I heard about this book from a recent episode of The Indicator and it sounded interesting enough that I went out and immediately borrowed it. Although I’ve been a bit skeptical of personal finance books since reading Pound Foolish, the advice here is pretty different.
First though, let me tell you who I think this book is for: this book is for people who are earning enough money that they not only have enough to get by, they have enough to plan for the future. Sure, there are lots of stories about people making bad money decisions, but all these people start from a comfortable financial position. If you’re barely making enough to make ends meet, or if you’re looking for strategies on how to get out of debt, this isn’t really the book for you.
Dumb Things Smart People Do With Their Money covers the baker’s dozen of money mistakes that lots of people, even highly educated ones, make. The thirteen are:
- Buying financial products you don’t understand
- Taking financial advice from the wrong people
- Making money more important than it is
- Taking on too much college debt
- Buying a house when renting makes more financial sense
- Taking on too much risk
- Failing to protect your own identity
- Spending too much during early retirement
- Saddling kids with your money issues (related to chapter 3)
- Don’t plan for the care of aging parents
- Buying the wrong kinds of insurance, or not buying any
- Not having a will
- Trying to time the market
Those are a lot of topics and she gives a lot of practical advice on each issue, but her advice can be distilled into two parts. If you haven’t gotten these basics, work on these now:
- Clearing consumer debt (credit card debt, student loans, auto loans)
- Max out your retirement contributions
- Have an emergency account with enough money to cover half a year to one year of expenses.
And her principles about money (as I understand them) are:
- Cultivate a healthy relationship with money
- Understand your financial position and what you’ll probably need
- Take the appropriate steps to cover yourself and stop making emotional decisions
I think all of the money mistakes can be classified under these three categories. It sounds like common sense, but sometimes, common sense isn’t very common. For example, I didn’t even know that not all financial advisers in the United States follow the fiduciary standards!
Not everything here is applicable to me, some because I’m not in that stage of life, and some because I don’t live in the US (no IRAs for me). Still, a lot of the advice is applicable, such as what kind of questions to ask before buying financial products, and how to calculate the amount of money you’re going to need for the future.
Overall, this was an interesting and worthwhile read. This book really goes back to the basics and if you haven’t been for any personal finance classes, or if you need a refresher, this would be something I’d recommend (assuming you’re in the position to think long term – after The Indicator podcast on payday loans, I realised that not everyone is in the position where taking her advice is doable.)
This sounds like an interesting book. I know we could be better with our finances than we are. We often are just living paycheck to paycheck, but I often wonder if we could do things differently. We cut corners and yet it never seems like we get ahead . . . Or we do, and then something comes up and we are back where we started.
Personal finance is a really tricky subject to master. I liked that the book covered concrete subjects, like how to pay for college, insurance, etc. Definitely worth a read!