Many well-regarded personal finance and investing books, The Psychology of Money by Morgan Housel being a stand out example, have taken special care to address the matter of psychology in money management. For all its remarkable capacity for reason and logic, the human mind is riddled with irrationality. Daniel Kahneman, author of Thinking Fast and Slow, approaches psychology from a broader perspective, examining the psychology of decision making in all facets of life. Is Thinking Fast and Slow a genuinely enlightening read for those of us on the path to FIRE? Or should we set it aside in favor of more specialized books?

The long and short of it:

In Thinking Fast and Slow, Kahneman presents readers with an array of psychological concepts and theories about how and why we make the decisions that we do. Kahneman presents a set of foundational principles alongside a variety of more specific theories and experiments which serve as examples.

System 1 vs System 2

There are two modes of operation for the human brain. The first is System 1: our unconscious intuitive self, it’s fast, instinctive, and constantly active. The second is System 2: our conscious thinking self, it’s rational, deliberative, and only active when directly called upon. System 2 is slow and lazy, it leaves the decision making to System 1 at every possible opportunity. Meanwhile, System 1 is reckless and brash, making snap decisions based on rapid free-association as opposed to solid evidence and logic.

Due to the indolence of System 2 and the rapid-fire confidence of System 1, a whole host of psychological pitfalls result:

1. Anchoring

The anchoring effect is the tendency for a given number to affect people’s estimation of an unknown value, regardless of whether the given number resulted from a dice throw or in-depth calculation.
Kahneman and his research partner Amos Tversky rigged a wheel of fortune to only land on 10 or 65.

Then they invited university students in for an experiment. First, they spin the wheel, then had the student write down the number it landed on. Afterwards, Kahneman and Tversky asked the students “Is the percentage of African nations among UN members larger or smaller than the number you just wrote? What is your best guess of the percentage of African nations in the UN?” Students know that the number was produced by random, the written number should not have any influence on the students’ estimation of African nations in the UN. Yet on average, those students who got 10 estimated 25% while those who got 65 estimated 45%.

In the instance of estimating the intrinsic value of a stock, we are similarly persuaded. The given number (stock price) will inevitably influence our estimation of the stock’s true worth unless we’re exceedingly wary. It’s for this reason that overpriced stocks look attractive while underpriced stocks look risky. Despite the fact that we should not let the actual price of a stock influence our calculation of its intrinsic value, most of us can’t help but do so due to the anchoring effect. For example, imagine you have a normal plastic bag. If asked, we might say it’s worth a nickel at most. However, if the store priced the plastic bag at $1000 and hundreds of people purchased it for that price, we might be persuaded that the plastic bag is worth more when it’s not.

2. Overconfidence

System 1 is unconscious and therefore it isn’t able to second-guess and self-evaluate its judgements. Paired with a lazy System 2, it’s only too easy for people to form beliefs that lack evidence. Confidence, contrary to what our intuition says, is not an indication of correctness. In fact, the more confident we are, the more vigilant we should be. In the case of investing, it’s important not to be led astray by overconfidence, both your own and that of investing professionals.

Given the danger and prevalence of overconfidence, Kahneman offers us a thought experiment called the postmortem to help diminish the tendency. Postmortem is where you imagine that the project you’re about to embark upon or the business you’re about to invest in had failed 15 years down the line. You then take 5-10 minutes to brainstorm how this might have happened. In performing this exercise, you inoculate yourself against overconfidence and create opportunities to pre-empt future mistakes.

3. Base Rate Neglect

To illustrate this concept, Kahneman came up with the following thought experiment:

Tom W is a graduate student at the main university in your state. Please rank the following nine fields of graduate specialization in order of the likelihood that Tom W is currently studying in each field. Use 1 for the most likely, 9 for the least likely.

• • business administration
  • computer science
  • engineering
  • humanities and education
  • law
  • medicine
  • library science
  • physical and life sciences
  • social science and social work

Going by pure statistics, we would guess that Tom W is more likely to be a humanities and education student than a computer science or library science student. This is a base rate, because the sheer percentage of students who graduate with a humanities or education degree definitively outnumbers the number of students who graduate with a computer science or library science degree. However, consider how your judgment changes when you read the following:

The following is a personality sketch of Tom W written during Tom’s senior year in high school by a psychologist on the basis of psychological tests of uncertain validity:

Tom W is of high intelligence, although lacking in true creativity. He has a need for order and clarity, and for neat and tidy systems in which every detail finds its appropriate place. His writing is rather dull and mechanical, occasionally enlivened by somewhat corny puns and flashes of imagination of the sci-fi type. He has a strong drive for competence. He seems to have little feeling and little sympathy for other people, and does not enjoy interacting with others. Self-centered, he nonetheless has a deep moral compass.

Most people would at this point be persuaded to re-evaluate Tom W’s graduate specialization. Surely, he’s more likely to be a computer science student than a humanities and education student, if he liked sci-fi and disliked human interaction? Nevermind that this is a high school personality sketch of uncertain validity. System 1 likes narratives and stereotypes. The description of Tom W is overwhelmingly in line with computer science, enough for most people to entirely forget about the base rate and statistical likelihood that tells us he is very likely to be a humanities or education student even with the personality sketch.

Humans and Econs

One of the base assumptions of economics is that the economy is made up of rational agents, all making rational and internally consistent decisions based on all available information. Kahneman takes issue with this, asserting that a Human is far more prone to errors of logic and judgment than an Econ. The main differences between Humans and Econs can be observed in the following situations:

4. Loss Aversion

At the core of many of our poor money choices lie loss aversion. The idea is that most people feel the loss of something far more acutely than they feel the gain. Through his research, Kaneman found that the ratio of loss aversion measures out to 1:2 or 1:1.5 on average. This means you must earn $200-$150 to offset the psychological pain of losing $100.

Although it’s reasonable to protect wealth more fiercely than pursue gains, many people are loss averse to the point of irrationality. When faced with an offer of —

              pay $400 for 95% chance to win $1,000 

                        OR 

               pay $700 to win $1,000 for sure 

Most of us would go with the second option. Objectively speaking, 95% chance to win $600 is an excellent deal, yet we are willing to pay a hefty premium to eliminate the negligible chance of losing money.

To resolve this in-equivalency Kahneman recommends taking a broadview perspective when investing. Our stock performance is not determined by short-term dips. Waiting until we come upon an opportunity that offers 100% guarantee to make money means we’ll never invest at all. It may also mean we end up relying solely on bank deposits with returns that fail to keep up with inflation, an inevitable result of loss. Yes, it’s likely that some investments will come out at a loss, but as long as you make more good investments than bad, your net result will follow the trend of probability. Meanwhile, if you shy away from good deals, these missed opportunities will gradually accumulate into a big loss.

5. Attitude to Risk

In Kahneman and Tversky’s Nobel Prize-winning theory called Prospect Theory, they posited that just as there are diminishing returns for gains, there is a similarly diminishing impact for losses.

Kahneman offers two illustrative problems to explain prospect theory:
    Problem 1*: Which do you choose?*
    Get $900 for sure OR 90% chance to get $1,000
    Problem 2*: Which do you choose?*
    Lose $900 for sure OR 90% chance to lose $1,000

As mentioned in the previous point on Loss Aversion, most people would much prefer to get $900 for sure for Problem 1. What’s interesting is that this situation is entirely inverted in Problem 2. All of a sudden, people would prefer a 90% chance to lose $1,000 over a guaranteed loss of $900.

The reason is because going from $900 to $1,000 is an insignificant increase in psychological value and the 10% risk of getting nothing at all is a huge loss. We are unwilling to put $900 on the line for a chance to gain an additional $100, even when the odds of success is 90%. When it comes to gains, we are risk averse.

Meanwhile, going from a sure loss of $900 to a potential loss of $1,000 is precisely the opposite. If we are guaranteed to lose $900, the loss of an additional $100 feels negligible. In exchange for the possibility of losing an additional $100, we gain a 10% chance to lose nothing at all, which has much greater psychological value. When it comes to losses, we are risk seeking.

Why is this important?

Consider we purchased a stock for $80 a share and it has gone down to $30. We know the company is performing poorly and the economy is entering a recession. The odds that the stock will drop to $20 and stay at that price is 90%. The smart decision is to sell the stock at $30 and reinvest in another stronger company, but because we are risk seeking when faced with loss, we hold on to the stock for that slim 10% chance that it will bounce back to $80 a share. This is the reason why we hold on to losing stocks and refuse to realize a loss. Selling now and losing $50 for sure feels much worse than a 90% chance to lose an additional $10 and a 10% chance to make it all back.

6. Statistical Blindness

To illustrate this, Kahneman provides a personal anecdote. Years ago, Kahneman worked with a team of educators to design a curriculum and write a textbook for a high school class on judgment and decision making. During an early brainstorming session, Kahneman and his team each shared their estimates for how long they think the project will take. Guesses ranged from 1.5 to 2.5 years. When the dean of the Hebrew University’s School of Education, warned that other teams working on the sae project took about 8-10 years and that 40% never finished, Kahneman dismissed this information. 

In truth, Kahneman now recalls, they should have quit right then and there. No one was prepared to devote so much of their time to a project with such a high chance of failure. Eventually, the textbook and curriculum was completed; the project took a total of 8 years.

The tendency of the individual is to assume that statistics do not apply to them. We may know intellectually that we are influenced by the bystander effect and therefore less likely to help someone in danger when we’re surrounded by others, but emotionally we’re convinced that we won’t be one of those bystanders. We may know that the new IPO stock we purchased is very, very unlikely to become the next google (or even turn a profit in the next quarter), but we can’t help but wonder what if…?

What makes Thinking Fast and Slow unique?

