How to Get Better at Finance in Six (?) Easy Steps
September 16, 2023 4:28 AM Subscribe
I want to spend a year getting REALLY good at managing my finances and understanding money. What should I read/learn? Snowflakes inside.
I am doing fine financially but I want to be doing more than fine. I know the basics and am inherently risk-averse. I live within my means and invest in index funds. I am not going to try to beat the market. I have an emergency fund etc. So I don't need any of the typical advice given to newbies.
HOWEVER, despite being a fairly smart and functional person, I really don't have an "ear" for finance, if that's the right word, and I would like to develop one. I've always been a typical humanities person and most of what I've tried to learn about financial markets, accounting, etc, has gone in one ear and out the other. I also don't have any instinct at all for making money or stuff like currency arbitrage (which is a handicap since I live between two different countries). I'd like to feel more confident managing my money and, ideally, growing my little nest egg without advice from family members who are great with money (who, frankly, have helped me a ton over the years). I've decided to spend a year trying to get as good at this as possible. What should I do and what books should I read to make this happen?
I am doing fine financially but I want to be doing more than fine. I know the basics and am inherently risk-averse. I live within my means and invest in index funds. I am not going to try to beat the market. I have an emergency fund etc. So I don't need any of the typical advice given to newbies.
HOWEVER, despite being a fairly smart and functional person, I really don't have an "ear" for finance, if that's the right word, and I would like to develop one. I've always been a typical humanities person and most of what I've tried to learn about financial markets, accounting, etc, has gone in one ear and out the other. I also don't have any instinct at all for making money or stuff like currency arbitrage (which is a handicap since I live between two different countries). I'd like to feel more confident managing my money and, ideally, growing my little nest egg without advice from family members who are great with money (who, frankly, have helped me a ton over the years). I've decided to spend a year trying to get as good at this as possible. What should I do and what books should I read to make this happen?
I was going to suggest hanging out on the boglehead forums. Also, I enjoy the podcasts and blogs from the Ritholtz Wealth people - they are not the most sophisticated stuff out there, but they mix good information with some entertainment factor, which makes them less dry/serious/like homework. Animal Spirits is good, though pretty dad/middle-aged dude oriented, if that is a turnoff. Mainly, I would encourage you to keep it simple - you can make a ton of money just investing in low cost index funds in a discipled way. Adding more exotic stuff is not helpful for the vast majority of people.
posted by Mid at 8:05 AM on September 16, 2023
posted by Mid at 8:05 AM on September 16, 2023
I’ve spent a fair amount of time looking into this and have regular conversations about investments with a family member with more dosh than I’ve got, and the basic, boring advice is all there is. Timing the market (as with currency arbitrage) is inherently risky. Poking around to find better interest rates on your savings account and lower fees for transactions is probably the main thing to tweak. A large part of the equation is figuring out how to get paid more at work vs. investing secrets.
Not sure what country you’re primarily investing in, if you’re making enough to max out your 401k in the US, you’d start looking for tax minimizing strategies, but it sounds like you’re not there right now.
posted by momus_window at 8:25 AM on September 16, 2023 [2 favorites]
Not sure what country you’re primarily investing in, if you’re making enough to max out your 401k in the US, you’d start looking for tax minimizing strategies, but it sounds like you’re not there right now.
posted by momus_window at 8:25 AM on September 16, 2023 [2 favorites]
I would recommend looking for an intro Economics course -- one that covers Micro/Macro. My intro college textbook "Principles of Economics" by Mankiw is readable enough for someone that's brand new to the field (and honestly, I thought it was generally pretty enjoyable to read, but then again I did end up majoring in Economics). This really helps ground you on what makes something valuable vs. what is its inherent value, and how this all impacts its price, and how do people take advantage of these dynamics. [Short answer - if people think something is valuable, it becomes more valuable. See also "efficient market hypothesis" and the role of entities like hedge funds. See also "winner's curse"].
