It turns out, everything you need to know about mastering your money can fit on a three-by-five inch index card.
That’s what University of Chicago professor Harold Pollack discovered through trial and error, after turning around his and his wife Veronica’s financial situation, which took an unexpected turn when they started caring for Veronica’s disabled brother. Their income fell, as Veronica had to leave the workforce, and their expenses soared, thanks to medical bills.
“Harold came up with the concept of the index card not as some academic experiment but as a practical solution to the kinds of urgent financial problems many of us encounter at some point in our lives,” financial journalist Helaine Olen writes in “The Index Card,” the book she and Pollack co-authored to further explain how the concepts on the original card outperform more complex financial strategies.
The coauthors made a few alterations to the original index card, but the overarching theme of simplicity holds true — as Pollack found while turning around his financial life, “The most important advice was embarrassingly simple.”
Here are nine rules to follow to start building wealth today, as described in “The Index Card”:
1. Save at least 10% of your income.
Getting rich begins with paying yourself first. More specifically, set aside 10% to 20% of your gross income (the amount listed on your paycheck before taxes are taken out), Olen and Pollack recommend.
'If you can put aside 10% of each paycheck, you will have more than one month's salary set aside in your first year!' they write. 'As an added bonus, you'll experience a whole lot less financial stress and drama along the way.'
You don't have to immediately start setting aside such a hefty chunk of your money. 'Saving 10% to 20% is the ultimate goal, not something you need to achieve yesterday afternoon,' they explain. 'It's better to save 1% consistently than try and fail over and over again to save 10% to 20%.'
Today, it's even easier to learn to live without a certain chunk of your income, thanks to technology. You can automatically deposit money from your paycheck and checking account into a retirement account, savings account, or other investment vehicle, removing the temptation to spend. If you never see it, you'll learn to live without it.
2. Pay your credit card balance in full every month.
'A third of us will pay the minimum almost every month, with another third sometimes paying the bill in full but also often paying, yes, the minimum,' Olen and Pollack report. In short, a lot of credit card users are paying just the minimum amount, and as a result, losing a lot of money.
Most credit cards only require you to pay 1% to 3% of your balance each month. 'That minimum payment amount listed on your statement is not a recommendation,' they emphasise. 'Unfortunately, all too many of us take this minimum payment as just that ... Paying the minimum when you can afford to pay more takes a lot of money out of your pocket and gives it away to the credit card company.'
Interest rates vary depending on the card, but credit cards charge an average of 15% on unpaid balances. To get an idea of how costly this can be in the long run, check out this chart showing how charging $100 per year and paying the minimum would result in you paying thousands of dollars in interest over time.
'There is no better way to simplify and gain control over your financial life than by eliminating high-interest debt,' Olen and Pollack write.
3. Max out your retirement accounts.
'When it comes to planning for retirement, playground rules apply -- no do-overs,' Olen and Pollack explain. 'If you don't begin putting away money today, you will almost certainly regret it tomorrow.'
Getting an early start on retirement savings will result in huge gains later on, thanks to compound interest, and will allow you to maintain your standard of living when you're no longer earning a paycheck. 'Wait until your forties and it will be much harder,' they explain. 'Some analysts say you'll need to save more than a third of your salary to catch up.'
Contribute to your employer's 401(k) retirement account if you have access (if you don't, you have other options) and consider putting additional money towards a traditional or Roth IRA, other retirement savings accounts that offer tax benefits.
4. Don't buy or sell individual stocks.
'You're not Warren Buffett,' Olen and Pollack emphasise -- and chances are, you're not going to become him, so don't invest in individual stocks and try to beat the market.
'Don't get us wrong. People do hit the occasional home run,' they say. 'Yet studies suggest that less than 1% of us have the ability to consistently and regularly beat the Street ... Not only will individual stock picking not lead you to beat the market, but it will likely leave you behind -- possibly way behind.'