Seeing as it’s a book about the psychology of decision making written by the foremost expert in the field, you can imagine that Thinking Fast and Slow has powerful applications. Governments can (and do) implement policies in accordance with these principles. CEOs can (and do) apply these principles to maximize profits. You can (and should) incorporate these principles when making important decisions in your daily life.

While Daniel Kahneman’s book speaks for itself, there’s no ignoring his remarkable accomplishments. Kahneman is credited as one of the founders of behavioral economics, the recipient of the Nobel Prize in Economics in 2002 and Professor of Psychology and Public Affairs Emeritus at Princeton. Just as it would be wise to consider Warren Buffett’s philosophy before becoming a serious investor, it would be wise to account for Daniel Kahneman’s research before becoming a serious decision maker.

Final thoughts:

This review has examined only a fraction of the many psychological phenomena detailed in Thinking Fast and Slow. There was a deliberate prioritization of the psychological factors most relevant to personal finance and investing, but we must recall that FIRE is about more than personal finance, it’s a lifestyle. In order to achieve FIRE, it’s important to take a step back and return to the fundamentals of decision making. Why do we think about the things we do? And how can we change this so it better aligns with our values?

Should you read Thinking Fast and Slow?

Absolutely.

For some readers, I don’t doubt that the theories Kahneman begins with will seem pedestrian. The verbiage of System 1 and System 2, the concept of priming, availability heuristic, loss aversion — these are all relatively familiar. If you are among this group of less easily impressed, Kahneman offers a more complex and mathematical approach in later chapters, for example prospect theory, base rate neglect, and regression to the mean. Additionally, just because we’re aware of psychological pitfalls doesn’t mean we’re immune, so it does us good to get a refresher every now and then.

I should warn you though, that at 499 pages, Thinking Fast and Slow is not a short book. Not to mention it’s decently dense, especially later on. It’s all in all an enjoyable read, but there are a few moments, particularly in the later chapters, where the language becomes difficult to parse. My recommendation is to go slow and take it easy. Thinking Fast and Slow is a book to be digested, not consumed.

 

Recommended Reading:

6 Logical Fallacies from Thinking Fast and Slow

FIRE Book List

Reviewing The Psychology of Money – How Reasonable Are We With Money?

The post Reviewing Thinking Fast and Slow – 7 Psychological Fallacies That Affect Our Relationship With Money (and everything else) appeared first on TheWeFIRE.

There are many books about personal finance and it’s easy to see why. Many people want to become financially literate, to be rich. However, most personal finance books repeat the same basic beginner-friendly advice; Save your money! Make a budget! Live within your means! And while that’s helpful for beginners, it doesn’t do much good for those of us who already know the basics and want to learn more.

Here at WeFIRE, we have taken the liberty to comb through bestseller lists and several pages worth of book recommendations to bring you a variety of useful personal finance books, so you can find the one you need no matter where you are on your journey to FIRE. Don’t feel like reading a book? No problem! We know your time is precious so we’ve also prepared comprehensive reviews for each book on the list!

Take your pick, your journey to financial independence awaits!

Best books for general financial advice (for beginners):

For those of us who are complete beginners to money management, there are a wealth of options. Virtually any book you find in the personal finance section of your local library or bookstore will do the trick. Of the myriad of options, we landed on these four books as all-around good reads that will provide a strong start to your journey to financial independence.

Rich Dad Poor Dad by Robert Kiyosaki and Sharon Lechter

Main points:

• Invest in yourself! If you can learn and use your mind to generate enormous wealth
• Assets put money in your pocket, liabilities take money out. Know which is which
• Don’t say “I can’t afford it” instead ask “how can I afford it?”
• Start today! Overcome your fear of failure, you need to fail to learn, and learn to succeed

Read the full review: Reviewing Rich Dad Poor Dad – Is this Book Worth the Hype?

The Richest Man in Babylon by George Samuel Clason

Main points:

• Pay yourself first, save 10% (or more) of your paycheck every month
• Make sure you know the difference between needs and wants
• Take advantage of compounding – have patience and money will work for you
• Beware of scams, if something sounds too good to be true, it is
• Own your house and make it an investment
• Establish a future income so you can retire comfortably
• Increase your knowledge and skill so you have greater earning power

Read the full review: Reviewing The Richest Man in Babylon – Is This Book Truly Timeless?

The Millionaire Next Door by Thomas J. Stanley and William D. Danko

Main points:

• Millionaires don’t spend money the way non-millionaires think
• Millionaires devote time to planning their annual budgets
• Millionaires invest in what they know and they hold the same companies for years
• Millionaires live in middle-class neighborhoods
• Millionaires drive used cars

Read the full review: Reviewing The Millionaire Next Door – Do We Actually Have Millionaire Neighbors?

A Random Walk Down Wall Street by Burton G. Malkiel

Main points:

• What is the efficient market hypothesis and how to apply it
• Why retail investors have an edge over professional mutual and hedge fund managers
• Focus on stocks that are both a bargain and have potential for growth
• Consider investing in an index fund
• Diversify in companies with a negative covariance

Read the full review: Reviewing A Random Walk Down Wall Street – Is It Worth A Read?

Best books on investing (for more experienced FIRE chasers):

On the whole, personal finance have two levels of complexity. The first is “lower your expenses” and the second is “increase your earnings.” Lowering your expenses is fairly straight forward: sort out your needs and wants, make a budget, save your money, but increasing your earnings is complicated. There are only so many hours in a day and only so much money our boss can afford to pay us, no matter how experienced and educated we get.

That leaves two options: 1) start businesses, or 2) invest in businesses. We will focus on investing, because it’s far less work (and less risky) than starting a business. While easier than starting a business, investing is by no means easy. Fortunately, there are a number of investment books available to help you along. Unfortunately, some of them are scams. We selected for you the best and most influential investment books (that are not scams, we promise) to help you improve your return on investment.

The Intelligent Investor by Benjamin Graham

Main points:

• Decide whether you are a passive investor or active investor and stick with it
• Passive investors invest in index funds and/or large stable companies with dollar cost averaging
• Active investors can purchase smaller companies but only at a bargain
• Look for net-asset-stocks (cigar butts) where total asset is greater than liabilites + share price
• Don’t listen to the price quotations of “Mr. Market,” trust your own valuation
• Have a margin of safety

Read the full review: Reviewing The Intelligent Investor – Is It Still Relevant?

The Most Important Thing by Howard Marks

Main points:

• You must first understand what it means to be above average before you can achieve such a thing
• Know the relationship between price (where are we in the market cycle?) and value
• Be a contarian, be right, and practice mental fortitude
• The influence psychology on the market and yourself
• Know what you don’t know, don’t try and predict the market, it never works
• Understand, recognize, and control risk
• Earn more from the stock market than you give back to achieve alpha

Read the full review: Reviewing The Most Important Thing – How Do People Beat the Market?

Common Stocks and Uncommon Profits by Phil Fisher

Main points:

• The “scuttlebutt” technique – actually talk to people who know the company
• Make sure the company passes at least 13 of the 15 points listed by Fisher
  • won’t know if the company passes these points without first doing the scuttlebutt
• Don’t try to time the market, but don’t overpay for stocks
• Only sell a company if the fundamentals have deteriorated, growth is exhausted, or you have made a mistake

Read the full review: Reviewing Common Stocks and Uncommon Profits – The Lesser Known Foundation of Buffett’s Investment Philosophy

Best books on motivation and changing your mindset:

We all need some motivation from time to time, to remind us why we’re on this path and what we have to look forward to after achieving FIRE. Motivational books that can help change your mindset can be a powerful tool, because before we can accomplish anything, we must first understand why we are doing it and what value it will bring us. The issue is that motivational books can get repetitive, so we’ve selected a couple that have unique insights.

Your Money or Your Life by Joseph R. Dominguez and Vicki Robin

Main points:

• Money is life energy (the condensed value of your time, energy, and skill)
• Know when enough is enough (recognize that more money doesn’t mean more happy)
• Don’t overexaggerate the danger of inflation, being frugal is more important
• Money is the Earth’s life energy (the value of natural resources and energy)
• No shame no blame (money makes us emotional, take a deep breath and keep going)
• Work is not just paid employment (just because you’re not being paid doesn’t mean it’s not worth doing)
• The 9 Step Program to help you achieve self-fulfillment and financial independence

Read the full review: Reviewing Your Money or Your Life – Is It Possible to Have Both?

The Psychology of Money by Morgan Housel

Main points:

• No one’s crazy, we’re all driven by our unique experiences with money
• Luck and risk are two sides of the same coin, and both are heavily influenced by factors beyond our control
• A small percentage of investments are responsible for the majority of the gains
• True wealth is invisible
• Humans can’t be 100% rational so being reasonable is good enough
• We tend to be skeptical of optimistic and trusting of pessimism – try and adopt a more balanced perspective

Read the full review: Reviewing The Psychology of Money – How Reasonable Are We With Money?

Thinking Fast and Slow by David Kahneman

Main points:

• A book covering the influences on our decision making that are not logical
• System 1 vs System 2
  • Priming – how your subconscious influences your decisions
  • Availability heuristic – the path of least resistence
• Humans and Econs
  • Accounting for loss aversion in attitude to risk taking
  • The fear of regret
  • The importance of taking on an outside view over an inside view

Read the full review: Reviewing Thinking Fast and Slow – 7 Psychological Fallacies That Affect Our Relationship With Money (and everything else)

Best books on Warren Buffet:

To achieve FIRE, you need to be a competent investor, and to be a competent investor, you need to know about more than just money. The stock market operates as a complicated web of relationships, from other retail investors, to large hedge funds, to massive multi-national companies. Navigating this tulmutuous landscape is no easy task, but fortunately, there are experienced explorers whose paths we can follow. We have gathered for you a comprehensive list of the best books on Warren Buffett so you can learn from his investments.

