Saturday, September 14, 2019

My “Five Books” for Financial and Life Improvement

In last week’s Dozen Pieces of Inspiration, I made a reference to the website Five Books, where people in various fields recommend five books related to that field.

Since then, I’ve been tossing around that very idea in my head over and over again. If I were to recommend five books in an appropriate category for The Simple Dollar, probably “Financial and Life Improvement,” what five books would they be?

One book was very easy to pick. Two others came pretty quickly on their heels. With the two other slots… I had to struggle a little bit, but I think I came around to some wonderful choices.

So, without further ado, here are the five books I would choose if I were to select “five books for financial and life improvement.”

Your Money or Your Life by Joe Dominguez and Vicki Robin

This was the “no brainer” book on this list, as it would be the one book I would recommend to almost anyone who found themselves struggling financially. This book was the essential book for me when I started to turn my financial life around, and it’s had a similar profound impact on many readers.

In a nutshell, this book is about the relationship between your finances and the other aspects of your life that you care about, particularly your time. The book introduces a ton of concepts that are really powerful in terms of evaluating your money use and the real impact that has on your life as a whole.

I’ll mention two that really stand out for me.

One is the idea of your “real hourly wage.” Most people think of their jobs in terms of their salary or in terms of the amount of money they make per hour. This book instead focuses on how much money you actually get to keep in exchange for an hour of your life. You might work for eight hours, but are you also including the hour of commuting that you have to do and the hour you sit in your chair at home slumped over because you’re burnt out after your workday? You’re really handing ten hours over to your job. What about time spent doing things like buying work clothes or going out with coworkers or traveling for work? That adds up. On the other hand, you might know how much you “make,” but have you subtracted out taxes? Have you subtracted out the cost of eating out with coworkers? Have you subtracted out the cost of your wardrobe? As you start subtracting work-related expenses from your income and adding in all of those extra hours you devote to work or thinking about work or getting to work, your hourly wage drops precipitously. That resultant number is your real hourly wage, and it’s very useful to use that as a comparison point for everything you spend money on. You might nominally make $15 per hour, but once you add in the extra hours devoted to work and subtract out the money spent on things related to work, you’re actually only keeping $8 an hour. If you spend $20 going out for a meal at Applebee’s versus spending $4 making a meal at home, you’re basically trading two hours of your life for the privilege of Applebee’s versus your meal at home. Is that really worth it?

Another idea that’s really impactful is the fulfillment curve. Basically, the idea is that once you get past a relatively low level of purchasing, additional purchasing in that area leads to diminishing returns and can actually even lead to a decline in your enjoyment. There’s a “peak” where you get the most pleasure for your dollar, and it is very easy to overshoot that peak, often without realizing it. We aim for that peak and very, very often wind up on the far side, spending too much and getting too little overall value and pleasure out of that expense.

This book is loaded with concepts like this and yet manages to fit them all into a clear overall picture of your finances and how they relate to getting what you want out of life. To me, it’s the essential personal finance read.

While I’m going to name some alternate choices for all of the other books on this list, I can’t really think of a book that I would recommend as an alternative to this one. It deserves to be read and thought about by anyone who is struggling with lining up their finances with what they want out of life.

The Total Money Makeover by Dave Ramsey

If you’re struggling with debt and with getting the very basics of your life in order (like keeping the bills paid), this is likely the best book on the market for you. Dave Ramsey offers a very straightforward plan for getting out of debt and couples it with a coaching style that serves as a powerful motivator to carry through with that plan.

Ramsey’s plan centers around seven “baby steps” that people should take to move from a disastrous personal debt situation to debt freedom (or close to it). They are, in a nutshell:
+ Baby Step 1: $1,000 to start an emergency fund
+ Baby Step 2: Pay off all debt using the Debt Snowball
+ Baby Step 3: 3 to 6 months of expenses in savings
+ Baby Step 4: Invest 15% of household income into Roth IRAs and tax-advantaged retirement accounts
+ Baby Step 5: College funding for children
+ Baby Step 6: Pay off your house early
+ Baby Step 7: Build wealth and give!

For those unfamiliar, a “debt snowball” means that you make a list of your debts from the smallest balance to the largest, then strive to make the largest possible extra payment on the debt with the smallest balance while making minimum payments on all of the others. When that debt is gone, move on to what is now the smallest debt and hit it with a hammer.

While I might have minor quibbles with the absolute specifics of this plan, I completely agree with the broad strokes of it, I admire its simplicity and straightforwardness, and it will work. Couple that with Dave’s coaching style, which will be a home run for some people, and this book gets a high recommendation from me.

A couple of alternate choices for a good book about getting out of debt and getting started on your financial journey include You Need a Budget by Jesse Mecham and I Will Teach You to Be Rich by Ramit Sethi. You Need a Budget focuses on a simple way of developing an actual budget that works for people, while I Will Teach You to Be Rich offers good practical advice on the foundational big financial moves people should make early in their professional lives.

The Bogleheads’ Guide to Investing (2nd Edition) by Taylor Larimore, Mel Lindauer, and Michael LeBoeuf

This is the single book I would recommend to anyone who needs to invest for goals like retirement or for a child’s education but isn’t exorbitantly wealthy. The book does a fantastic job of carefully laying out a plan for doing those things that doesn’t require a financial advisor or obsessive study of finances with a thoughtful philosophy behind all of it.

In short, the Bogleheads recommend investing in index funds, which are a low cost type of investment that aims to match the overall market rather than trying to beat the market. For example, if you are buying a very broad based stock index fund, that fund’s goal is to match the growth of the overall stock market by including tiny amounts of all available stocks and doing that as inexpensively as possible. You won’t get huge returns with this model, but you will get very good returns with a much higher level of consistency and you won’t lose it all, either.