I would pair this w/ something from the "behavioral economics" realm -- maybe the "Nudge" book? Written for the lay reader, but adds the wrinkle to "classic" economics [which the above textbook really focuses on] in demonstrating that real people don't always behave rationally to maximize their strict economic benefit, so what is it that drives decision making?
Last but not least, I would add onto the curriculum something about how "markets" can really really "go wrong" -- the 2007-08 economic crisis triggered by sub-prime mortgages, the role of private equity in "flipping" companies for sale, what CEOs are actually compensated on [stock prices] and how that impacts their decision making, and possibly the more recent small bank collapses in the US due to the interest rate changes [Silicon Valley Bank]. I'm sure there's something around Crypto / Gamestop + wallstreetbets that's illuminating here too.
The above is not to say you shouldn't learn about specifically financial markets in more detail, but ultimately these core economic content will provide a really really good grounding into what are the behaviors/beliefs that underlie the financial markets [and all markets] and ultimately gives you some background in what it means to participate in financial markets as a Joe investor vs. firms w/ ginormous amounts of market moving money+tech vs. other Joe/Jane investors throwing money into the pool.
I definitely fall on the conservative side of the fence when it comes to personal financial management. I generally don't buy investments I don't understand. For me, it's really really hard not to see speculative markets like NFTs/crypto as a market for a thing that generally only has value b/c other people think it has value, and so inherently are speculative and subject to whims [see: Beanie Babies, trading cards]. It's rare to see any investment-focus content focus on these more existential concepts simply b/c they often discourage investments.
posted by ellerhodes at 8:41 AM on September 16, 2023 [2 favorites]
I would pair this w/ something from the "behavioral economics" realm -- maybe the "Nudge" book? Written for the lay reader, but adds the wrinkle to "classic" economics [which the above textbook really focuses on] in demonstrating that real people don't always behave rationally to maximize their strict economic benefit, so what is it that drives decision making?
Last but not least, I would add onto the curriculum something about how "markets" can really really "go wrong" -- the 2007-08 economic crisis triggered by sub-prime mortgages, the role of private equity in "flipping" companies for sale, what CEOs are actually compensated on [stock prices] and how that impacts their decision making, and possibly the more recent small bank collapses in the US due to the interest rate changes [Silicon Valley Bank]. I'm sure there's something around Crypto / Gamestop + wallstreetbets that's illuminating here too.
The above is not to say you shouldn't learn about specifically financial markets in more detail, but ultimately these core economic content will provide a really really good grounding into what are the behaviors/beliefs that underlie the financial markets [and all markets] and ultimately gives you some background in what it means to participate in financial markets as a Joe investor vs. firms w/ ginormous amounts of market moving money+tech vs. other Joe/Jane investors throwing money into the pool.
I definitely fall on the conservative side of the fence when it comes to personal financial management. I generally don't buy investments I don't understand. For me, it's really really hard not to see speculative markets like NFTs/crypto as a market for a thing that generally only has value b/c other people think it has value, and so inherently are speculative and subject to whims [see: Beanie Babies, trading cards]. It's rare to see any investment-focus content focus on these more existential concepts simply b/c they often discourage investments.
posted by ellerhodes at 8:41 AM on September 16, 2023 [2 favorites]
I'm going to take a bit of a different tack. If you're debt-free, have a low debt load, an emergency fund, low-fee index fund(s), you take your employer's match (if available) in a 401k, and your spending is under control, you're probably mostly versed in what Bogleheads has to offer. In fact, other lower-risk retail investing options are fairly limited. What kind of things are your family advising you about that you want to learn more of?
Let's say that you want to learn about the bigger picture - major investments, economics, advanced budgeting and analyzing balance sheets and profit and loss statements, using the credit markets, understanding currencies and global arbitrage? Generally, those are the things covered by an MBA program. (I worked for two Harvard MBAs earlier in my career and joke that I got an MBA "by osmosis", but it was clear that their MBA program was the primary source of information on what they knew - I'm more of a technical / operations guy myself). Outside of focusing on economics or accounting individually, it's those MBA courses that people use as the stepping stone into advanced budgeting, planning and understanding global financial trends.