The Snowball: Warren Buffett and the Business of Life by Alice Schroeder

Main points:

• Don’t undrestimate compounding, Warren Buffett started investing at 10 and is now 92
• Intangible assets like reputation and a loyal customer base are valuable
• Go for companies with a wide moat, they’re more stable and competitive
• It’s better to focus on strong companies than diversification for the sake of diversification
• Invest in what you know, stay in your circle of competence
• There’s no such thing as a new paradigm

Read the full review: Reviewing The Snowball: Warren Buffett and the Business of Life – What Can We Learn?

The Warren Buffett Way by Robert G. Hagstrom

Main points:

• Fisher and Graham as fundamental influences in Buffett’s philosophy
  • Fisher as the first growth investor, Graham as the classic value investor
• Buffett’s 12 tenets
  • The most important being: invest in people, not stocks
• Psychological pitfalls
  • Overconfidence – we don’t know what we don’t know
  • Loss aversion – don’t wait to sell weak stockpicks
  • Mental account – don’t give back your earnings to the stock market

Read the full review: Reviewing The Warren Buffett Way – Is This A Path Average Investor Can Follow?

The post FIRE Book List appeared first on TheWeFIRE.

Photo by Xavier Mouton Photographie/Unsplash

“Becoming a single mother means your life is over,” so the narrative goes. “You’re stuck alone and miserable, forced to shoulder the burden of making money and raising your child all alone.“

Here at WeFIRE, we strongly disagree with this narrative.

Yes, supporting your child on a single income is difficult. And yes, being a single mother (or single father) requires hard work and sacrifice, but with careful planning it can also be full of joy and opportunity. Single motherhood does not mean you need to surrender your dreams.

In this article, we will discuss the ins and outs of financial independence for single mothers. The core path to financial independence is the same for single mothers as it is for anyone else – spend less than you earn and invest the difference. Achieving this may seem daunting when you’re responsible for children but with sufficient determination and planning, you’ll find that financial independence is in fact very possible!

Adopting a New Mindset

The stigma of single motherhood holds countless single parents back from going after their dreams. The reality is, financial independence can still be achieved by single parents if they…

• Seek help – As the saying goes, it takes a village to raise a child. You don’t need to spend all your time with your child to be a good parent. There’s nothing wrong with asking friends and family to watch your child for a couple hours each week so you have time for yourself. If those options aren’t convenient, you can also hire a babysitter. There are always options.
• Take time for yourself – You may be a single parent, but your life doesn’t have to be constant work and child rearing. Make sure to take the time you need for yourself and make space in your life for your hobbies. Seeing you overworked and tired all the time is not good for your child either. It’s always better to be happy.
• Take financial control – As a single parent, there’s no need to compromise your plans for the future and your vision for financial independence. You have full control over your money and your spending and all your assets belong to you and your child upon inheritance. If you do pursue FIRE in earnest, you won’t need to save as much to achieve because you only have your own retirement to worry about.
• Teach your child good money habits – Children don’t need to be kept ignorant of money, in fact, as long as all their needs are provided for, it’s good to teach them how best to save, spend, and invest money. Once your child is made aware, they will understand, and keeping your expenses within budget becomes a much easier task.
• You’re a single parent for a reason – No matter the circumstance that led to your single parenthood, being a single parent is a decision you made and a challenge you chose to take on. To be a single parent is a blessing, not a curse. You owe it both to yourself and your child to live a fulfilling life so you can provide them with the best possible future.

What matters is changing your mindset, so you’re thinking of ways you can grow and develop instead of ways you’re restricted. After all, only you can say where your limits lie.

The Actual Steps

To achieve financial independence, there are steps virtually everyone would benefit from following. Although they are laid out in an order of priority, you should ideally be doing all of them at the same time, at least until the first few steps have been completed.

Step 1) Pay off Non-Mortgage Debt

Put simply, there are 5 main categories of debt that face the American public, they range from bad, to neutral, to good.

Bad:

• Consumer Debt – Technically “consumer debt” refers to any debt you take on in order to purchase a good, but for our purposes, when we say “consumer debt” we really mean “credit card debt” and “payday loans.” These are your high-interest debt that should be avoided as much as possible and paid off as soon as possible. 
• Car Debt – Car loans don’t have nearly as high of an interest rate as consumer debt, but overly expensive car loans are generally a waste. New cars drop dramatically in value the moment they’re driven off the lot so there’s no much benefit to going into debt for your car. With some diligent saving, you’ll be able to purchase a perfectly good second hand vehicle entirely with cash.

Neutral:

• Student Debt – Depending on the amount you owe, the interest rate and if you’re currently investing in stocks, you might want to hold off paying back your student loans. We go into more detail about student loans, and debt repayment more generally, in this article but suffice it to say, if your student loan interest rate is 5.5% and the stock market has an average return on investment of 10%, it makes sense to prioritize investing in the stock market.

Good:

• Housing Debt – Mortgages are the largest debt the average person will take on but in many ways it’s also the most necessary. A house is a place you can live, and very affordable too, after you’ve paid off your mortgage. You can also sell your house in the future for a big profit, or rent it out for a monthly income. Although there are many benefits to taking on a mortgage, mortgage is still debt which means there are risks to keep in mind. Housing debt will cost you in interest, drain your income as you pay if off, and it’s not a guarantee that you’ll sell it for a higher price than you purchased it.
• Business Debt – Not every person will go into debt for starting a business but while the risk is high, so is the reward. Many entrepreneurs also opt to save their money to start a business rather than go into debt. As this category is less common, we will for now leave it aside.

Step 2) Emergency fund

Having an emergency fund in place can go a long way to easing your financial burdens and mental burdens. An emergency fund will cover unexpected expenses like car breakdowns or your child’s sudden peanut allergy forcing you to take time off work.

How much do you need in your emergency fund?

Ideally, you want to track your expenses for one month, and then multiply that number by 6. This will give you roughly the amount you need to sustain yourself and your child for half a year. This amount can be revised upward or downward, depending on how secure your job is and how risky your investments are. If your job is very secure with steady pay and you can afford to keep a smaller emergency fund (say 3 months), if your job is less secure with less expected pay then perhaps more (say 1 year).

It takes a bit of work, but you can track your expenses on a notebook, or through excel. If you’d prefer a faster, more efficient method, WeFIRE is currently running a limited time offer. Download the WeFIRE app and come try out our secure account tracking features and the AI Copilot for 1 month for free by clicking on this link. 

The best place to keep your cash.

While your emergency fund can be kept in a checking or savings account, we strongly recommend opening a new high yield savings account with a new bank and keeping your emergency funds there. The reason for this is because having money in a different bank makes it more difficult to spend and therefore easier to save.
Today HYSAs offer competitive rates as high as 4.5% in annual interest. As long as the institution you bank with is FDIC-insured, you can rest assured that your money will be safe.

Step 3) Increase Income

Making a living for yourself and your child while being a full-time caretaker is difficult even with a good job. Whether the compromise is to work more hours and spend less time with your child or to work part time and earn less, single parenthood is rife with difficult decisions.

The path we advocate for is finding more flexible free-lance work and speaking to management about getting a pay raise. As the head of household, it is within your rights to advocate for yourself so you have the money to take care of yourself and raise your child.

On the subject of suitable side-hustles, you can consider…

• Uber/Lyft – If you have a car, signing up as a driver for a ride-sharing app is always a viable side-hustle. On average, uber drivers earn $18.75/hr and lyft drivers earn $22.12/hr. Although these numbers don’t take the cost of gas or car maintenance into account, these are still respectable wages, and you stand to make even more during busier hours like the afternoon rush.
• Instacart – A grocery delivery service where you are paid per delivery. Generally, higher income and metropolitan areas pay better, so your mileage with this app may vary. Instacart is great for if you don’t like other people getting into your car and aren’t able to drive long distances.
• Doordash – An excellent option if you live in an area with a lot of restaurants. Unlike the two other options, delivery side-hustles, doordash doesn’t require you to drive a vehicle. If you live in an area that allows for it, you can get around on a cost-efficient moped and make a lot more per delivery. On average, Doordash pays anywhere from $15-25/hr depending on when you work.
• Babysit for other parents – Just as you need time to unwind, so too do other parents. As a parent yourself makes you a trustworthy candidate and you’ll likely know many fellow parents personally from picking up your child. Granted, this side-hustle is time sensitive, either when your child is very young and doesn’t mind unknown playmates in their home or when your child has grown older and left home. Otherwise it can be difficult to find the opportunity to babysit.
• Tutor – Online tutoring is easy to manage from home and allows for flexible scheduling, especially if you’re tutoring for children from other countries. For a list of viable online tutoring platforms, we suggest having a look at this article. Speaking with your fellow parents and offering your service is also an option.
• Dog-walker/pet-sitter – Being a dog walker or pet sitter can be a job you do alongside taking care of your child. As long as you teach your child to be careful around animals, walking dogs together is not just a way to make money, but also a bonding activity and opportunity to exercise with your child.

Although a long list, it is far from exhaustive. Read more about side-hustles.

Step 4) Tax Shelters

In order to help the average American reach retirement, there are many government-run tax shelters that offer a discount on the taxes you pay. The 4 most popular of such tax shelters are listed out below in a comparative table so you know how they match up.

