This is part of our Rockstar Book Review series.
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The “Why” Behind Pollack’s No-Nonsense Cheat Sheet That Took the Financial World by Storm in 2013
Ironically enough, the 4 x 6 index card that ultimately went viral, thanks in part to this Washington Post article, didn’t exist until reader Alex M. requested to see it!
Prior to this request, it had only existed as a metaphor shared during a conversation Pollack had with future co-author Helaine Olen: “The best investment advice fits on an index card.”
The original index card (pictured below) included nine points.
The book offers nine points as well, though they differ somewhat from the original:
- Strive to save 10% to 20% of your income
- Pay your credit card balances every month (and pay down other debt)
- Max out retirement and other tax-advantaged savings
- Never buy or sell individual stocks
- Buy inexpensive, well-diversified indexed mutual funds and ETFs
- Make your financial advisor commit to the fiduciary standard
- Buy a home when you’re financially ready *NEW*
- Insurance—make sure you’re protected *NEW*
- Do what you can to support the social safety net
- OK, it offers ten, but the last one offers a summary, which is why I’m omitting it.
#1. Strive to Save 10% to 20%
Originally, Pollack suggested that 20% of gross income should be the goal, but the authors have softened on this point. The suggestion is now 10-20% of net income, stating that more is better and that, if double-digits is not feasible at the moment, some is better than none. In the authors’ estimation, this savings rate is what’s necessary to secure our financial future and that, given the power of compounding interest, starting sooner than later matters.
Further, learning how to save effectively drives our success in executing on every other point. If we don’t have money, we can’t pay down debt, put money in retirement savings, invest or buy a home. In short, living paycheck-to-paycheck is not a way to ensure our financial success over the long term. If moving away from this behavior is proving difficult, the authors suggest conducting a personal spending audit to help you clarify needs vs wants.
Finally, forget the latte factor. It’s the big stuff that kills us financially: housing, transportation and health care spending. Finding ways to reduce spending in these areas can make a big difference in creating some much-needed financial wiggle room, making it possible to set up to three months of expenses aside in an emergency fund.
#2. Pay Your Credit Card Balances Every Month
The authors argue that the high interest rates associated with credit cards make it a necessity to pay off the full balance every month (beware of the lure of paying only the minimum as doing so will keep the debt around for years). They also stress that credit cards have a tendency to lead to overspending – in the order of 20% more on average. If spending is an issue, they strongly suggest sticking to cash.
Pollack and Olen also stress that our ready access to credit is a relatively new phenomenon, and that the accessibility of credit is often what gets us into trouble in the first place. If we can’t borrow, we can’t get into debt. If we are in debt, we can minimize its long-term impact on our net worth by paying it off as quickly as possible, starting with the highest interest rate debt. The authors also caution that when it comes to debt consolidation and/or bankruptcy (including student loan consolidation/refinancing), it’s important to do our homework, as not all solutions work in our favor over the longer term.
#3. Max Out Retirement Savings
Once we have our credit cards under control and we’ve built up our emergency savings, it’s time to start ramping up our retirement savings. And the most important step is to maximize our use of employer-matched contributions and our use of all tax-advantaged savings vehicles. After all, why should any of us say no to free money?! (Unfortunately, as it turns out, a surprising percentage of the workforce does.)
#4. Never Buy or Sell Individual Stocks
The authors stress that there is really no benefit to owning individuals stocks when these are compared to well-diversified, low-cost funds. Trading in individual stocks encourages behaviors such as attempting to time the market and the frequent buying and selling of securities, both of which tend to eat away at our overall portfolio, no matter what the experts on TV might lead us to believe. Why participate in an activity that doesn’t tend to work, even for the pros?
#5. Buy Inexpensive, Well-Diversified Funds
Buy and hold is key, along with ensuring that what we buy are low cost (less than 0.5% annual fees), well-diversified IMFs and ETFs. Broad-based funds ensure that we can invest and then leave the investments alone until we come to the point where it’s time to withdraw our living expenses after retirement. Yes, after retirement. Borrowing from our retirement savings, for any reason, should be used only as a last resort.
Also, though Target-Date Funds were all the rage a few years ago, their benefits appear to be outweighed by the higher fees, which is why the authors now suggest sticking with lower-cost IMFs and ETFs.
#6. Secure A Fiduciary
The only way to know that a financial advisor is working for you is to ensure they are a fiduciary. Even a fee-only advisor may be receiving some commissions and/or may not be required to act in your best interest. If you want sound advice, have the advisor confirm in writing that he/she is a fiduciary and pay for the expertise up front and not in the form of commissions. A good advisor will be worth the hourly or flat fee they charge.
#7. Buy a Home When You’re Financially Ready
The heading for this rule is somewhat misleading. The authors are not suggesting that home ownership is for everyone. What they are suggesting is that, if home ownership is right for you, you need to consider it a long-term purchase to justify the commission, closing, legal, maintenance & repair, interest and insurance costs associated with the purchase. In their estimation, a family is ready to purchase a home once the household has a fully-funded emergency fund, has saved the 20% down payment, can finance on a fixed, best-possible-rate 15 or 30-year mortgage, and that the anticipated housing costs will represent at most 1/3 of their household’s take home pay.
#8. Get Insurance
Bad things happen. Period. That means that having proper insurance is important to protect your dependents. The authors advocate term insurance, disability insurance, household or renters insurance, health insurance and liability insurance (possibly including umbrella insurance). Pollack’s personal story helps drive home the importance of having the right coverage at the right time because tragedy and unforeseen events can affect anyone at any time. Every one of us knows of at least one person who has fallen on hard times in part because of having the wrong or no coverage. Better we be safe than sorry.
#9. Support the Social Safety Net
There are some forms of insurance we actively buy and then there’s other insurance that we contribute to via taxation: social security, disability, medicare, unemployment insurance and subsidized student loans. All these government services are forms of insurance that offer a safety net of last resort and the vast majority of people come to depend on at least one of these at some point in their lives (whether they realize these are government-run programs or not).
Despite our lack of appreciation for them until we find ourselves in need, the authors suggest that these services are worthy of our support because they can be just as important to our quality of life as the safety nets we secure for ourselves directly.
If you want to know the “whys” behind the recommendations Harold Pollack made on that single index card back in 2013, I recommend reading this book and, of course, heeding its advice!
Other suggested non-fiction books that offer similar advice include: “The Total Money Makeover” by Dave Ramsey and “I Will Teach You to Be Rich” by Ramit Sethi. For entertaining works of fiction that cover similar concepts, I recommend “The Wealthy Barber” by David Chilton and “The Richest Man in Babylon” by George S. Clason (its principles are timeless). Finally, if you like the “it all fits on one page”/KISS concept, you might also like “The One-Page Financial Plan” by Carl Richards.
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