If your reaction to that is "oh, no, no, not an MBA" and you want to stick with exclusively personal finance accessible to a middle-class family, The Millionaire Next Door is a classic starting point on personal spending habits, budgeting and investing, focused on how to maximize future growth without high-risk investments using a middle-class income, and how those (generally non-flashy) strategies can, over an extended period of time, actually end up with a substantial nest egg.
posted by eschatfische at 8:51 AM on September 16, 2023 [2 favorites]
Let's say that you want to learn about the bigger picture - major investments, economics, advanced budgeting and analyzing balance sheets and profit and loss statements, using the credit markets, understanding currencies and global arbitrage? Generally, those are the things covered by an MBA program. (I worked for two Harvard MBAs earlier in my career and joke that I got an MBA "by osmosis", but it was clear that their MBA program was the primary source of information on what they knew - I'm more of a technical / operations guy myself). Outside of focusing on economics or accounting individually, it's those MBA courses that people use as the stepping stone into advanced budgeting, planning and understanding global financial trends.
If your reaction to that is "oh, no, no, not an MBA" and you want to stick with exclusively personal finance accessible to a middle-class family, The Millionaire Next Door is a classic starting point on personal spending habits, budgeting and investing, focused on how to maximize future growth without high-risk investments using a middle-class income, and how those (generally non-flashy) strategies can, over an extended period of time, actually end up with a substantial nest egg.
posted by eschatfische at 8:51 AM on September 16, 2023 [2 favorites]
I really love Elizabeth Warren's All Your Worth as a personal finance guide. Sounds like it will tell you some things you already know, but it might still be worth reading.
However, if you want to get a bit more big picture, the book she wrote with her daughter, The Two-Income Trap, is a great book for us non–finance brain people about how institutional factors can make it harder for middle-class families to achieve financial stability. If you are trying to develop a better "ear" for finance in general, this might be a good way to get your toes wet.
posted by FencingGal at 9:27 AM on September 16, 2023 [6 favorites]
However, if you want to get a bit more big picture, the book she wrote with her daughter, The Two-Income Trap, is a great book for us non–finance brain people about how institutional factors can make it harder for middle-class families to achieve financial stability. If you are trying to develop a better "ear" for finance in general, this might be a good way to get your toes wet.
posted by FencingGal at 9:27 AM on September 16, 2023 [6 favorites]
I've written about personal finance since 2006 (although I'm now trying to retire from doing so). Based on your description, I would tell you that you don't really need to develop an "ear" for finance. You are doing what you ought to be doing. You are following best practices. Yes, you can learn more (and many do), but it's not necessary.
My advice for somebody in your position would be: save more. You're already saving plenty, it sounds like, but I encourage folks to save as much as possible. If/when you have money left over at the end of the month (or year), don't look for ways to spend it. Throw it in your index funds. Let it grow.
After nearly twenty years of reading and writing about personal finance, all of the millions of words I've consumed and produced can be boiled down to three simple rules: Earn as much as possible. Spend as little as is comfortable. Invest the difference for the future. That's really all you need to know about personal finance. Everything else is needless complication and/or elaborations of these three rules. (The most important of these rules is: Earn as much as possible. It's also the one that meets the most resistance.)
posted by jdroth at 11:44 AM on September 16, 2023 [11 favorites]
My advice for somebody in your position would be: save more. You're already saving plenty, it sounds like, but I encourage folks to save as much as possible. If/when you have money left over at the end of the month (or year), don't look for ways to spend it. Throw it in your index funds. Let it grow.
