tries to show
that age proved concepts can bring you to a wealthy life in any kind of
environment or any period of history. The author tries to convey
this through a fictional story of a Babylon resident who wanted to be
come rich. Although of little historical value it serves to make
us understand the universality of financial concepts.
I only recommend reading the book once you feel like you have been introduced to financial concepts. Try The Wealthy Barber first if you feel like you want an easy-reading fictional story with a lot of wisdom inside.
Although the greatest value of the book is once again proving that
periodically investing a portion of your income is the first step to
creating wealth, I particularly liked a chapter in the book called Seven Cures for Lean Purses. It touched on the following topics:
- Start thy purse to fattening - Periodically contribute a portion of your income into your investments.
- Control thy expenditures - Proves that as we earn more, we tend
to spend more. Motivates to reduce spending on some frivolous
things, and investing a portion of the income.
- Make thy Gold Multiply - "... a man's wealth is not in the gold
he carries in his purse, it is the income he buildeth, the golden
stream that continually floweth into his purse and keepeth it always
bulging." (as the author expresses himself).
- Guard thy treasures from loss - Invest in reasonably stable
opportunities. Avoid speculation and become-rich-quick schemes.
- Make of thy dwelling a profitable investment - Buy your own
home. Pay rent to yourself. You will not be sparing a
single cent more (than renting), you will have the satisfaction of
owning your own place, and you get the important bonus of investing
while you sleep -- almost nothing beats that. But don't buy more
home than you need it. (If you want more real estate investment,
buy another one and rent it).
- Insure a future income - Save and invest for retirement.
Have disability insurance. If you have dependents, you may want
to think about life insurance.
- Increase thy ability to earn - Educate yourself, train, improve, and pursue a better level of income.
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