The book guides you through why you should do this and the mechanics of how you can do it through your retirement plans at work, an IRA you might set up for yourself, or plans for your child’s education, aiming to maximize the tax benefits for you. While a bit dry in places, it does a very good job of spelling out in very clear language the “how’s” and “why’s” of investing for the average person in a way that’s logically consistent and balances reasonable risk with pretty good returns without spending a lot of time managing all the details.

Basically, at the point at which The Total Money Makeover begins to become less relevant to your financial life, meaning you’ve paid off your debts and are starting to save for retirement and other goals in earnest, this is the book to pick up. The two books cover almost none of the same ground in personal finance, but complement each other perfectly.

Another well rounded book about investing that I would highly recommend as an alternatives to this book is The Simple Path to Wealth by J.L. Collins. Collins covers much of the same material as the Bogleheads’ book above, with many of the same principles, but uses a more conversational style. If you found the Bogleheads’ book to be a little dry, this might be a better read, but I find that the Bogleheads’ book serves as a great reference book and I turn to it more often (perhaps out of familiarity). However, both books remain on my shelf and I suspect that the authors would all laud the other book and would have a lot in common if they sat down for a conversation.

Atomic Habits by James Clear

Regardless of what stage you’re in on your personal finance journey, you’re going to eventually realize that a lot of your success in terms of both improving your income and keeping your spending habits under control comes down to having good routines in your life and being able to make good decisions in the moment. Controlling your impulses and having a daily set of routines that guide you toward your big goal is absolutely fundamental. If your ordinary days don’t guide you toward where you want to be, you’ll never get there.

I considered a lot of books on developing better personal habits and routines, but I think the best all-around book I’ve read in terms of making sense and providing good tools for actually applying the ideas inside is Atomic Habits by James Clear.

Clear’s core idea is that, if you have a sense of what your big goals are, at least in terms of the direction you want to go in life, the best way to get there is a systems-based approach, where you essentially have a handful of tiny habits that you do as a routine on a daily basis that will naturally guide you toward your goal. In terms of personal finance, those tiny habits would be oriented around reducing the overall spending in your average day by doing things like preparing meals at home, taking leftovers, filling your time with low-cost activities, and so on. If you make each day into a system of those habits, you’ll gradually move in a much healthier financial direction. Ask yourself, “what would a financially successful person do today?” and stick to that, making an effort to carry out the habits and routines that a financially successful person would have.

I would strongly point toward Triggers by Marshall Goldsmith as a complement to this book. They are both essentially tackling the same issue – how do I become the person I want to be? – from different angles, with Triggers focusing on behaviors and Atomic Habits focusing on tiny habits and routines. Both are great approaches, with one angle working well for some changes and the other working well for other changes.

Man’s Search for Meaning by Victor Frankl

The problem, of course, is that many people don’t know who they want to be or where they want to go.

My view is that personal finance success for anyone who is not exorbitantly wealthy is practically impossible without some level of inner contentment. Inner contentment is different for everyone, but it’s heavily tied to really understanding what you truly care about and value and having a life that supports those things, recognizing that even the difficult things are a part of life and that you can’t appreciate the good without some challenges along the way.

That journey toward inner contentment, to me, is an absolute fundamental part of financial success. Your financial state, particularly in terms of your personal choices and spending decisions, are just the surface of what’s going on underneath. We often use money to chase desires and chase away bad feelings that even we don’t understand, and modern marketing is really effective at nudging those underlying feelings. Having some level of inner contentment is absolutely key for resisting those urges and feeling naturally content with your life.

I thought about a lot of different books that could express this idea well. A Guide to the Good Life by William Irvine is certainly one of them, as is Why Buddhism Is True by Robert Wright and How to Be a Stoic by Massimo Pigliucci, among many others. However, I felt like each of those books really just described one particular path to inner contentment, whereas Man’s Search for Meaning is about the idea of that path as a whole.

Part of me wants to recommend this book first rather than last, but the reality is that many people are in an urgent place with their personal finances and going down a path toward internal contentment is not going to be the fix to their finances that they’re seeking. Rather, there’s a realization point with almost any personal change – finances included – that the changes they’re trying to make aren’t fixing what they want from life and a different approach is warranted.

In the end, one’s finances are just a big part of the expression of what we want out of life. When we’re unsure what we want and aren’t content with things, our finances tend to be a mess. It’s only when we’re more sure of what we want and are on a path toward contentment that we can get our finances in line with what we really want.

And, believe it or not, that brings us right back in a circle to Your Money or Your Life, the first book I recommended in this list.

Final Thoughts

My recommendation is that, if you’re struggling with your finances, at least one of these books will deeply speak to you, depending on where you’re at, and that Your Money or Your Life is probably the best jumping-in point by default, followed quickly by either The Total Money Makeover if you’re struggling with debt or The Bogleheads’ Guide to Investing (2nd Edition) if your debt is under control and you’re wanting to understand investing basics. The other books follow in almost a cycle, from purpose to plans to routine and back to purpose again, as we all need a helping hand at different points in that cycle at different times.

The amazing part is, many of the principles you’ll pick up from these books apply just as well to other aspects of your life – yes, even the more financially-focused ones.

It’s worth noting that many of the books in this article that I haven’t written about individually on this site before will eventually be discussed in detail, offering a detailed summary so you can know the high points of the book before deciding whether to read them yourself. Many of them have already been discussed before, and here are links to those earlier discussions:
+ Your Money or Your Life by Joe Dominguez and Vicki Robin
+ The Total Money Makeover by Dave Ramsey
+ You Need a Budget by Jesse Mecham
+ Atomic Habits by James Clear
+ Triggers by Marshall Goldsmith

Good luck, and happy reading!

The post My “Five Books” for Financial and Life Improvement appeared first on The Simple Dollar.

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