After nearly twenty years of reading and writing about personal finance, all of the millions of words I've consumed and produced can be boiled down to three simple rules: Earn as much as possible. Spend as little as is comfortable. Invest the difference for the future. That's really all you need to know about personal finance. Everything else is needless complication and/or elaborations of these three rules. (The most important of these rules is: Earn as much as possible. It's also the one that meets the most resistance.)
posted by jdroth at 11:44 AM on September 16, 2023 [11 favorites]
I'm going to echo the others who say that you sound more or less like you know what you are doing. I'm an engineer who happens to have taken an entire year of business courses at university, including accounting and finance; I've read dozens of finance books, and while I found some of it interesting, the best thing I did was just live below my means and shovel money into index funds.
You could take economics, that might be interesting but it wouldn't really do a lot for you. A couple book recs above aren't great IMO - The Millionaire Next Door is dated and a little dodgy in some aspects (the broad message that the mass affluent don't live like sports or music stars is a good one), and Nudge has a real problem with overstating the impacts of a nudge (there was a good If Books Could Kill episode about it). You might enjoy Matt Levine's newsletter or Michael Lewis' books - both are great writing and beginner friendly - if you want a look at some of the weird excesses of Wall Street.
But once you have the basics, very little is going to help you. You aren't going to out-arbitrage professional currency traders, and so you can spend little time or a lot to get basically the same result.
Some domains reward you for each additional bit of study or skill; if you dedicated the next year to improving your cooking, you'd be able to prepare substantially nicer/tastier/healthier/better meals. If you dedicated the next year to improving your dish washing, your best case is you'd maybe get 5% cleaner dishes in 13 minutes instead of 15. If you loved dish washing, that's a great way to spend a year. But you don't, so don't waste your time.
posted by Superilla at 3:22 PM on September 16, 2023 [3 favorites]
You could take economics, that might be interesting but it wouldn't really do a lot for you. A couple book recs above aren't great IMO - The Millionaire Next Door is dated and a little dodgy in some aspects (the broad message that the mass affluent don't live like sports or music stars is a good one), and Nudge has a real problem with overstating the impacts of a nudge (there was a good If Books Could Kill episode about it). You might enjoy Matt Levine's newsletter or Michael Lewis' books - both are great writing and beginner friendly - if you want a look at some of the weird excesses of Wall Street.
But once you have the basics, very little is going to help you. You aren't going to out-arbitrage professional currency traders, and so you can spend little time or a lot to get basically the same result.
Some domains reward you for each additional bit of study or skill; if you dedicated the next year to improving your cooking, you'd be able to prepare substantially nicer/tastier/healthier/better meals. If you dedicated the next year to improving your dish washing, your best case is you'd maybe get 5% cleaner dishes in 13 minutes instead of 15. If you loved dish washing, that's a great way to spend a year. But you don't, so don't waste your time.
posted by Superilla at 3:22 PM on September 16, 2023 [3 favorites]
most of what I've tried to learn about financial markets, accounting, etc, has gone in one ear and out the other. I also don't have any instinct at all for making money or stuff like currency arbitrage (which is a handicap since I live between two different countries).
If you don't already read the Money Stuff newsletter that might be interesting? Subscribe here, read here. Not personal finance, but it sounds like the sheer amount of it, and the readability, and how well he explains things, might be up your street in terms of getting an "ear" for bigger (mostly US) finance stuff.
posted by fabius at 11:56 PM on September 16, 2023 [1 favorite]
If you don't already read the Money Stuff newsletter that might be interesting? Subscribe here, read here. Not personal finance, but it sounds like the sheer amount of it, and the readability, and how well he explains things, might be up your street in terms of getting an "ear" for bigger (mostly US) finance stuff.
posted by fabius at 11:56 PM on September 16, 2023 [1 favorite]
Just nth-ing above comments, that it sounds like you are doing fine and don't need to get more in to it. Keep it simple. Index funds. Regular saving. Live within your means. That's it.