5. Rather, invest in low-cost index funds.
'Follow Warren Buffett's advice: Invest in index funds,' Olen and Pollack advise. Buffett isn't the only advocate of low-cost index funds -- investing pros John Bogle and Charlie Munger also agree that successful investing boils down to this strategy.
'It is a simple concept that guarantees you will win the investment game played by most other investors who -- as a group -- are guaranteed to lose,' Vanguard Mutual Fund Group founder Bogle writes in 'The Little Book of Common Sense Investing.'
Investing in index funds works for two main reasons, he says: They're broadly diversified, which eliminates individual stock risk, and they're low cost.
It's important to note that not all index funds are low-cost -- and cost is everything, Bogle says. While there are options out there that carry expense ratios (the industry term for these fees) as low as .10%, others have expense ratios as high as .80%. What may seem like an insignificant difference can add up in an astonishing way, Bogle notes.
6. Make sure your financial adviser is bound to the Fiduciary standard.
If you're looking to pay for professional financial advice, you'll want one word in your back pocket: fiduciary.
'A financial adviser working to the fiduciary standard has a legal duty to act in your best interest and is not getting paid to steer you into buying overpriced investment products you don't want or need,' Olen and Pollack write. 'A majority of men and women offering financial advice don't work to the fiduciary standard.'
Those not working to the fiduciary standard are held only to a suitability standard, meaning their advice must be suitable for the clients' financial situation, but is not necessarily in their best interest.
Someone is almost certainly working to the fiduciary standard if they are a certified financial planner (CFP), registered investment adviser (RIA), or fee-only adviser, Olen and Pollack explain.
To be sure you're getting sound advice, 'You need to ask and ask quite specifically: Do you work to the fiduciary standard at all times?' they write. 'This last part, 'at all times,' is important. As the fine print on brokerage forms indicates, the fact that an adviser commits to a fiduciary standard for some of her dealings with you does not hold her to this standard in others.'
7. Buy a home only when you are financially ready.
Home ownership is pricey -- there's the down payment, mortgage interest, closing costs, various property taxes, maintenance, renovations, and the inevitable intangibles. To ensure it will be a smart financial decision, Olen and Pollack offer basic rules to follow before making the plunge:
1. Get your debt under control. 'If your debt is high, home ownership is going to be a stretch, and you're more likely to fall into financial distress if something goes wrong.'
2. Have an emergency fund. 'Do you have a fully funded emergency savings account? If you don't, do not pass go ... Finance your emergency fund. Then think about purchasing a home.'
3. Save as close to a 20% down payment as you can. 'The more money you can put down toward the initial purchase of a home, the lower your monthly mortgage payment. That's because you will need to borrow less money to finance the home. This can save you tens of thousands of dollars over the life of the loan.'
4. Shop around for a mortgage. 'Comparison shopping is essential ... Call more than one bank or mortgage broker. Look at online mortgage comparison and informational sites, such as Bankrate.com and the CFPB's Know Before You Owe.'
5. Stay consistent with your budget. 'Try not to get too emotionally attached to any specific house. There is always another home to buy. It's easier to drive a hard bargain when you are comfortable walking away.'
8. Make sure you're protected.
Nobody wants to deal with insurance -- it's complex, confusing, and generally not fun to talk about, so it often gets put on the back burner.
However, 'It's absolutely essential if you plan on taking control and protecting your finances,' Olen and Pollack write. 'Insurance is a complicated but necessary evil ... In exchange for a monthly premium, insurance can protect us from the financial fallout of tragedy.'
Start by looking at the the type of insurance you should buy at every age. If you have a family, consider the three most important types to protect your family for years to come: disability, life, and long-term care insurance.
9. Remember the index card.
Keep things simple and stick with the basics.
'The only defence against the onslaught of information and the warp speed at which we're expected to process it is still good old-fashioned simplicity and common sense,' they write. 'When in doubt, the index card is there to remind you of that.'