Top 5 Books to Learn Financial Literacy

Looking to uplevel your financial knowledge with a book? Look no further. These 5 books will teach you all you need to build financial literacy in all aspects of personal finance, including budgeting, saving and investing.

(1) The Bogleheads’ Guide to Investing

By Mel Lindauer, Taylor Larimore, Michael LeBoeuf, John C. Bogle (Foreword)

If you had to read just one book to learn financial literacy, it should be ‘The Bogleheads Guide to Investing’. Jack Bogle was the founder of Vanguard and pioneered low-cost index fund investing. This book is based on Jack Bogle’s financial philosophy and distills his principles into an easy-to-read but comprehensive overview of all the things you need to learn to gain financial knowledge.

Live below one’s means and manage expenses

The book shows how living below one’s means, even on a tight income, can make a huge difference to one’s finances. The first step to getting financially secure is to get your expenses under control. There are some interesting examples of people with low income who still managed to build a strong financial nest egg by just saving and investing.

Invest Early & often

Start investing early and use the magic of time and compound interest to build a strong financial position. Also, make regular investments and use the Dollar Cost Average approach to reduce market volatility and smooth out investments. It is also highly recommended to put one’s money in tax advantaged funds such as 401Ks or IRAs.

Passive investing/ Index funds

Jack Bogle was a pioneer in passive investing. His philosophy is that (1) it is hard to beat the market and (2) high investment fees reduce one’s returns significantly over the long term. This book strongly recommends passive investing in low-cost index funds to maximize returns over the long term.

Asset allocation

The book encourages people to think deeply about their risk tolerance and pick an asset mix of stocks, bonds, cash and other asset classes that reflects this risk tolerance. Diversifying one’s assets amongst multiple investment classes reduces the risk caused by the poor performance of any one asset class or sector.

Ultimately, this is one of the best books to build a strong foundation of financial knowledge. By focusing on the fundamentals, it makes financial literacy accessible to everyone.

The Bogleheads’s Guide to Investing is the definitive book on personal finance and provides a 360-degree view of all major aspects of personal finance - budgeting, investing and asset allocation. It strongly advocates for a low-fees passive investing approach coupled with asset diversification.

(2) A Random Walk Down Wall Street

By Burton G. Malkiel

The Random Walk theory maintains that stock prices cannot be predicted and in fact, they move completely randomly. Therefore, it does not make sense to try to beat the market by picking stocks or timing the market. Instead, this book advises people to focus on index investing and asset diversification.

A key concept is the Efficient Market Hypothesis, which states that all available information is already priced into stock prices. Stocks trade at their perfect value, so it is hard to find alpha in this world of full information availability.

Malkiel does not advocate for the technical analysis of stocks, which uses previous prices to predict future stock price patterns. Neither does he believe in fundamental analysis, i.e. evaluating company finances to pick stocks. He believes that neither of these methods works better than random chance in stock picking.

Ultimately, the recommendation is to diversify one’s portfolio to manage risk and invest in index funds for the long term.

A Random Walk Through Wall Street’ makes the case for passive and disciplined investing, portfolio diversification and index fund investing. The book is skeptical of finding alpha through either technical or fundamentals based investing. 

(3) The Millionaire Next Door

By Thomas J. Stanley and Willian D. Danko

Authors Thomas J. Stanley and William D. Danko have studied the patterns and habits of America’s millionaires and come up with some surprising conclusions;

High income is not high wealth

Having a high income does not equal having a lot of wealth. In fact, a lot of high income people live above their means and fail to save enough money. On the other hand, many millionaires live below their means so much that people around them are not even aware of their wealth.

Frugality

Frugality is a key virtue for many millionaires, as opposed to people who have high salaries but are not wealthy. In fact, there is an interesting anecdote in which the authors hosted an event in which the millionaires did not indulge in expensive food like caviar or fancy wines, preferring instead a simpler menu. In contrast, their lawyers ended up eating the more expensive food and showed a preference for a luxury lifestyle, even though they were less wealthy than the millionaires themselves.

Millionaires come from varied backgrounds

Many millionaires own non-glamorous businesses such as plumbing or landscaping.  Some are professionals such as doctors and lawyers or engineers with a high savings mindset. Some millionaires are even in ordinary professions such as teaching but have accumulated wealth by diligent saving and investing.

This book challenges conventional stereotypes of wealthy people and shows how millionaires can be found in the unlikeliest places, often running very non-glamorous small businesses. 

(4) Rich dad poor dad

By Robert T. Kiyosaki

Robert Kiyosaki uses the contrast between his own biological dad and his friend’s dad to showcase the different financial philosophies between the wealthy and the middle classes towards money, wealth building.

His poor dad is his own biological father, who is highly educated and a high earner but is not money savvy. His poor dad emphasized education and having a stable job but struggled in managing his finances. 

His rich dad is actually his friend’s dad, who, despite being less educated, actually has a very savvy wealth growing mindset and treats all his earnings as capital to build more assets. His mindset was to make money work for him and not the other way around.

Here are some key takeaways from this book that will go a long way to build one’s financial knowledge.

Money philosophy

The rich don’t work for money. They make their money work for them.

Mind your business

Have an entrepreneurial mindset, add new income sources and build assets.

Control your emotions: Overcome feelings of fear or greed because they can result in poor financial decisions.

Learn financial knowledge

Building strong financial knowledge is important. Learn about assets, liabilities, the tax code, investments and real estate.

Focus on building assets

Understand the difference between assets and liabilities. Focus on building assets that grow wealth and not liabilities that eat away at wealth.

Work to learn, not for money

Work to learn financial literacy and skills, rather than just to earn a paycheck.

What makes this book thought provoking is Kiyosaki’s use of his rich and poor dads to contrast two different money philosophies. He urges his readers to think of their money as capital with which to grow their assets. 

(5) I Will Teach You To Be Rich

By Ramit Sethi

Ramit Sethi’s ‘I will teach you to be rich’ is a financial literacy book aimed at younger professionals and is full of actionable advice, down to negotiation scripts. The unique thing about Ramit’s approach is that it encourages people to identify things that are important to them and spend money on these things while ruthlessly cutting back on everything else. The goal is to live a ‘rich life’ however you define it, and not on a one-size-fits-all frugality.

Many of the things that Ramit says about saving are similar to other personal finance advice. But what makes Ramit unique is his voice and how he frames things in a way that appeals to his target audience of young professionals.

Build a ‘Rich Life’

Ramit Sethi advocates for spending consciously on things you love and constitute a ‘rich life’ for you. He does not emphasize blanket frugality.

Use systems and automation

He advocates using systems to automate savings, investing and bill paying, instead of relying on good intentions alone.

Negotiate

Sethi does not just urge people to watch their expenses. He also wants everyone to find ways to negotiate a higher salary or negotiate with service providers to reduce phone or cable bills. In fact, what is unique about this book is that he goes as far as to provide scripts for people to use in their negotiations.

Focus on big wins

These could be higher salaries, or automated investing or paying off credit card debt.

Overall, Sethi’s focus on living the ideal rich life and actionable advice such as automated systems and negotiation scripts makes his book stand apart from a lot of other financial knowledge and literacy books.

In short, these 5 books are great options for anyone looking to learn the basics of personal finance and investing and set themselves up for financial literacy. Readers would do well to determine which of these books aligns well with their money philosophy and use it to build a strong foundation in financial knowledge.