Aside from 401(k), Roth 401(k), Traditional IRA, and Roth IRAs there are other ways to reduce taxes as well. The more common of these are…

• Health Savings Account (HSA) – HSAs exist to help you pay for healthcare but can also serve as an effective retirement savings tool. Contributions to the HSA are tax deductible and withdrawals from the HSA for healthcare are also tax free. The contributions rollover year on year, meaning you’re able to make up for past years. After 65, you can withdraw as much as you like and only be subject to income tax. Until then, all withdrawals from the HSA must go towards medical expenses (check out this article for more information), or else income tax and an additional 20% tax penalty will be incurred.
• 529 Plan – The purpose of 529s is to help parents pay for their child’s education. Contributions to the 529 Plan are tax deductible and withdrawals to pay for schooling are also tax-free ($10,000 can go towards elementary and high school expenses). Contribution limits are very high and differ by state, the lowest being $269,000 in North Dakota. 529 Plans have little impact on your child’s eligibility for FAFSA because they are considered the parents’ asset. Unspent money in the 529 can be rolled over to a different beneficiary or a Roth IRA.

Step 5) Invest

People who aim for financial independence use the 4% rule to determine whether they’ve reached their target. In theory if you stick to withdrawing only 4% of your stock portfolio every year, you’ll be guaranteed at least 30 years of withdrawals without running out of money. You can find the amount you need, aka your FIRE number, by multiplying your annual expenses by 25.

By maxing out your Roth IRA and 401(k) and taking advantage of other tools like the Health Savings Account and 529 Plan, you’ll be able to make the best use of your investment earnings without being subject to undue tax.

An unexpected boon

Although single parents earn less in income than dual income households, a single parent also spends less. As a single mother, your FIRE number is lower than that of a couple. With more control over your finances, you have more say in how much money you save and how much you spend.

Note: These aren’t all of the ways you can invest but the other options like cryptocurrency and foreign emerging markets have high risk and aren’t as suited to single parents so we decided not to cover them here.

Stocks

Since the creation of a tracking system for the US stock market, it’s been recorded that the US stocks has grown by an average of 10% every year. If we assume an inflation rate of 3%, that makes for a real annual return of 7%. As long as you invest in a broad-based index fund like S&P 500, you’ll be able to capture the stock market return at very low management fees.

Of course, the market is volatile and unpredictable in the short term. It can be up 15% one month, only to drop by a third in the next. Trying to time the market doesn’t work, which is why it’s better to ignore short term price increases or dips and focus instead on the very long term. Only then will the 10% average returns prove out.

Bonds

A bond is a contract between you and a company or the government, where you agree to lend them a certain amount of money and they agree to pay you back by a certain date plus an additional amount in interest. 

Bonds are graded according to how trustworthy the burrower is. If you’re lending money to the US Government (Treasury Bonds), you’re guaranteed to get your money back but the interest will be lower. If you’re lending money to a company that has a history of defaulting on bonds (junk bonds), the risk is much higher and so the interest will also be much higher. Exactly like how someone with a lower credit score have to pay high interest rates to borrow money

In today’s economy, bonds don’t offer very high interest rates. The 10-year US Treasury bond offers a yield of 3.78% which only barely covers inflation. Meanwhile CCC junk bonds have a yield of 13.38%, but come at the fairly high risk of losing your principal (initial amount you lent out).

At these rates, bonds do not make for an effective method to store wealth. A high yield savings account offers rates from 4.5-5% and because they are FDIC-insured, they’re almost as safe as US Treasury bonds. 

You may want to keep a certain amount of money in bonds for the purpose of diversification as you near retirement but at their current rates, they are not good for building wealth. Interest rates often change, if bond yields increase in the future, then we’ll reconsider.

Real Estate

Unlike stocks or bonds, real estate serves a purpose beyond growing wealth; shelter. People need places to live and well-situated locations are especially in demand. If chosen correctly, a real estate property can be a very good investment, both as a property you rent out, and as an asset you sell after its value increases.Before diving into the choppy waters of real estate investing, there are somethings to consider:

• Real estate is not a passive investment. Unlike monthly contributions to a broad-based index fund, real estate ownership requires finding a good property, bidding, maintaining the property and vetting renters if you intend to rent it out. Finding a good place to rent out requires a good eye for consumer demand. Although rent income is a great income stream, the process can be time consuming.
• The US housing market is currently in a bubble. Does this mean that buying a house now will definitely lead to a drop in value and cause you to lose money? Not necessarily, we wouldn’t dare try to predict when the bubble will burst (or if it even will, for that matter). The fact is, mortgage application is at its lowest since May 2023 and home prices are still far above what the average salary can afford.
• Houses take time to buy and sell, which means a big opportunity cost. As an illiquid asset, your money can be tied up in real estate for years and decades. During this period of time, you won’t be able to put it anywhere else, whether you spend it, in stocks, or in bonds.

Further Concerns

Aside from the topics covered above, there are some further concerns unique to single parents.

Child Support

In the case that your child’s other parent is still alive, they are obligated by law to make child support payments as the non-custodial parent. In most cases, this is 15%-25% of their gross income for one child, with the percentage increasing per additional child. With child support going towards raising your child, more of your own income can be put towards investing.

Insurance

As sole caretaker for your child(ren), having insurance in place can do a lot for their future and your peace of mind. Life insurance is a heavy consideration for anyone but it’s particularly weighty for single parents. To learn more about the ins and outs of life insurance, specifically for single parents, check out this article.

Claim Your Tax Benefits

As a single parent, you are eligible for an array of different tax benefits. Take advantage of these by making sure you…

• File as head of household – If you earn at least 50% of household income, you qualify as head of household. Compared to filing as “Single” or “Married Filing Separately”, you can claim a lower tax rate.
• Claim child tax credit – According to Turbo Tax, “A single mom making less than $200,000, can claim a $2,000 child tax credit for each child when using the Single or Head of Household filing status.”
• Deduct childcare expenses – Under certain circumstances, the cost of daycare is tax-deductible if you rely on it in order to work or look for work.

Conclusion

As much as the prospect of single parenthood is daunting, it’s also full of joy and opportunity. Just because you’ve become a single parent doesn’t mean your life is over. You can still take the time to do the things you want to do, plan for your own financially independent future and, who knows, maybe meet someone who will become the love of your life and help you raise your family together.

At the end of the day, the steps to financial independence are the same for single parents as they are for everyone else and the challenges are much the same. 

How can we make more money than we spend? 

How can we put that money to good use so it grows in the future? 

These are the questions that every person must face in their journey to financial independence, whether they’re married and child-free, or single with a high income. So what if your road is a little longer? It’s a good solid path all the same.

Did you find this article helpful? Check out our other articles for more tips to accelerate your journey to Financial Independence! 

How to Retire Early with No Money

Master FIRE Money Management: Your Blueprint for Early Retirement

How to Plan for Early Retirement: A Step-by-Step Guide

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The post 6 Logical Fallacies from Thinking Fast and Slow appeared first on TheWeFIRE.

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The FIRE (Financial Independence, Retire Early) movement has taken the world by storm, capturing the imaginations of millennials and Gen Z who yearn for a life beyond the traditional 9-to-5 grind. FIRE isn’t just about retiring early; it’s a lifestyle that empowers individuals to take control of their finances and design a life on their own terms. Imagine having the freedom to pursue your passions, travel the world, or simply spend more time with loved ones – all without the constraints of a traditional job.

At its core, FIRE is about achieving financial independence, where your investments and savings generate enough passive income to cover your living expenses. This allows you to retire early, or at the very least, have the flexibility to choose work that aligns with your values and interests.

While the allure of FIRE is undeniable, achieving it requires careful planning and disciplined money management. It’s not a get-rich-quick scheme but a long-term strategy that involves making smart financial choices and maximizing your resources. In this comprehensive guide, we’ll delve into the essential money management tips that can pave the way for your FIRE journey. From budgeting and saving hacks to investment strategies and lifestyle adjustments, we’ll equip you with the knowledge and tools you need to build a solid financial foundation and achieve the financial freedom you desire. Whether you’re just starting or already on your path to FIRE, this article will provide valuable insights and practical advice to help you reach your goals faster and with greater confidence.

Understand the core principles of FIRE

At its core, FIRE is a financial philosophy that prioritizes saving and investing a large portion of your income to achieve financial independence and retire early. The ultimate goal is to accumulate enough wealth to generate passive income that covers your living expenses, allowing you to leave the traditional workforce on your own terms.

Three key factors play a crucial role in achieving FIRE:

1. Savings Rate: This refers to the percentage of your income that you save and invest. A higher savings rate translates to faster wealth accumulation and a shorter path to FIRE. Many FIRE enthusiasts aim for a savings rate of 50% or more, but even smaller percentages can make a significant difference over time.
2. Investment Returns: Your investment returns determine how quickly your money grows. While there’s no guarantee of specific returns, historically, the stock market has provided an average annual return of around 7-10%. Investing wisely can help you maximize your returns and reach FIRE sooner.
3. Living Expenses: Your expenses directly impact how much money you need to save for FIRE. By adopting a frugal lifestyle and minimizing unnecessary spending, you can significantly reduce the amount you need to accumulate and accelerate your journey to financial independence.

The beauty of FIRE is its adaptability. It’s not a rigid formula, but rather a customizable framework that can be tailored to align with your individual priorities and lifestyle preferences. Let’s explore some of the most popular FIRE variations:

• Lean FIRE: This involves living a minimalist lifestyle with a focus on frugality and low expenses. It requires a smaller nest egg but may involve sacrifices in terms of lifestyle choices.
• Fat FIRE: This allows for a more luxurious lifestyle with higher expenses. It requires a larger nest egg and often involves higher income or more aggressive investment strategies.
• Barista FIRE: This hybrid approach involves working part-time or pursuing a passion project while relying on investments for partial income. It offers a balance between early retirement and continued work.

