Your Financial Plan: Use an Index Card

Personal finance doesn’t have to be complicated.    In fact, a couple of years ago, Harold Pollack, a social social scientist at the University of Chicago made the claim that the best personal finance advice can fit on a 4”x6” index card -- and he backed it up by producing a picture of his handwritten index card with 9 personal finance rules that went viral for its simplicity and effectiveness.    

The 9 simple rules that he fits on to that index card are below with some explanation from us:

(1.) Max out your 401(k) or similar employee retirement savings contribution.  

This one relates to the advantages of saving consistently, saving pretax, and getting a match from your employer if you can.   Saving consistently (and early) and leaving the money invested for retirement, is the most direct way to ensure a you'll end up in a good place.    Saving in a 401(k) or other pretax vehicle allows you to save and invest money before you pay taxes on it to the government.  That means you start with a larger amount of money to invest and you are likely to pay lower taxes overall than you would if you had to pay the taxes upfront AND on your capital gains.   Lastly, if an employer offers to "match" your 401(k) contributions, you'll be getting free money toward your retirement from your employer. 

(2.) Buy inexpensive, well-diversified mutual funds i.e. Vanguard Target 20xx funds.

Most investment managers struggle to "beat the market."  As a result, rather than paying for a losing performance, many experts suggest that you should pay a lot less and get a better performance.  Sounds like a winning formula, and what Professor Pollack recommends here.  Specifically, he references an investment company, Vanguard, that is known for its low-cost, market tracking options.  They also offer "Target Date" funds that will manage your money professionally with a particular retirement date in mind, changing your investments over time to fit your ability to take risk at older ages closer to your retirement.  

(3.) Never buy or sell an individual security.  

Buying and selling individual stocks and bonds is often a losing trade for the average investor.  Transaction costs are expensive, the people selling or buying your stock are usually doing it for a full time job, and if something goes wrong at the company it's going to hurt you directly.

(4.) Save as close to 20% of the money you make as you can.

Most Americans are saving <5% of their income.  Its not enough.  Saving 10% of your income over your career would put you in a good position, but it would be on the edge of enough. Saving 20%, however, allows you to easily afford your existing lifestyle throughout your retirement.  It's a lot to save for many people, but its a good goal to strive for. 

(5.) Pay your credit card balance in full every month.

Credit cards can be helpful as a convenient way to make a purchase or a helpful way to manage one time expenses between pay periods, but they aren't sustainable.  Credit card companies charge huge interest rates of 20%, 25%, or 30%+ to you when you use a card to borrow money for a purchase and don't pay it back in full on the next statement.   Those are some of the highest interest rates you can find and are very difficult to recover from once you start incurring them.  If you are going to use a credit card, make sure you can pay off the entire balance when the next payment is due.

(6.) Maximize tax-advantaged savings vehicles like Roth, SEP and 529 accounts.

For similar reasons to the 401(k), saving in a tax-advantaged account may let you grow your money off of a larger starting balance (because you haven't paid Uncle Sam yet) or let you minimize a capital gains tax associated with the growth of the money over time. 

(7.) Pay attention to fees. Avoid actively managed funds.

This is a mirror and an extension of (2).  Fees add up and will cut into your returns, perhaps without providing any offsetting value.  Better to keep it simple and low fee and to rely on the power of the market to deliver you the growth over time it has historically delivered.  In general, avoid paying fees that are avoidable -- its money down the drain.

(8.) Make financial advisors commit to the fiduciary standard.

If you are going to work with a financial advisor, wouldn't you want them to put your best interests first?  Maybe you assumed they did already, but the truth is most advisors dont have to keep your best interests in mind.  They can sell you a product solely on the basis that it makes them more money, not because it's better for you.   A "fiduciary" has taken a pledge to act in your best interests and to provide advice in your best interests.  Advice from a fidcuairy might not always turn out to be the right advice, but it's at least coming from a good place -- and if you can prove they did something that wasn't in your best interests that caused you harm, they may be liable.  It's the kind of accountability that is refreshing to find, so make sure you work with someone willing to put your best interests first, and have them agree to it in writing.  

(9.) Promote social insurance programs to help people when things go wrong.

We all hit rough patches.  Sometimes the only thing that gets us through it without the wheels falling off is help from a friend, a family member, or form some form of social assistance.  Do your best to help others when things go wrong for them and we will build a better system for helping everyone (and anyone) to get through the tough times. 

Follow the rules above and you'll end up in a good place.  Take the idea of keeping (making) personal finance simple to heart and you'll have the chance to end up in a great place.

Stay motivated. 

Nicholas MoyHarbor, Inc.