Hanging out on Bogleheads is a good starting point, because you can just focus on issues that are relevant to you and use that as a basis to learn more as you need it. That's how I've handled things, with some supplementary reading on Investopedia when needed.
posted by Dashy at 7:22 AM on September 17, 2023
Hanging out on Bogleheads is a good starting point, because you can just focus on issues that are relevant to you and use that as a basis to learn more as you need it. That's how I've handled things, with some supplementary reading on Investopedia when needed.
posted by Dashy at 7:22 AM on September 17, 2023
The personal finance flowchart honestly covers 90% of people quite well. For most folks most of the time, it's unlikely that active management of your money is going to beat aggressively investing in low-cost index funds and letting it mature. If you have the money and time to engage in things like real estate speculation or flipping houses, then that's a whole other can of worms, but few people do.
posted by chrisamiller at 8:07 AM on September 17, 2023
posted by chrisamiller at 8:07 AM on September 17, 2023
Like the rest of the people said, it sounds like you are doing the right things. The biggest challenge will be to avoid tinkering with things too much or panicking when the stock market inevitably drops by 20-60% for a short period of time.
The only thing you may have missed is that money market funds and/or short term T-bills are a great deal now relative to what they have been in the recent past. You can park your emergency fund and get 5% "risk free" in highly liquid instruments with basically no costs.
Forget about the currency arbitrage. Try to match the currency of your savings/investments with your present/future needs. - i.e. if you are going to retire in Japan, it is could make sense to have more JPY assets. Otherwise, you can get diversification through an index fund.
posted by clark at 5:46 AM on September 18, 2023 [1 favorite]
The only thing you may have missed is that money market funds and/or short term T-bills are a great deal now relative to what they have been in the recent past. You can park your emergency fund and get 5% "risk free" in highly liquid instruments with basically no costs.
Forget about the currency arbitrage. Try to match the currency of your savings/investments with your present/future needs. - i.e. if you are going to retire in Japan, it is could make sense to have more JPY assets. Otherwise, you can get diversification through an index fund.
posted by clark at 5:46 AM on September 18, 2023 [1 favorite]
If you'd like to develop an "ear for finance" I'd recommend A Random Walk Down Wall Street by Malkiel and The Four Pillars of Investing by Bernstein. They cover a lot of the fundamental concepts especially risk and how to manage it.
If you spend a year on learning currency arbitrage you may enjoy the action, but the rewards will likely not be commensurate with the effort. Judging by the tone of your post though, you're likely to disregard this statement :). In which case be sure to play conservatively and never make sizeable one way bets on *anything*. Making above average returns in the stock market is easier than currency arbitrage and yet the former is already very hard to do on a long term basis.
Speaking here from four decades of financial investment experience.
posted by storybored at 8:17 PM on September 18, 2023 [1 favorite]
If you spend a year on learning currency arbitrage you may enjoy the action, but the rewards will likely not be commensurate with the effort. Judging by the tone of your post though, you're likely to disregard this statement :). In which case be sure to play conservatively and never make sizeable one way bets on *anything*. Making above average returns in the stock market is easier than currency arbitrage and yet the former is already very hard to do on a long term basis.
Speaking here from four decades of financial investment experience.
posted by storybored at 8:17 PM on September 18, 2023 [1 favorite]
A lot of financial news, advice, magazine and web articles, is driven by ads for financial services, so be extremely wary. I like Mr. Money Mustache. I read a few blogs and fb groups, like The Non-Consumer Advocate and I'm sure there are good subreddits. Your library probably has a copy of The Millionaire Next Door, which is well-reviewed and recommended. I used to read Andrew Tobias, kind of old-school, but common sense. However, the financial products and rules have evolevd.
posted by theora55 at 3:21 PM on September 27, 2023
posted by theora55 at 3:21 PM on September 27, 2023
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Honestly, once you have decided on a risk tolerance, a simple portfolio of two or three index funds gets you 90% of the way there. You aren't going to grow your nest egg faster than that without taking on excessive risk.
posted by justkevin at 7:04 AM on September 16, 2023 [3 favorites]