Wales was born in Huntsville, Alabama, shortly before midnight on August 7, 1966; however, his birth certificate lists his date of birth as August 8. His father, Jimmy, worked as a grocery store manager, while his mother, Doris Ann (née Dudley), and his grandmother, Erma, ran the House of Learning, a small private school in the tradition of the one-room schoolhouse, where Wales and his three siblings received their early education.
As a child, Wales was a keen reader with an acute intellectual curiosity. When he was three, his mother bought a World Book Encyclopedia from a door-to-door salesman. As he grew up and learned to read, it became an object of reverence. It put at his fingertips an abundant supply of knowledge complete with maps, illustrations, and a few cellophane layers of transparencies one could lift to explore such things as the muscles, arteries, and digestive system of a dissected frog. But Wales soon discovered that the World Book had shortcomings: no matter how much was in it, there were many more things that were not. World Book sent out stickers for owners to paste on the pages in order to update the encyclopedia, and Wales was careful to put the stickers to work, stating, "I joke that I started as a kid revising the encyclopedia by stickering the one my mother bought."
During an interview in 2005 with Brian Lamb, Wales described his childhood private school as a "Montessori influenced philosophy of education", where he "spent lots of hours poring over the Britannicas and World Book Encyclopedias". There were only four other children in Wales's grade, so the school grouped together the first through fourth-grade students and the fifth through eighth-grade students. As an adult, Wales was sharply critical of the government's treatment of the school, citing the "constant interference and bureaucracy and very sort of snobby inspectors from the state" as a formative influence on his political philosophy.
After eighth grade, Wales attended Randolph School, a university-preparatory school in Huntsville, graduating at sixteen. Wales said that the school was expensive for his family, but that "education was always a passion in my household ... you know, the very traditional approach to knowledge and learning and establishing that as a base for a good life." He received his bachelor's degree in finance from Auburn University in 1986. He began his Auburn education when he was 16 years old. Wales then entered the PhD finance program at the University of Alabama before leaving with a master's degree to enter the PhD finance program at Indiana University. At the University of Alabama, he played Internet fantasy games and developed his interest in the web. He taught at both universities during his postgraduate studies but did not write the doctoral dissertation required for a PhD, something he ascribed to boredom.