Understanding these core principles and different FIRE variations is essential for tailoring your approach to your individual goals and circumstances. By carefully considering your savings rate, investment returns, and desired lifestyle, you can create a personalized FIRE plan that aligns with your values and aspirations.

Create a FIRE Financial Plan

Creating a comprehensive financial plan is the foundation upon which your FIRE (Financial Independence, Retire Early) journey is built. It serves as your compass, guiding you towards your desired destination of financial freedom. Let’s delve into the essential steps of building this crucial roadmap:

Define Your FIRE Vision:

The first step is to crystallize your FIRE aspirations. Answer the following questions:

• Retirement Age: Envision the age at which you desire to achieve financial independence and potentially retire early. This will depend on your personal values, lifestyle preferences, and retirement aspirations.
• Dream Lifestyle: Paint a vivid picture of your ideal retirement lifestyle. What activities will bring you joy? Where do you want to live? How much will you spend on travel, hobbies, and other pursuits?
• Target Nest Egg: Calculate the amount of money you’ll need to have saved to fund your dream retirement lifestyle. Consider factors like your estimated annual expenses, projected inflation rates, desired retirement duration, and potential healthcare costs.

Calculate Your FIRE Number:

Your FIRE number is the magic figure that represents the amount of money you need to accumulate to achieve financial independence. Several calculation methods can help you arrive at this crucial number:

• The 4% Rule: This widely used rule of thumb suggests that you can safely withdraw 4% of your investment portfolio annually in retirement without depleting your nest egg. To calculate your FIRE number using the 4% rule, simply multiply your estimated annual expenses by 25 (the reciprocal of 4%). For example, if your annual expenses are projected to be $50,000, your FIRE number would be $1,250,000.
• Cash Flow Approach: This method is more flexible, adjusting your withdrawal amount based on your actual living expenses and investment returns. It adapts better to market changes, ensuring your money lasts throughout your retirement. Our WeFire App utilizes the cash flow approach, providing personalized withdrawal strategies to help you enjoy your retirement while maintaining financial security.

Strategize and Implement:

Once you’ve defined your FIRE goals and calculated your FIRE number, it’s time to develop a strategic plan for reaching your financial independence milestone. This plan will involve:

• Aggressive Saving: Maximize your savings rate by tracking your income and expenses, identifying areas to cut back, and automating your savings.
• Smart Investing: Choose investment vehicles aligned with your risk tolerance and time horizon. Consider diversifying your portfolio across various asset classes to mitigate risk and potentially enhance returns.
• Expense Management: Consciously manage your expenses by distinguishing between needs and wants, prioritizing value over impulse purchases, and embracing a frugal mindset.
• Income Optimization: Explore avenues to increase your income, such as seeking career advancement, pursuing side hustles, or starting a business.

Track, Review, and Adapt:

Your FIRE plan is not a static document. It’s a dynamic roadmap that should evolve alongside your life circumstances and financial goals. Regularly review your progress, track your spending, monitor your investments, and reassess your FIRE timeline. Be prepared to adjust your plan as needed if you experience unexpected changes in income, expenses, or investment returns.

Empower Your FIRE Journey with WeFIRE

Navigating the complexities of FIRE planning can be daunting, but you don’t have to do it alone. The WeFIRE app is your personal AI-powered financial copilot, designed to simplify and streamline your path to financial independence.

With WeFIRE, you have a suite of tools and insights at your fingertips, from a built-in FIRE calculator using the adaptable cash flow approach to personalized advice and educational resources. Whether you’re just starting your FIRE journey or well on your way, WeFIRE can be a valuable companion, providing the support you need to achieve your financial independence dreams (click here to learn about WeFIRE).

Supercharging Your Savings Rate

Boosting your savings rate is a potent lever you can pull to fast-track your journey to FIRE (Financial Independence, Retire Early). By accelerating your wealth accumulation, you shorten the timeline to financial freedom. It’s a dual approach that involves maximizing your income and minimizing your expenses. Let’s delve into actionable strategies to supercharge your savings:

Ignite Your Income

• Side Hustles: Unleash Your Potential: Tap into your passions, skills, and hobbies to identify lucrative side hustle opportunities. The digital age offers a plethora of possibilities, from freelance writing and graphic design to virtual assistance and online tutoring. Explore platforms like Upwork, Fiverr, or Etsy to showcase your talents and connect with potential clients.
• Career Advancement: Invest in Your Future: Your career is your most significant income-generating asset. Invest in continuous learning and professional development to expand your skill set and open doors to higher-paying positions. Pursue advanced degrees, certifications, or specialized training programs that align with your career goals. Actively network with colleagues and mentors to stay abreast of industry trends and opportunities.
• Salary Negotiation: Know Your Worth: Don’t shy away from negotiating your salary or requesting a raise when your performance merits it. Research industry benchmarks, prepare a compelling case highlighting your achievements, and confidently articulate your value to your employer. Remember, your compensation is an ongoing negotiation.
• Entrepreneurship: Forge Your Own Path: If you possess an entrepreneurial spirit and a viable business idea, starting your own venture can be a game-changer for your income potential. Thoroughly research your market, develop a solid business plan, and secure adequate funding. While entrepreneurship comes with risks, the rewards can be substantial.

Streamline Your Expenses

• Budgeting Mastery: Gain Financial Clarity: Creating a detailed budget is the cornerstone of expense management. Track every penny you earn and spend, categorizing your expenses to identify areas where you can cut back. Utilize budgeting apps to automate this process and gain a clear picture of your financial inflows and outflows.

• Needs vs. Wants: Prioritize Essentials: Differentiate between your needs and wants. While indulging in occasional treats is perfectly fine, prioritize spending on essential items like housing, food, transportation, and utilities. Challenge yourself to find cost-effective alternatives without sacrificing quality.
• Debt Elimination: Break Free from Shackles: High-interest debt, such as credit card balances or personal loans, can drain your finances and hinder your FIRE progress. Create a debt repayment plan, focus on paying off the highest-interest debts first, and consider debt consolidation strategies to streamline your payments.
• Frugal Living: Embrace Simplicity: Frugal living doesn’t mean deprivation; it means making conscious choices about your spending. Embrace DIY projects, cook at home more often, use public transportation or bike instead of driving, and seek out free or low-cost entertainment options.

WeFIRE: Your Partner in Mindful Spending

The WeFIRE app can be your ultimate companion in cultivating mindful spending habits. With its intuitive budgeting tools, spending trackers, and personalized insights, WeFIRE empowers you to take control of your finances and make conscious choices that align with your FIRE goals. By harnessing the power of technology and adopting these mindful spending practices, you can create a sustainable financial path toward early retirement and the freedom to live life on your own terms.

Making Your Money Work for You

Investing is the engine that propels your FIRE journey, accelerating your wealth accumulation and bringing financial independence closer. It’s about putting your hard-earned savings to work, generating passive income that eventually replaces your need for a traditional paycheck. However, it’s crucial to approach investing with a strategic mindset, aligning your choices with your risk tolerance and long-term FIRE goals.

FIRE-Friendly Investment Options:

• Index Funds: The Simple and Effective Path: Index funds are investment vehicles that track a specific market index, such as the S&P 500 or the Nasdaq Composite. They offer instant diversification by holding a basket of stocks or bonds that mirror the index’s composition. Index funds are favored by FIRE enthusiasts for their simplicity, low fees, and historical track record of delivering solid returns over the long term. They require minimal maintenance and are an excellent choice for beginners and seasoned investors alike.
• Stocks: The Potential for Higher Returns: Investing in individual stocks can be a rewarding endeavor, offering the potential for higher returns than index funds. However, it often comes with greater volatility. Thorough research and a solid understanding of market dynamics are essential for successful stock picking. It’s advisable to diversify your stock portfolio across different sectors and industries to mitigate risk.
• Real Estate: Building a Tangible Asset: Real estate investing can be a lucrative avenue for FIRE enthusiasts. It offers the potential for rental income, property appreciation, and tax benefits. However, real estate requires substantial capital, ongoing management, and knowledge of local market conditions. Consider options like rental properties, REITs (Real Estate Investment Trusts), or real estate crowdfunding platforms to get started.
• Other Options: Diversifying Your Portfolio: Depending on your risk appetite and financial knowledge, you can explore other investment options like bonds, peer-to-peer lending, dividend-paying stocks, or even starting your own business. Diversifying appropriately helps spread risk and ensures that your portfolio isn’t overly reliant on a single asset class.

Key Principles for FIRE Investing:

• Long-Term Focus: The Tortoise Wins the Race: FIRE investing is a marathon, not a sprint. Avoid the temptation to chase short-term gains or react impulsively to market fluctuations. Instead, focus on long-term growth and allow compound interest to work its magic over time.
• Only Invest What You Know: Stick to investments you understand well. As Warren Buffett wisely advises, “Never invest in a business you cannot understand.” This means avoiding complex investments or those beyond your comprehension, thereby minimizing the chances of making poor investment choices based on incomplete or misunderstood information.
• Align Investment Horizons: Keep short-term money liquid. Investing funds that you might need in the near future into long-term assets like stocks can lead to financial strain if you have to sell these investments prematurely, potentially at a loss. Maintain a balance between liquid assets and long-term investments to ensure financial stability and flexibility.
• Risk Management: Know Your Limits: Understand your risk tolerance and invest accordingly. Avoid speculative investments that could jeopardize your financial security. If you’re unsure, consult with a professional financial advisor to create a personalized investment plan that aligns with your goals and risk profile.
• Regular Contributions: Consistency is Key: Make regular contributions to your investment accounts, even if it’s a small amount. This dollar-cost averaging approach helps you buy more shares when prices are low and fewer shares when prices are high, averaging out your cost basis over time.

