Tuesday, November 8, 2011

How to start getting your money to make its own money (and why it's not that hard!)

Instead of the usual criticism, in this post I thought I’d suggest a few avenues for those who are looking to learn more about personal finance and investing. It seems that most people have a decent grasp on the fact that they should spend more than they earn, but hesitate when dealing with the world of investing. Things are indeed scary out there, but there are a few havens where one can get a fair shake out of the financial markets.

In terms of basic money issues that more relate to the idea of creating and investing your surplus, the best book out there is The Richest Man In Babylon. No, it won’t tell you what mutual fund to use, but it contains some of the most plain and upfront advice on how to create a nestegg. And best of all, you can read it in a few hours. Another book worth mentioning is Your Money or Your Life, which mainly deals with how to bring your spending better in line with your income. Even if you’re doing well on that front, it provides more motivation as to how to get off the hedonic treadmill and properly evaluate whether your purchases are worth the time it takes to earn the money. This book made me think I have too much stuff, which sounds about right.

Books on personal finance:

The Wall Street Journal Complete Personal Finance Guidebook by Jeff Opdyke: This is the one that helped get me started. It goes over the basics of saving, insurance, investing, retirement planning, stocks, bonds, and IRAs. It treats complicated issues in simple terms and is a great reference book to keep on the shelf.

The Little Book of Main Street Money by Jonathan Clements: The author is a beloved former personal finance columnist for the Wall Street Journal. I used to read his stuff sitting around the kitchen counter with Dad. The book is another great intro to personal finance and discusses issues like buying a house, using index mutual funds, determining how much insurance one needs, and also delves into the ways money can and can’t affect our happiness. You can read it in a day or two.

Investing basics:

The Investor’s Manifesto by William Bernstein: This guy’s a MD/PhD who’s finally provided an interesting and basic guide to the world of investing. This is a great place to start if you’re able to save money and want to start investing money for retirement. He discusses a little financial market history, how bonds and stocks work, the investment industry, and investor psychology. Carefully read this and you’ll know more than most investment professionals. No joke.

The Bogleheads Guide to Investing: The wonderful people at bogleheads.org people put this together a few years back and it was instantly an investment classic. It starts from the beginning and discusses the large impact mutual fund expenses, taxes, and stock-picking can have on a portfolio. They explain why one should invest passively, use tax-advantaged accounts, and tune out market noise. This is the ultimate book on common sense investing, and the best part is that their approach allows you to setup your portfolio and move on with your life.

Indeed, a common thread throughout these books is that a simple approach is truly the most sophisticated. Put it on auto-pilot and get on with your life.

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