19 Lessons From the Best Books on Finance

There are a ton of books out there about investing and personal finance, some of them are pretty good others not really which is why sometimes we need a little summary on finance books. Some have very useful ideas hidden inside a lot of filler to justify the existence of the book. Some have very similar themes and repeat the same advice from other books, so if you read 5 books on investing chances are that you’re going the read the same advice multiple times. So, in an effort to save you time and energy on this post I have compiled some of the best lessons from a great variety of books on personal finance, investing, debt etc.  So without further ado let’s get into the best 19 lessons from the best books on finance:

1. Most millionaires in the United States do not run a large and successful company neither are they famous musicians/actors/athletes with big houses and luxurious cars or anything similar. According o The Millionaire Next Door that type of millionaire is just a Hollywood stereotype and among millionaires only an incredible small minority has this lifestyle. What is actually common among millionaires is just 3 things: they live below their means, they invest around 20% of their income and a majority of them are self-employed

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2. Never start a business just to make money or it will fail rather you should first focus on needs that people actually have. It’s common advice that you should just do what you love but according The Millionaire Fastlane you should only start a business that people want, sound obvious but most entrepreneurs completely ignore what their target audience wants and try to instead just sell whatever they personally like.

3. The first step you should take to reach financial stability is to save $1000, according to the Total Money Makeover by Dave Ramsey this will work like cushion that can absorb any accidents that can happen in the future, that could stray you from your financial plan. Let’s for example say that you’re putting $200 each month on your investments account but one day your kitchen breaks and now you need $500 to fix it, now being that you’re living paycheck to paycheck you will have to pull your money from your investment account and maybe even get penalized for it. This is no way to reach financial freedom, emergencies do happen which is why an emergency fund is a must.

4. “The Commandment of Scale”: make sure that whatever business you’re starting is easy to scale, if for example you open up a carwash you have a maximum amount of clients that you can serve in a day and you can only do it while the business is open on the other hand there are other businesses that are easier to scale like online businesses where the amount of clients you can reach in a day is limitless and operates 24 hours, this makes things easier because you only need to focus on growing your audience (Lesson from The Millionaire Fastlane).

5. Accumulators of wealth vs under-accumulators of wealth: accumulators of wealth spend less of what they earn be it 60k or 200k and by doing this they manage to save and invest and therefore they increase their net-worth consistently, this a common trait among millionaires, there are some who even managed to reach a million bucks making less than 100k per year. On the other hand, under-accumulators are always in debt and even with high salaries they always live paycheck to paycheck (Lesson from The Millionaire Next Door).

6. Debt Snowball: create a snowball effect by paying your smaller debts first and then using the money you’re not longer paying on that debt on the remaining debts. Once you have paid off the small debts you can focus all your money on the big loans like student loans and pay them in a shorter time (Lesson from Total Money Makeover)

7. Automate your finances, according to I Will Teach To Be Rich the best way to actually put money where it should be going is by automation. Set an automatic transfer on your bank account the same day of each month that moves a specified amount to your investments account, that way you save time and will power and make investing easier.

8. Investment vs Speculation: the difference being that in an investment you did extensive analysis on the safety of the investment and you expect a reasonable return. Therefore the 3 main criteria for an investment are fundamental analysis, diversification and that you seek steady returns. If your “Investment” does not meet these criteria then you’re just gambling (Lesson from The Intelligent Investor)

9. Based on the efficient market hypothesis (which states that investors and traders buy and sell so efficiently based on the latest news and every piece of information available) we can make the conclusion that every piece of information available is already incorporated into the price of a stock  at any given time and therefore the next movement of the stock is entirely unpredictable and you shouldn’t try to beat the market since it would be extremely difficult or according to A Random Walk Down Wallstreet  outright impossible. What you should do instead according to this book is invest in the broad market through an ETF or a Mutual Fund.

