Financial literacy is important for anyone wanting to build wealth. During my years as a financial advisor, I was surprised by how little people knew about basic investing. Most people spend more time planning their annual vacations than they do their finances. Maybe that’s why Americans are so bad with money. I don’t blame them. Investing can seem really complicated when you start to learn about it. There are a lot of terms to figure out, like net income, asset classes, and P/E ratios.
Add to that the fact that money is an emotional topic. There’s a reason why it’s taboo to talk about only 2 topics at the dinner table with friends: religion and money. We don’t live in a culture that openly discusses money and how to handle it for our personal gain and well-being.
It wasn’t until recently that personal finance and investing for beginners were taught in school. I’m so glad that it’s finally getting some attention, however, from what I’ve seen, they don’t focus completely on the right things. They teach about how to get a credit card (i.e. how to get into debt) and how to manage your credit score. Given the dearth of education and all the incorrect information, it’s up to you to teach yourself about personal finance. The good news is that there are a lot of free resources so you don’t need a degree in finance or an MBA, like me. Just a desire to start and a commitment to keep learning.
You can do this all on your own. In fact, while getting help is always useful, I don’t think everyone needs a financial advisor and I wrote about why here.
So where can you start to learn about investing? I’d start at the modern source of investing wisdom (and one of the richest people on the planet), Warren Buffett. Start by looking up a few interviews on Youtube with the man and listen to his attitudes about investing. He consistently offers rational advice on how to invest and stay unemotional.
He believes in things like investing only in what you know, don’t buy any stock unless you plan to hold it forever, don’t be emotional with stocks, do your research and never lose money.
For a deeper dive, go to his company’s website, Berkshire Hathaway and read his annual letters. These annual letters include commentary and lessons from Warren Buffett. There’s a lot that can be learned from the annual letters. I suggest you take notes and write down the principles he talks about in each one.
There’s also a great book that includes a summary of all the knowledge contained in the letters. There are a lot of books about Buffett, but this one is actually his actual words. It’s something everyone should read every few years.
The Trinity Study (or the 4% rule)
If you’re learning about financial independence and early retirement (FIRE) you will hear about “the 4% rule.” I wrote about it in the intro to financial independence. The general rule is to save enough so you can live off 4% of your investments. In other words, 25 times your annual income. So if you make $50,000 now and would like to live on the same amount after retirement, you should accumulate $1,250,000. The 4% figure is a conservative number that’s been backtested and has been found to hold up in nearly every situation, except instances when a country went to war and lost.4,5
This rule comes from a research paper called “Sustainable withdrawal rates from your retirement portfolio,” also known as The Trinity Study after the university where the 3 professions who wrote it teach. If you want to understand how large your investment portfolio needs to be and how much you can safely live on and not run out of money, go to the source and read the study.
Here’s a list of the most useful books on investing for beginners as a place to start. They focus on general principles, which is important to get down before moving on to more advanced strategies. For example, it’s a mistake to try to jump into shorting the market if you don’t understand how the market works.
The Intelligent Investor – written by Warren Buffett’s mentor
The Millionaire Nextdoor: Surprising Secret’s of America’s Wealthy – disproved that you can never tell how much money someone has
The Richest Man in Babylon (only $1.36 for paperback)
Think and Grow Rich – an old school classic
The Simple Path to Wealth – a FIRE classic
Great investing websites
The internet can be a great source of knowledge on just about anything. However, with so much information and so many opinions, it’s not easy to know what’s correct. There are a few trusted resources that I’d start with to learn about investing.
Like websites about money, podcasts can be a great source, as long as you listen to one where the hosts know what they’re talking about.
Planet Money – this podcast is more about economics, but understanding how the economy works is an important piece of the puzzle to understand your place in it. The episodes are short but informative and entertaining.
The Dave Ramsey Show – one of the most popular radio, and now podcasts, about money. You can also watch him on YouTube. If you have any debt at all, I’d recommend listing to him and going through his 7 steps.
Bigger Pockets – if you’re interested in real estate investing, their podcast and website are a great resource.
Freakonomics – one of my favorite podcasts (and book) because he takes a look at economics from a different standpoint and helps you think of things in a new way.
Many brokerages are really helpful when you have specific questions about investing. Vanguard has been great about answering my specific tax questions. While they usually don’t give investment advice, they can answer your questions about how things work like fees, returns, and asset allocation.
Of course, we’ve got a whole series of instructive articles about personal finance, investing for beginners and the FIRE movement here on this website. I suggest you go to the Financial Independence section and start at the top and read through all of them.
Taking time each week to review your budget and read about investing and financial planning is one of the best things you can do for your future. Most people don’t understand money and take little time to figure it out and end up spending more than they have and paying more in fees and hidden charges than they should. Staying on top of your finances and learning about how money works is the first step toward growing your wealth and one you won’t regret.
There’s only one Warren Buffett (and it ain’t you) – why it’s difficult for private investors to make money.
What to do when the stock market plunges
The 4% rule and other magic numbers to never run out of money