Two years ago, there was an article about someone who wrote down all of the important personal financial advice onto an index card. The theory being that everything important that you needed to know was simple, and that all the other advice that people tried to give you was just noise or a sales pitch.
How did I miss this??
This appeals to me on many different levels. I don’t want to reduce things to be more simplistic than they actually are, but when it comes to managing your finances, I honestly believe that simpler is almost always more accurate.
So with that in mind, here is the index card:
“The best investment advice fits on an index card. … Although I was originally speaking in metaphor, I grabbed a pen and one of my daughter’s note cards, scribbled this out in maybe three minutes, snapped a picture with my iPhone, and the rest was history.”
Frankly, if you read this index card and take it to heart, you’ll be in great shape. But as long as I’m looking at it, I see that maybe it’s worth discussing these suggestions.
1. Max your 401(k) or equivalent employee contribution
Perhaps I’m reading too much into this, but this is an interesting one to start out with, isn’t it?
Your 401(k), or employer-based retirement account, is a tax-advantaged (not always tax-free) account that allows you to put away money for retirement. At the time of writing, you can put upwards of $18,000 a year in this account. If managed properly, this money can grow to many times the initial contribution by the time of retirement.
This is good advice, but to actually maximize your contributions might be a little aspirational for most people today. Because, let’s face it, even using pre-tax money, $18,000 is a lot, especially when the average salary around here is somewhere in the ballpark of $50,000 a year.
(Also, this assumes a traditional employee situation, which if you’re a freelancer you may not have. But maybe that’s a nitpick, as anyone can open a retirement account and put money into it, so it’s kind of the same thing.)
However, I’d add that the biggest potential advantage of these employer/employee schemes is something I like to call free money. Often times, companies will incentivize contributions by matching the contribution up to a certain amount, usually 2% or 3% of salary. This is a 100% return on investment. This is a no-brainer. Sign up for this if you have the option.
My take: Good goal for the future, but get as close as you can now. And get the match today.
2. Buy inexpensive, well-diversified mutual funds such as Vanguard Target 20XX funds
I’m on-board with “inexpensive”, “well-diversified”, “mutual funds”, and even “Vanguard”, but the Target Funds? I’m not so sure.
These funds start out aggressive (higher risk, higher return), but get progressively more conservative until your target retirement age. The goal is, as they put it, is to “[free] you from the hassle of ongoing rebalancing.”
Meh. Rebalancing is something you can do once every couple of years, and should take only a few hours (max) of work. I think you can handle that.
And I’m not into this because target funds assume that you no longer want to invest for good returns after you retire. But when you have potentially 30 years to live after retirement, that’s a long time to spend not investing! Keep in mind: 30 years is equivalent to almost the entire amount of time you spent working!
I’d much prefer a minimal portfolio, of the kind indicated here by Forbes. Every few years, if you want, maybe add a bit more bond and less stock. But you can do this yourself. You don’t want zero risk/reward at retirement; you still have a future.
My take: Mostly agreed. But pick a few broad market funds and balance them yourself.
3. Never buy or sell individual securities. The person on the other side of the table knows more than you do about the stuff.
Yes. This is very similar to my best stock tip ever.
My take: Agreed.
4. Save 20% of your money
I wish everyone could start doing this today. I never thought about 20% as an explicit metric, but I think I’ve been agreeing with it all along. I’ve been a fan of the “15% toward retirement” for many years, but I also believe in building an additional savings (for example, see why you’re not ready to buy a home). So that effectively is equal to 20%.
Which seems like a lot, I know. And it is. But that 20% is something that, with good stewardship, will grow to become 100% of your income eventually. Which if you think about it, is a pretty good deal.
So if you’re not doing this now, don’t fret. As your wage increases (which is likely, if not guaranteed), don’t just give yourself a raise. Put more away. Calculate how much you’re putting away, and keep aware of that percentage. Increase it over time. 20% is a good number.
My take: Agreed, though it’s also aspirational. Get as close as you can now.
5. Pay your credit card balance in full every month
Yes. If you must have credit cards and you use them (but hopefully not for everyday spend) then you must do this. Please. I’m all but begging you on this one. I know you’re generous, but the credit card companies are not where you want to donate.
My take: Agreed.
6. Maximize tax-advantaged savings vehicles like Roth, SEP, and 529 accounts.
This is along the same line as the first point, but is kind of an addition to it. For me personally, the key one here is Roth, which I’ve already talked about. SEP is a retirement arrangement for business owners, but it confers the same kind of benefits as an IRA. And a 529 is an education savings account that allows you to put away money for education in a tax-incentivized way.
Basically, the point of lumping these all together is to suggest that you use the benefits you have been offered. These are benefits that you can take advantage of, but only if you are proactive about it. No one is going to force you to save for college with a 529. But, just like the truth, it’s out there.
My take: Agreed.
7. Pay attention to fees. Avoid actively managed funds.
Yes yes yes yes yes. I asked a question along similar lines once: “Why would anyone buy loaded mutual funds?” and so far as I could tell, the answer was, “because they don’t yet know better”.
Granted, loaded mutual funds and actively-managed funds aren’t the same thing. (One costs money to purchase, one has a higher ongoing fee associated with it.) But they fall under the same heading to me. When you get other people to do the work for you, there is a payment or penalty associated with it. In short, it costs money, potentially lots of money. It could be the difference between having enough to retire on, and not. Your job: know better.
My take: Agreed.
8. Make financial advisor commit to a fiduciary standard.
Are the people who you enlist for financial help working in your best interest? How can you be sure?
If they have committed to a fiduciary standard, you can be as certain as you can.
The Committee for The Fiduciary Standard defines a fiduciary with five core principles:
- Put the client’s best interests first;
- Act with prudence, that is, with the skill, care, diligence and good judgment of a professional;
- Do not mislead clients–provide conspicuous, full and fair disclosure of all important facts;
- Avoid conflicts of interest;
- Fully disclose and fairly manage, in the client’s favor, unavoidable conflicts.
My take: Agreed.
I’m going to hold off on the last one, because I think it deserves its own post. But I will say that I think this index card is probably the most densely-packed instructional vehicle for financial success I’ve seen anywhere.
There are, of course, some bullet points I’d add to it, namely:
- Give a direction to every dollar that you earn
- Actively track your spending
- Spend no more than what you make each month
All of which could probably be condensed a little further than I’ve presented them here. After all, I’ve never been good at fitting everything on an index card.
But enough about me. What do you think about these suggestions?
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