Hello friends — and foes… you know who you are Mr. Panda Express guy who always scrimps on my orange chicken. There’s a special circle in Dante’s Inferno reserved just for you. Overpriced Chinese-but-not-really-Chinese food aside, I wanted to let you all in an awesome image I saw retweeted a few weeks ago.
The Holy Index Card of Financial Success (tweeted by @m_sendhil)
Those who know me well know that I’m a sucker for financial tips. And I’ve actually always been obsessed with notecards. In college, I amassed hundreds of chicken-scratched 3″ x 5″‘s with questions and key terms on one side and answers and definitions on the other. Joanna would probably define my studying methods as “neurotic,” but we’ll just pretend that’s a compliment. At any rate, this notecard image was right up my alley.
There’s not much of a backstory to the image, but it’s important to know its author: University of Chicago professor Harold Pollack. A finance teacher he is not (health policy is his expertise), but Harvard/Princeton/Yale PhD he is. Needless to say, dude’s smart. And beyond smart, he knows how to distill a mountain of financial guidelines, best practices, and opinions into a notecard of 10 simple tips. Here’s my brief analysis:
- Max your 401(k) or equivalent employee contribution.
Yes, yes, YES! Remember folks — it’s free mon-ay! If you need a refresher on why you should jump on this bandwagon, here’s where we’ve made that case before.
- Buy inexpensive, well-diversified mutual funds such as Vanguard Target 20xx funds.
If you’re not familiar with Target funds, they’re actually incredibly intuitive. Say you’ll be 65 years old in 2050. If you invest in a Target 2050 fund, the fund will auto-magically adjust over time from investing more aggressively (lots of stocks) to more conservatively (lots of bonds). And while most Target funds have the same purpose, their fees (what you’re paying the people managing the mutual fund) vary wildly. Vanguard is known for having some of the lowest fees, which means more money goes in your pocket instead of theirs.
- Never buy or sell an individual security.
This is another way of saying, “diversify.” I’ve made this mistake and I won’t make it again. There will likely be some naysayers out there, but if you’re a noob to investing, heed this advice.
- The person on the other side of the table knows more than you do about this stuff.
“I hear what you’re saying and note your concerns, but I’m going to go with my gut and trust that random commercial I saw during daytime TV that told me to cash out all of my investments and buy gold.”
- Save 20% of your money.
I’m not sure where he came up with this number, but a guess would be the 70-20-10 rule: 70% living expenses, 20% savings, 10% debt. There’s also Elizabeth Warren’s 50-30-20 rule which allocates 50% to wants, 30% to needs, and 20% to savings. I’m not a huge fan of that method, but in any event 20% seems like a great benchmark.
- Pay your credit card balance off in full every month.
Duh. If you can’t follow this one, no more credit cards for you. Here’s our take on credit cards.
- Maximize tax-advantaged savings vehicles like Roth, SEP, and 529 accounts.
The more money you put toward these weird-sounding acronyms, the less Uncle Sam will hold you accountable when you pay your taxes. And that’s always a good thing.
- Pay attention to fees. Avoid actively managed funds.
As mentioned in #2, fees eat away at your investment earnings. Any time you’re researching mutual funds, look at the Gross Expense Ratio. Let’s say Mutual Fund XYZ has a 1.75% expense ratio. That doesn’t seem too high, right? Well, let’s say your mutual fund earns 7%. That would mean 25% of your earnings would be lost to fees. That’s a lot of dough. That doesn’t mean that high fees always equate to poor funds, but be cautious of unseen costs that will eat at your earnings.
- Make financial advisor commit to fiduciary standard.
Fiduciary is such a weird word. Fi-do-she-airy. Fiduciary. Weird. Anyway, it’s a weird word that has a simple meaning: acting in your best interest. That means your financial profits should come before theirs. Seems like that’s what every financial advisor should do anyway, but that’s just not the case.
- Promote social insurance programs to help people when things go wrong.
Sure, I guess. I do my part in “promoting” those programs every time I look at my paycheck and realize a whole lot of it is missing. Beyond your involuntary responsibilities to support public programs, helping individuals and charities is a great place to put extra money.
While there’s probably more that goes into financial success, this is as good a starting list as I’ve ever seen. That being said, I’m sure we’ll have differing opinions on a few of these items. So what do y’all think? Any kool-aid on this notecard that you aren’t drinking?