Conclusion

The path to FIRE is a personal journey that demands dedication, discipline, and savvy financial decision-making. By understanding the fundamental principles of FIRE, establishing clear goals, accelerating your savings rate, making informed investment choices, and adopting a mindful lifestyle, you can pave the way to financial independence and early retirement.

Remember, FIRE is not a cookie-cutter approach. It’s about crafting a financial plan that aligns with your unique aspirations and values. Take that first step today: create a budget, explore potential side hustles, or invest in your education. Every small step you take propels you closer to your dream of financial freedom.

For further guidance and a wealth of information, be sure to explore our “WeFIRE Library.” (click here) Immerse yourself in the thriving FIRE community, learn from the experiences of others, and share your own journey. Your future self will be immensely grateful for the actions you take today.

Click here to dive into articles on:

Am I Too Old to Start Saving for Retirement?

FIRE Budgeting 101: Your Essential Guide to Financial Independence

FIRE Movement: Is Financial Freedom Right for You?

Does FIRE Mean Living Frugally

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The Millionaire Next Door was written by Thomas J. Stanley and William D. Danko following a study the two did on the millionaires of America. Initially, the two conducted the project with the full expectation that the millionaires they interviewed would all be living “the good life,” with thousand dollar wrist-watches, tailored brand-name suits, and luxury foreign cars. However, Stanley and Danko soon realized that this was far from reality. What can we learn from Stanley and Danko’s study? And do these lessons remain relevant today?

 

The long and short of it:

Between 1973 and 1996, Stanley and Danko sent lengthy 200 question surveys to those who have a net worth of 1 million or greater and personally interviewed 500 millionaires in preparation for the book. In doing so, Stanley and Danko were able to compile a set of helpful guidelines which most millionaires traditionally operated under. By adopting these practices ourselves, we can improve our own financial health and get one step closer to FIRE.

Millionaire basics

In a hyper-consumerist culture, the importance of playing a good offense (making money) is overemphasized and the need to pair that with a good defense (saving money) is neglected. Consider Warren Buffett, who was a millionaire by the time he was 30 yet infamously frugal. This isn’t just a quirk of his personality, but one of three vital elements to becoming wealthy. They are:

1. High income

As much as we wish it might be different, amassing a considerable net worth does correlate with the amount of money you’re able to bring in on a regular basis. Seek to increase your hourly wage whenever the opportunity arrives. It’s not about needing or not needing the money, it’s about securing your future and moving towards financial independence.

2. Frugal habits

Millionaires can be sorted into two categories. On one hand, there are those who gained their wealth through inheritance/an incredibly lucrative career. Millionaires of this breed tend to be extravagant spenders and Under Accumulators of Wealth (UAW), meaning their net worth is below what would be expected of someone of their age and income. On the other hand are millionaires who earned a fairly high income from their business and/or profession and accumulated their wealth slowly through the years. These millionaires are frugal, generally preferring to lead middle-class life-styles and drive used vehicles. They are what Stanley and Danko call Prodigious Accumulators of Wealth (PAW), meaning their net worth is significantly above what would be expected of someone of their age and income. For the purposes of wealth-building, PAWs represent a much more achievable and sustainable path. 

3. Smart investing 

When done wisely, investing is a vital aspect of building wealth. Left alone in a savings account, money depreciates year after year due to inflation. Not to mention that it’s more difficult to be disciplined in your spending when you keep all your assets liquid, due to how easy it is to transfer money out of a savings account. The most effective way to ensure you don’t overspend is to invest your money. So how do millionaires invest? By staying within their circle of competence, which in this case means investing in the industry they understand well and the people they trust. Millionaire investing is also notable in that most of them invest long-term, frequently holding onto stocks for upwards of a year so as not to incur unnecessary trading fees.

Time spent planning finances translates directly to more wealth

People who make high six figure incomes tend to think that it’s not worthwhile to take the time to properly budget and plan their finances. By blindly going into their finances, UAWs are susceptible to adopt a lifestyle far beyond even their prodigious incomes. More distressingly, this lack of planning also means UAWs are setting themselves up for an unpleasant retirement, where they either don’t retire at all, or are forced to go into debt with a drastically reduced standard of living. Compared to UAWs, PAWs are much more attentive to their spending and investing. On average, Stanley and Danko found that PAWs spent 83% more time on financial planning per month than UAWs (about 4.6 hours vs 8.42 hours per month). The idea isn’t to devote all your time and energy into intricate budgets and day trading. Rather, you should approach spending and investing attentively and consciously, but not over plan.

Expensive purchases come in sets

The most insidious spending trap is the well-to-do lifestyle. When you live in a high-class neighborhood surrounded by regular displays of wealth in the form of expensive cars, clothing, and houses, it becomes a constant social pressure to keep up appearances. It doesn’t matter that your neighbors aren’t millionaires anymore than you are, what matters is looking rich. Thus living in an expensive neighborhood can foster expensive tastes. Although living areas have the greatest influence, expensive gifts can also have this effect. An expensive wine for guests of discerning taste may demand caviar, and the high-class setting would demand expensive formal wear, which would in turn demand expensive transportation. Having just one piece of the “rich people collection” may very well open the floodgates to hyper-consumption. 

PAWs are well aware of this phenomenon and so they make a deliberate effort to avoid up-scale neighborhoods and up-scale associates. PAWs are unmoved by status symbols and would prefer to lead simple lives. Millionaires (PAWs for the most part) are among the top consumers of used vehicles in America. UAWs assume that the car someone drives is the best they are able to afford, but from the PAWs’ perspective, they are letting someone else finance the burden of a rapidly depreciating vehicle so they can get a good-as-new car at a significant discount.

Economic outpatient care

It is the wish of every parent to have their child lead a better life than they did. Affluent parents try to provide their children with everything that will help them succeed in life. This ranges from tuition, to downpayment on a house, to annual monetary aid of $10,000. While some of these efforts are genuinely helpful (mostly university tuition) other well-intentioned attempts at aid are actually damaging. 

Psychologically speaking, people find it much easier to spend someone else’s money than their own. Adult children who receive regular monetary aid from their affluent parents are disincentivized to be frugal, invest their savings, and seek higher income. While affluent parents provide their adult children with monthly stipends, they do so with the implicit desire for the arrangement to be temporary. However, what frequently ends up happening is that their adult children become dependent and find themselves unable to maintain their (upper middle class) lifestyle without their parents’ money. This is a perilous arrangement, as not only does it mean the parents’ wealth is rapidly draining away, potentially endangering their retirement plans, but also the adult children never learn proper money management skills and find themselves without recourse after squandering their parents’ final inheritance.

Best career to become a millionaire

Approximately half of the millionaires surveyed by Stanley and Danko are, perhaps unsurprisingly, entrepreneurs. Stanley and Danko theorize that this may be because businessmen are a demographic especially sensitive to cost and profit. Considering how much money it costs and effort it takes to hire staff, purchase inventory, and maintain a storefront, a businessman would view new cars to be an illogical expenditure, especially seeing as used cars function just as well. It would seem that starting your own business is the way to go, but Stanley and Danko warn against this approach. 

Only 25% of new businesses last 15 years or longer, meaning that for every entrepreneur who succeeds, there are 3 more who fail (source). Founding a company certainly takes skill and creative thinking, but the true deciding factor frequently comes down to luck. Parents who made their fortune as company owners invariably send their children to private schools and universities to become physicians, lawyers, and accountants. No matter how potentially successful the profitable business owner is, the overwhelming consensus suggests that the best approach is to become a self-employed professional, whose best asset is their learned intellect.

 

What makes The Millionaire Next Door unique?

As it both takes time to accumulate wealth, and time to accumulate the experience needed to command a higher salary, nearly all of Stanley and Danko’s survey respondents are in their 50’s or older. The Millionaire Next Door offers a window into what smart investing, increased income, and consistent frugality will look like decades down the line. 

Stanley and Danko compare this vision of genuine success with the superficial success of hyper-consumers with a high income and low net worth. Although the millionaires described all have above-average income (70k being the lowest mentioned and 700k the highest), Stanley and Danko’s description of PAWs gives people of every age and every income level a tangible goal to strive for. Additionally, their emphasis on the relative normalcy and frugality of PAW millionaires highlight that greater wealth is available to everyone, provided they practice good saving habits.

 

Final thoughts:

While there are many good messages to take away from The Millionaire Next Door, I first feel the need to address two important factors that prevent this book from being an ideal guide to money management. The first issue is purely economic and the second concerns systemic oppression. 

Past vs current economics

The economic landscape of today is very different from when Stanley and Danko wrote The Millionaire Next Door. 

Firstly, inflation has severely devalued the notion of a million dollars. A dollar today is worth $0.52 of Stanley and Danko’s dollar in 1996. To have the same purchasing power as you would have had for $1 million in 1996, you now need about $2 million (or $1,944,608.03 to be precise). 

Another difficulty is the rising cost of housing. The average home in America today costs $436,800 where it used to cost $322,541, adjusted for inflation (source). 

The final nail in the rich millionaire coffin is stagnating wages. From 1973 to 2013, productivity of the average American employee has increased by 74.4% while hourly compensation increased by a measly 9.2% (source). Due to all these factors, where six-figure household income was high in Stanley and Danko’s time, today it’s not nearly enough to sustain a middle-class lifestyle, especially in the big city. In fact, according to CNBC, a middle class lifestyle in a big city with retirement savings, enough to pay for the children’s college tuition, vacations, and a house would require an annual household salary of about $350k or more.

