Great Books on Personal Finance

I thought it might be helpful to tell you about some great books on personal finance that I’ve read over the years. Like many things in life, personal budgeting starts with a shift in mindset. One day, you see something, or hear someone recounting their story, or read an article or book, and suddenly you realise that you might be better served by making some changes to your life.

In other words, you come across a new idea. Or quite often, it’s an idea you’ve heard many times before but, for some reason, today the time is right.

I’ll start off with a couple of books which set out the big picture, and then move onto other books that help with detailed action plans.

The Rich Dad Poor Dad Books

About 25 years ago, a friend introduced me to ‘Rich Dad, Poor Dad’ by Robert Kiyosaki. At the time I was working as an accountant advising clients on their small businesses and taxes. I had a ton of knowledge, but reading Rich Dad Poor Dad lifted a veil from my eyes. It’s not a book on the details of budgeting but it gives a birds-eye view about why people get short of money despite earning decent wages.

For the first time I understood what Kiyosaki calls the ‘money trap’ people can get into, year by year, slowly digging a deeper hole.

As income increases
We tend to enjoy a more expensive lifestyle
Live in a bigger house
Take on more consumer debt and other monthly obligations
So, much of our income disappears from our bank in direct debits
And we don’t save sufficient for the future

When we don’t save for the future, Kiyosaki says, we have little choice but to carry on working for a living – without the prospect of a more secure or more ‘free’ financial future. So, if we want a different future, we must get a grip on our finances, so we build our financial assets.

The Richest Man in Babylon

I think it was soon after that I read The Richest Man in Babylon. It’s a thin book written in the form of parables and contains straightforward advice on the way to achieve long-term riches. Like Rich Dad, Poor Dad, it provides a valuable birds-eye view, but it doesn’t go into detail about how to set up your monthly budget. Clason wrote the book in 1926, at least 40 years before direct debits came into use. Also, consumer credit was less readily available. It presents a simple picture, yet the principles remain useful.

Save 10% of your earnings every time you get paid
Put this 10% into your savings right away, before you spend anything
Then live on the 90% remaining
Don’t take on debt
If you already have debts, use another 10% of your earnings to pay them off

All Your Worth – The Ultimate Lifetime Money Plan

Now we get down to more detailed action plans. If I was forced to choose just one of the great books on personal finance, this is the one I'd probably go for. That's because All Your Worth provides both an overview and some of the detail you need for personal budgeting. It also recognises the importance of enjoying life today. When people hear the word 'budgeting ', it can sound boring and penny-pinching - 'scrimp and save now so you can enjoy a better tomorrow'. But what if we could allow ourselves treats now as well as when we've achieved our financial goals? Would that help us take the right actions today, so we achieve our longer-term dreams?

What I love most about this book is the 50-30-20 rule. It’s the only personal finance book I recall that recommends a balanced money formula.

50% of our take-home income for necessities (must-haves)
30% for treats and lifestyle choice (wants)
20% for a better future (savings and paying off debt)

The 50-30-20 rule is great because it encourages us to budget for treats as well as planning for the future. In fact, it emphasises the importance of all three categories: a three legged stool. And the book goes beyond the level of ideas. You’ll find detailed guidance on how to allocate your budget between these three ‘super-categories’.

The Total Money Makeover

In this book, Dave Ramsey runs through a 7-step process he recommends for achieving a better financial future. It covers with the nitty-gritty of what to do:

Build an emergency savings fund
Pay off debt
Increase the size of the emergency fund
Retirement investing
College funding
Pay off the home mortgage
Build wealth

Dave Ramsey tells you what to do – and in what order. His message is, ‘I know this works’. In the introduction he says, ‘The stuff I teach is the truth…The principles stand, and they work every time.’

Great Books on Personal Finance for Business Owners

If you’re self-employed your income may vary from month to month, which can be a challenge when it comes to personal budgeting. If you’re in this situation, the ideas set out by Mike Michalowicz in ‘Profit First’ could be a big help.

A bit like the 50-30-20 rule, Profit First suggests that you use the principle of 'pay yourself first' and allocate your business income to various categories:

Profit
Tax
Your ‘wage’
Operating expenses

Each of these categories has a separate bank account. How much do you allocate to each account? That depends on the figures in your business.

Great Books on Personal Finance for Mindset

Finally, a quick word about mindset and money habits. The first step in personal budgeting is in your mind. You decide to improve your finances and set some sort of goal. This goal might be to save for specific major purchase, or it could be wider such as building your savings so that you no longer have to work for a living.

Whatever goals you set, consistent action is the key. You develop a plan, then you set out to instil new habits of behaviour (in your spending, for example). But, as BJ Fogg says in his book Tiny Habits, ‘there is a painful gap between what people want and what they actually do’.

There's many a time in my life when I've wanted to achieve a goal, yet failed to carry through with the right actions. Many people make the mistake of thinking that the most important factor is self-motivation. Well, it's true, motivation does come into it. But, once we understand how the mind works, we can make it much easier to succeed.