10. Always pay your credit card on time otherwise the ridiculous interests they can charge can put you in a hole very hard to get out. If you’re going to be using credit try to pay the full amount to not generate interests at the end of the month (Lesson from I Will Teach You To Be Rich)

11. Savings accounts will make you lose money. Now this doesn’t mean you should never use savings account they can be useful for money you are going to need soon or for an emergency fund but not for the long run. In The Intelligent Investor Benjamin Graham (mentor of Warren Buffet) says that savings account usually pay an interest that is way lower than the rate of inflation, so if your savings are only growing 1% per year while inflation is at 2% you’re actually losing on real terms and the longer you have your money there the more value you lose. Losing money in real terms means that even if your money grew throughout the year you can buy less stuff because prices rose more than what your money grew.

12. On One Up On Wall Street Peter Lynch contradicts Burton Malkiel from A Random Walk Down Wall Street and claims that you can actually beat the market and get great returns, now this debate has been going between practitioners and academics for decades and is the topic for another post. So the argument Peter Lynch (who managed the Fidelity Megallon Fund for decades and managed to achieve a 29% average annual return in that time) makes is that the reason why funds make just mediocre or average returns is that they invest like institutions they bet for the safest stocks and don’t take any chances on small stocks that can grow exponentially but rather they just focus on safe blue chip stocks that will definitely grow but not really a lot. But individuals are not forced to have a ton of open positions in every industry at all times like institutions do so individuals do have some advantages on this regard, they can only invest in a booming industry or stay entirely out of the market in bad times, which is not an option for institutions

13. When it comes to investing your temperament is very important if you get scared easily and tend to lose rationality in those cases maybe active investing s not for you and you should just stick to an index fund(and avoid looking at it constantly)this is because markets are volatile and you can’t be selling every time the market declines which happens very often.(Lesson from One Up On Wall Street)

14. Never try to time the market even economists with Harvard PhDs can’t predict when is the next recession going to occur or something like that, when it comes to investing focus on industries you know, on companies that you are familiar with and that look pretty solid with growth potential, don’t invest on stuff you don’t understand or believe in just because they’re trending and everyone is investing in them(Lesson from One Up On Wall Street)

15. People tend to fall into two categories when it comes to personal finance: those who outright ignore it and don’t care about it and those who obsessively debate and plan every minor detail before taking any decision. Both positions are detrimental, in reality you don’t need to have PhD on finance to reach financial freedom, the most important thing is just taking action it doesn’t really matter if you’re doing it perfectly (Lesson from I Will Teach You To Be Rich)

16. Have weekly, monthly and even annual income goals but focus on your daily income goal (DIG) this will be extremely motivating and more tangible and if you achieve your DIG you will also hit your other goals. This advice is primarily for entrepreneurs and self-employed people with businesses but even if you’re an employee you can increase your daily income by pursuing a side hustle on your free time. (Lesson from FU Money)

17. Compare your lifetime income to your net worth, the purpose of this exercise is to bring financial awareness, most people go through life without really thinking on what they’re doing. Comparing how much you’ve earned and how much of that money you could still get by selling all your assets could shed some light on whether you’re doing things right. The purpose here is to reflect on what you’re doing with your money, you might have spent a lot on travels and experiences with your loved ones and therefore although having made a lot of money through your lifetime you don’t have a lot of assets and your net worth is not that high and that’s ok the point is that you become conscious on how you spend your money, you might be wasting and are not happy at all of having such a low net worth after years of work (Lesson from Your Money Or Your Life)

18. Calculate your real hourly wage. In life we have a given amount of hours to do what we want and spending a lot of time working might not be worth it since you can never recover that time. If you’re wasting your life away and losing the opportunity to be with your loved ones or travel or anything else you want to do because you took a 100 hours workweek job you might want to reconsider if the money is worth it maybe those extra 10k every year are not worth wasting your best years. This is a very personal decision; some people are very driven and love their careers and should go for those jobs but if your job is making you miserable and there are other options that you discard because they pay less you might want to rethink that decision. (Lesson from Your Money Or Your Life)

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19. Money is life energy, not dollars. This one is very related to the last point and intends to create a more conscious spending. When buying stuff, you shouldn’t think just in terms of dollars but rather in how many hours did you work for that money. This will stop you from buying stuff you don’t really need or that you won’t even enjoy that much. Let’s say you just want to buy a luxurious car because you want to impress people, think that maybe that car is worth around 8 months of work or even a year, do you still want to buy it? Probably not. (Lesson from Your Money Or Your Life)

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