Systemic oppression

Stanley and Danko focused their study on households in 1996 with at least a million dollars in net worth, which naturally leads to a very narrow scope of people. As it’s a household, we can assume the majority of respondents are part of the traditional family unit of husband, wife and children. As it’s an affluent household, we can assume that the wife doesn’t need to work and can afford to stay home to take care of the children and manage the budget. Stanley and Danko spoke of the ancestry of millionaires and, surprise surprise, the vast majority have their roots in Europe. This is not a study of how all people regardless of whether they’re white, married, or male can become millionaires, it’s a study of the things existing millionaires self-report they have done that improved their lot in life.

The implicit message of The Millionaire Next Door is easy enough to decipher: “Look at all these normal-seeming millionaires! If you work hard, and properly manage your money, you can also achieve millionaire status before retirement!” It’s a good message, but now looking back on The Millionaire Next Door, we must acknowledge what the original authors did not: becoming a millionaire as a white man vs as a black woman are two very different matters, and these differences are very much deserving of scrutiny.

Is it worthwhile to read The Millionaire Next Door? 

In my opinion, yes, but only if you go into it with the awareness that it surveys a highly limited demographic.

Although the ideas presented by Stanley and Danko are persuasive and directly backed by numerous surveys and interviews with real millionaires, it doesn’t cover much that isn’t already talked about in other finance books. There are some important and unique lessons (if you decide to only read one chapter, I recommend chapter 5), but it’s unnecessary to fully revisit. If you haven’t read any finance books previously, The Millionaire Next Door is a good start, as long as you keep in mind its limited application and supplement it with something more up-to-date. If you have read other finance books and you happen to not fall under a distinguished subset of people, then might be best to give this book a pass. 

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Compared to the other offerings on our list, The Psychology of Money by Morgan Housel is a far more recent publication. Published just a few months shy of the pandemic, The Psychology of Money offers new insight on the apparent irrationalities of the stock market and common money fallacies to which we are all susceptible. Does The Psychology of Money offer up new observations in an already oversaturated field? Or does it again retread ground that were better charted and better presented by past writers?

The long and short of it:

The Psychology of Money is divided into 20 individual chapters that can be read together or in isolation. Some of these chapters repeat familiar wisdoms, others offer new advice. I have selected 7 chapters from The Psychology of Money that I personally felt were both unique and uniquely enlightening.

Chapter 1. No one’s crazy

Everyone experiences life differently. People who lived through the Great Depression will behave in ways that seem outright crazy to people who did not. They may be paranoid of investing in stocks, only putting their money in US Treasury bonds and gold. Contrastingly, those who grew up in the care of affluent parents would run up their credit cards in a way that people with frugal parents would find utterly bizarre. It’s been found that what the stock market did in an individual’s formative years (in this case, teenage and young adulthood) will go on to inform their attitude towards the stock market for the rest of their lives.

Chapter 2. Luck & Risk

Housel points to Bill Gates as an example of a very smart and very lucky individual — Gates went to Lakeside High School, the only high school with a Teletype Model 30 computer, the most advanced in the world at the time. There can be no doubt that Bill Gates’ luck in going to Lakeside coupled with his inherent talent with computers formed the bedrock of his future success. Think of the many Bill Gates of the world who were not at the right time and place and thus never achieved even a fraction of the success they otherwise might’ve. The flip side of luck is risk. Frequently, people make choices that have the equal likelihood of fabulous wealth and utter destitution. The only thing separating success and failure is sheer happenstance; factors on a societal and global scale that are beyond any individual’s control. Success is far more complicated than the linear cause-and-effect stories we’re accustomed to.

Chapter 6. Tails, You Win

Success is driven by tails. Big mutual funds regularly find that in the long term, out of 100 companies they invest in, 80% will fail, 15% will do reasonably well, and 5% will go on to dominate the market and utterly redefine our way of life. When Warren Buffet first purchased Apple stocks in 2016, it accounted for 6% of Berkshire Hathaway. Today Apple stocks make up over 46% of Berkshire Hathaway’s total equity portfolio. We have to go into investing with the understanding that we’ll probably be wrong more than 50% of the time, but that’s okay as long as when we’re right, we’re really right.

Chapter 9. Wealth is What You Don’t See

People who earn a lot of money are rich. People who have a lot of money are wealthy. Someone who is rich is not necessarily wealthy and vice versa. Generally speaking, the rich are much easier to spot than the wealthy. This makes sense — people who spend money on a Porsche, and a mansion in Beverly Hills with a pool in the back obviously have a lot of money to spend, but we can’t see the numbers on someone’s bank account. However, people who spend money on things will have things, not money. To have money is to save more of it than you spend, and this is something only behavior can determine, not income or value of possessions.

Chapter 11. Reasonable > Rational

When analyzing whether or not a financial decision is correct, we tend to fall back on the rhetoric of rationality. In a cold measurement of pros and cons, do the advantages outweigh the disadvantages? However, people are not emotionless logic machines, we have responsibilities, we have hopes and dreams and fears. It would be rational to assume that the US stock market will continue it’s historic upwards trajectory even in the depths of a bear market, but is it reasonable for an investor to maintain their optimism after losing their life savings in the 2008 housing crash? Housel would say no. If the choice is between potentially making tons of money at the low risk of losing everything you own or getting a low return but being able to sleep at night, it’s better to go with the latter. It’s okay to not make financial decisions that will make it difficult for you to look your spouse in the eye.

Chapter 14. You’ll Change

People have a tendency to assume that history ends with the present day. We assume all our changes are in the past. The teenager scoffs at their naiveté at 12, unable to imagine that they will have completely different hobbies and values at 25. As the 25 year old denounces their teenaged self, they picture themselves more or less the same at 30, 40, 50 and so on. No matter what age we are, we will inevitably change and become new people. When making plans for the future, financial or otherwise, we have to account for the distinct possibility that our career, our selves, our very lives may change. It’s only too common for the 40 year old to abandon the work the 30 year old had begun, for the 60 year old to completely undo what the 40 year old did.

Chapter 16. You & Me

Beware of the people in the stock market who have different goals. Some people are looking to buy a stock and sell it in a week. In that case, they don’t care about a business’s fundamentals, all that matters to them is that the stock goes up this week. If you’re looking to make reliable long-term gains in the stock market, it’s in your best interest to look for great companies with strong fundamentals and growth prospects. Ideally, you also want to wait for a time when these companies are out of favor with the market before investing. Don’t be swayed by soaring stock prices that result from people playing a different game from you. Just because your stock choices aren’t immediately verified by an increase in value doesn’t mean you should sell and switch to the crypto stock that’s “going to the moon.”

Chapter 17. The Seduction of Pessimism

People who give optimistic forecasts are thought of as naive and full of nonsense. People who offer pessimistic predictions are thought of as cautious well-wishers. There are many good reasons for favoring pessimism over optimism. Avoiding danger was far more conducive to our ancestors’ survival than appreciating luck and fortune. Another factor is the time frame. Growth in GDP and general standard of living is generally so slow as to be nigh-unnoticeable. Meanwhile, it only takes a moment for disaster to strike, for stocks to plummet and money to disappear.

Reality is a mix of optimism and pessimism, but due to a general tendency to hyperfocus on the negative, investors need to actively fight against the tendency to be pessimistic. Historically the stock market has rebounded after every big crash before subsequently growing to new heights. Our standard of living has improved to such a degree that even the luxuries of kings and emperors pale in comparison to today’s smartphone and air conditioning units. In truth, there is a lot of reason for optimism, as the opportunity to buy shares of good companies allow us to partake in their prosperity. The availability of investing opportunities to the common person is a democratization of wealth and voting power is unprecedented in history. It’s all a matter of perspective. Just as it would not do to be overconfident and let your dreams run away from you, it’s also important to account for the genuine grounds for optimism in your decision making.

Housel offers some additional insights for FIRE chasers.

 

Chapter 3. Never Enough

Get the goal-post to stop moving. As Warren Buffett says, never risk what you have and need for what you don’t have and don’t need. Examine your values and you will find that you actually need far less than you think you do to be happy.

Chapter 5. Getting Wealthy vs Staying Wealthy

People were able to get wealthy by being bold and taking risks. However, maintaining wealth requires playing it safe with your money and engaging in careful risk management. These skills call for different approaches and it’s important to cultivate both.

Chapter 7. Freedom

The most valuable dividend investments can pay is freedom. Look to maximize your freedom through financial independence so you aren’t beholden to paid employment.

Chapter 10. Save Money (For no reason)

You don’t need to save for something specific. There’s a first time for everything and the unpredictable events have the greatest impact because they, by definition, can’t be prepared for. Save your money, because it’s always better to have money on hand than nothing.

What makes The Psychology of Money unique?

While the advice laid out in The Psychology of Money is applicable to gaining and maintaining wealth, it’s also relevant to life in general. We all need a reminder every now and again that while the decisions of others sometimes don’t make sense to us, it made sense to them at the time. We must acknowledge that we are similarly susceptible to illogical tendencies, maintain awareness of the flaws in our own thinking, and approach others with sympathy.

The Psychology of Money takes a practical and empathetic view of personal finance in the modern age. It acknowledges that we are all different and in honor of that, it doesn’t try to give us specific money management advice. Instead, it offers us nuggets of wisdom to help guide our thinking so we are kinder to ourselves and those around us, and more realistic in our outlook.

Final thoughts:

As far as recommendations go, The Psychology of Money makes for a solid choice. The book is 256 pages, which is not too long but not short either. However, Morgan Housel offers readers a degree of flexibility not usually found in personal finance books by writing 20 individual chapters rather than a full 20-chapter book. You can read the chapters most pertinent to you and not feel like you’ve missed several steps of a math equation. It also helps that The Psychology of Money is written with simple language and includes enlightening true stories of other people’s (mis)adventures with money, making the book an altogether quick and engaging read.

