Books on Personal Finance Basics

A large number of the books on personal finance discuss attitudes about money, as well as basic concepts like earning, saving, and budgeting. If discussions of investing are included, they tend to be theoretical or limited. If you are just starting out on your financial journey, these books are a great place to start.

Rich Dad, Poor Dad: What the Rich Teach Their Kids About Money That the Poor and Middle Class Do Not! by Robert T. Kiyosaki. A consistent best seller for more than 20 years, this book is less about how to invest and more about how to think about money. In it, Kiyosaki debunks the myth that you have to have a high salary to be rich.

Prince Charming Isn’t Coming: How Women Get Smart About Money by Barbara Stanny. Like Rich Dad, Poor Dad, this book addresses our mindset about money. However, Prince Charming Isn’t Coming addresses the psychological factors that may stand in the way of a woman’s ability to make money. The titular “Prince”may be a person who sweeps in to provide wealth, or it may be fantasies about what it takes to build and grow wealth.

Money Rules: The Simple Path to Lifelong Security by Jean Chatzky. Jean Chatzky has a goal to make women smarter about money. To this end, she has authored over 11 books and runs the HerMoney podcast and website of the same name. In this book, Chatzky covers the basics to getting your financial life in order.

Napkin Finance: Build Your Wealth in 30 Seconds or Less by Tina Hay. Using a completely different approach to financial literacy, Tina Hay explains over 70 financial concepts through visual representations that fit on a napkin. The ideas range from budgeting and investing to business plans, recessions, and even crytocurrency. This is a fast, fun, and informative read.

Smart Money: The Step-by-Step Personal Finance Plan to Crush Debt by Naseema McElroy. Recently published, this book was written by a nurse who has become a money blogger. She gets right into, using her own story, Naseema gives you the information and tools you need to concur the financial challenges that are deviling you so you can move onto a path of financial freedom.

Books on Investing

We’ve found that most of the best-selling books on investing focus on the stock market. The Intelligent Investor and The Little Book of Common Sense Investing are two of the most popular books in this category. Another cadre of books dive into angel investing, which you will learn about in Chapter 9. A rarer find is a book that helps investors take a more holistic look at investing. Money for the Rest of Us falls into this category.

The Intelligent Investor: The Definitive Book on Value Investing by Benjamin Graham. First published in 1949, this book remains one of the top selling investment guides of all time. It is focused exclusively on the stock market and on picking individual stocks. If that is an approach you want to take with some of your money, then The Intelligent Investor is a valuable resource.

The Little Book of Common Sense Investing by John C. Bogle. As you will learn in Chapter 7, John Bogle was a renegade in his time. He was one of the first people to promote index funds as a viable (and – in his mind – preferred) way to invest in the stock market. This book explains his thinking behind this approach to investing, which has become increasing popular in the US. Vanguard, the company Bogle founded in 1974, still advocates his methods.

Money for the Rest of Us: 10 Questions to Master Successful Investing by J. David Stein. David Stein is an investment professional that hosts the popular Money for the Rest of Us podcast and website. A prior institutional investor, Stein helps readers understand the dynamics of making an investment decision. He provides ten simple questions to ask when considering any investment. Those questions help differentiate between investing and speculating, determine the level of risk, and identify what it takes to be successful with an investment. Stein’s podcast and web resources are also highly recommended.

Chapter References

WHERE YOU STAND COMPARED TO OTHER PEOPLE

How to Become Wealthy. Episode 252 from the Money for The Rest of Us podcast provides an enjoyable and unique perspective on wealth. It explains how much money people believe they need to consider themselves wealthy, describes how wealth is distributed across the US, and provides three steps to becoming financially wealthy.

HOW MUCH TIME DO YOU HAVE?

Compound Interest Calculator. The earlier you start saving and investing, the better. Use the compound interest calculator to show the changes in your net worth depending upon how much more time you have to save and invest. You can play around with the interest rate as well. For example, see the difference between keeping your assets in a savings account at 0.5% interest or investing for a 7% annual return.

WHAT IS YOUR RISK TOLERANCE?

Risk Tolerance Calculator. This five-minute quiz helps you learn more about your tolerance for risk. The results help show how your choices could impact your wealth over a 40-year period.

MAXIMUM DRAWDOWN

One way to think about risk and its impact on an investment portfolio is through the concept of maximum drawdown. Maximum drawdown is the percentage that an investment can drop – from its highest peak to its lowest point. This is determined using an “historic worst-case scenario.” Combining this information with the typical amount of time an asset has taken to regain its peak helps you assess an asset’s potential risk. In his book, Money for the Rest of Us, David Stein includes a table that shows the maximum drawdown and recovery period for several asset classes based on historical information including the financial crisis of 2007 to 2009 (which, until recently, marked the worst market downturn since the Great Depression). During this period, US stocks fell 60% and took 4 years to recover, while investment-grade (high-quality) bonds lost only 5% of their value and recovered in one year. Keep in mind that the past cannot predict the future, and this information is for guidance only.

How would you react if your stocks fell 60% in value over a short period? Would you have the time and emotional capacity to wait for the market to recover? Would you believe the market would eventually recover or would you want to accept your losses and withdraw your money?

DIVERSIFYING YOUR PORTFOLIO

Diversification is one of the most powerful concepts in investing. It can help you build a portfolio that’s resilient to market downturns. While it does not eliminate risk, diversification reduces risk by spreading assets across categories – stocks, bonds, and cash – that behave differently in different market conditions. In fact, some asset classes that are considered quite risky on their own can actually reduce the risk level of the overall portfolio by diversifying the portfolio’s performance. It’s important to note there are opportunities for diversification both across asset classes and within each asset class.

Professional investment managers use diversification tools as they seek to deliver the highest level of return per unit of risk. A typical professionally managed portfolio will include a mix of some or all of the asset classes: cash and equivalents, fixed income securities, public equities, and (perhaps) private investments and other alternatives like gold, real estate, and renewable energy.

You can determine how closely one type of asset tracks, or is correlated to, another asset with the use of an Asset Class Correlation Map, such as this one provided by Guggenheim.

Additional Resources

Ellevest. Ellevest is an online finance company created by women for women. Their website is a terrific source of financial wisdom that speaks directly to women. The company also provides robo- and professional advisory services. Many of the options offered by Ellevest are values-aligned. You can learn more about this women-centric finance site in Chapter 12. Click on the link and scroll down to the end of the page to subscribe to Ellevest’s newsletter.

Investopedia. This website was one of the go-to-resources during the creation of Activate Your Money. It provides an absolute wealth of personal finance and investing knowledge, presented in short, easy to understand bursts. The website is a great resource for more information about any of the topics presented in Activate Your Money. Sign up for one of their many newsletters here.

NerdWallet. Another great personal finance and investing resource full of articles, calculators and tools. In addition to investing, this site covers credit cards, loans, mortgages, and banking.

Jon Hale, Global Head Sustainable Investing Research, Morningstar. Jon Hale is Morningstar’s resident sustainable-investing expert. He is both knowledgeable and prolific. If you want to delve deeper into critical topics related to the state of sustainable investments, you can find Hale’s writings on Morningstar.