If there was any criticism I might levy against The Psychology of Money, it would be that some of the chapters were repetitive. The writing is simplistic, which at the beginning helps reader understanding but later meant using repeat phrases and words rather than coming up with new ways to say the same things. Morgan Housel also offers little in the way of universal good money practices. As someone running through personal finance books by the dozen, I appreciate that Housel doesn’t unduly repeat points found in other books, but a part of me wonders if someone who only ever read The Psychology of Money and no other personal finance book might be missing out. Additionally, many people might find the core lessons of The Psychology of Money to be overly simplistic and none too insightful.

The Psychology of Money is a good read. It’s an even better read if paired with a book like The Richest Man in Babylon for personal finance principles alongside The Most Important Thing for investing principles.

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Rich Dad Poor Dad by Robert Kiyosaki and Sharon Lechter is arguably the most successful personal finance book ever written, with over 32 million copies sold since publishing in 1997. Just think, that’s roughly 142 books sold every hour for over two decades! For many people, Rich Dad Poor Dad is the first (and sometimes only) finance book they read. Is Rich Dad Poor Dad truly the best finance book ever written? Or is it just that finance book everyone recommends because it’s the only finance book they ever read?

The long and short of it:

In his book, Kiyosaki makes frequent comparisons of his own well educated but financially illiterate father (Poor Dad) with his friend’s business-savvy and stock market-savvy father (Rich Dad).

Poor Dad…

• • purchased liabilities and thought they were assets (houses and cars)

• • treated money like a taboo that shouldn’t be discussed

• • gave up quickly on the things he couldn’t afford

Meanwhile, Rich Dad…

• • purchased assets (stocks, bonds, rental units) and diminished liabilities

• • talks about money, surrounds himself with people who know money

• • always asks how can I afford that?

To be like Rich Dad, Robert Kiyosaki offers a number of principles which he believes everyone should live by. Most of Kiyosaki’s recommendations are widely agreed-upon financial advice:

“Assets put money in your pocket, whether you work or not, and liabilities take money from your pocket”

… And the rich acquired assets where the poor acquired liabilities. All too often, people assume that an asset is anything that is worth money. We procure cars and designer products, thinking these items are assets by virtue of the amount of money we paid for them. Kiyosaki makes it clear that this is a misconception. If your capital doesn’t grow as a direct result of purchasing it, then it’s not an asset, it’s a liability. 

Here we must note that something which may be a liability for one person becomes an asset in someone else’s hands. Say for instance that you know nothing about cars and bought a Honda. 8 years later, you sell it second hand at a quarter of its original cost. That’s a liability. However, say you’re a car mechanic who purchased a broken down Ford, fixed it up, gave it a new coat of paint, then sold it for profit. Now that’s an asset. 

“I forbid myself from saying, “I can’t afford it.” I have disciplined myself to ask instead, “How can I afford it?”

This is the difference between a scarcity mindset and an abundance mindset. The way we think and feel about things have a big effect on our actions and our general sense of fulfillment. If we presume that something is out of our budget, we will never make an honest effort at gaining the thing we want. Ask yourself this, “why is it that other people can afford things that I can’t?” of course, for some of them it’s inherited wealth or winning a lottery, but for many others it’s because they believed they can improve their lot in life and then made and enacted plans to achieve their goal. This is the essence of the FIRE movement. FIRE chasers believe that anyone with an income is capable of accumulating wealth through wise investing and careful spending.

Above is a graph from Economic Policy Institute showing the stark difference between the money you generate for a company and the money you receive in the form of wages. There is more than enough wealth in America to justify every worker getting double their current wage. Abundance is out there, and you’re not about to get it just by working. It’s up to you to open your mind and seize the opportunities.

“The most life destroying word of all is the word tomorrow.”

Thanks to school, most of us think of procrastination as “putting off tasks until just before the deadline,” but what happens if there is no deadline? Procrastination in adulthood looks a little different. While we would never procrastinate on things like paying the bills the like we would our class presentation on The Great Gatsby, we procrastinate on life goals. When we’re given the responsibility to manage our own time, we frequently put off big goals, saying “someday” and “tomorrow,” because as long as we don’t set a tangible deadline, we’ll never be “late” or “overdue.” If we go through life flinching at shadows and backing away from possible failure we will soon find ourselves with no more life to live and little to show for it.

“The single most powerful asset we have is our mind. If we train it well, we can produce enormous wealth”

Before investing in the stock market, we must first invest in ourselves. This advice is very much in line with Warren Buffet’s well-known insistence of staying within one’s circle of competence. By investing in yourself, you expand your circle of competence. There is much to be learned about an industry by working in that industry, much to be gleaned from books for the things you can’t experience for yourself, and much to be said about keeping the company of people smarter than you. 

Despite recent advancements in artificial intelligence, the human mind is currently the only intelligence capable of conceiving new and entirely unprecedented ideas. Each and every one of us is capable of enormous creativity and insight. By accepting failure as a necessary part of learning and continuing to hone our mind, we will find that our potential for making money is far greater than conventional wisdom would have us believe.

What makes Rich Dad Poor Dad unique?

Kiyosaki very persuasively and very effectively compares the money habits of his dad, who is poor, and his friend’s dad, who is rich. By putting this comparison at the forefront of his book, he effectively shows the readers what the wrong thing to do is and how to change that into the right thing to do. This way, Kiyosaki establishes something of a roadmap, shining a light on the path to wealth while revealing the potholes that lie along the road.

Aside from the premise, perhaps the most notable idea presented in Rich Dad Poor Dad is Kiyosaki’s second principle: Assets put money in your pocket, whether you work or not, and liabilities take money from your pocket

He specifies that not only should possessions and cars be considered liabilities, a house is a liability as well. “But wait a minute,” I’m sure many people thought as they read Rich Dad Poor Dad, “Don’t houses appreciate in value? Doesn’t that make them an asset, because they eventually put money in your pocket, even if it takes a long time?” 

Kiyosaki has this to say: houses are expensive, and today they are more expensive than ever, especially in the cities. Don’t buy a house just because it’s the thing everyone else is doing. Take a good hard look at your own finances and ask if this is something you can actually afford.

Adding on to Kiyosaki’s points, I think we must also keep in mind the numerous dangers of having your money tied up in expensive real estate. For one, houses are very illiquid. Selling and buying houses is such a hassle that most people only do it maybe once in their entire lives. If you need funds for an emergency, it will take months, years even, to make a sale. Another concern is potential depreciation. Just because houses can generally be trusted to appreciate in value due to population growth, it’s not a guarantee. It wouldn’t do to forget the lessons of 2008. And finally, investors need to be aware that even if the house is appreciating, there is an opportunity cost. If you’re going to pour all your savings into an expensive three story for the next 50 years of your life, you had better be darn sure you don’t have a better use for that money in the meantime.

Rich Dad Poor Dad thus asks us to adjust our thinking on assets and liabilities. Although conventional wisdom says houses are assets, this is not always the case. Houses can only put money in your pocket if you sell it for a profit, rent it, or pay off the mortage in timely fashion and live there long enough to save on rent. In any other case, it’s a liability. Making your house into an asset requires taking your income, wealth, and the market cycle into account when you shop for real estate. If you want your house to put money in your pocket, then you need to treat it like an investment, and that means all the research and careful assessment that comes with the territory.

Regarding home ownership, Rich Dad Poor Dad differs dramatically from the majority of finance books. Pretty much every other personal finance book will unequivocally say it’s a good idea to buy a house and own it. For the smart buyer, owning a house means a comfortable and inexpensive place to live after paying off the mortgage and a way to invest your savings so it would appreciate, but for the inattentive buyer, house ownership is a serious liability. As Howard Marks stresses in The Most Important Thing, the safer an investment appears, the more vigilant you need to be for hidden risks. It’s important to know the foundations that lie behind “common sense” practices. If these foundations still hold true for you, then it’s a good idea to buy a home. However, if you have better use for your capital than purchasing an expensive house that you’ll be obligated to pay off over the next several decades, then homeownership might not be for you.

Final thoughts:

It’s probably time I addressed the elephant in the room. Yes, Robert Kiyosaki started several companies, and yes, he did declare bankruptcy for almost all of them. Most of his money today comes from his book sales and for this reason, he is regularly accused of being a fraud who tricked his way into money by selling money advice. I’m of a different mind. I feel that Rich Dad Poor Dad stands very well on its own as a personal finance book. No matter who the advice comes from or what the ulterior motives, if the advice is good, we should take it. Kiyosaki very much takes his own advice. He says “don’t fear failure,” and clearly he is willing to try things that may potentially fail, from starting companies to writing books. Kiyosaki also says “broke is different from poor,” as broke is temporary and poor is eternal. True enough, Kiyosaki’s company went bankrupt, but the man himself never did. He may have been broke, but he was not poor.

So what can we learn from Kiyosaki’s book? Certainly not how to run a business, if the bankruptcies are anything to go by. It’s a credit to Kiyosaki, then, that he never bothered giving business advice in Rich Dad Poor Dad. He instead encourages you to educate yourself, something I am fully onboard with. Rich Dad Poor Dad is most helpful to people at the very beginnings of their personal finance journey, when they’re unsure how to start and need a push to get going. The ideas presented in this book aren’t terribly unique, but the writing is simple and engaging, and the way Kiyosaki presents the well-worn wisdoms of personal finance is relatable and interesting. There is nothing actively wrong with the book, just make sure to keep your wits about you if you decide to read it, and to not take Kiyosaki’s words at face value. You wouldn’t want to go bankrupt after all.

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