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Financial Index Card: All You Need for Your Money Management

March 30, 2020 · 9 minute read

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Financial Index Card: All You Need for Your Money Management

In 2013, Harold Pollack, PhD, a social scientist at the University of Chicago, posted a photo of an index card online. On the card? The only financial advice he said anyone ever needed to know.

The nine simple tips on the card resonated with the public and the photo went viral. Here’s a closer look at Pollack’s story and the advice he had to offer.

The Story Behind the Card

The story of the index card began when Pollack was interviewing personal finance writer Helaine Olen. While speaking with Olen, Pollack offered his own two cents on the personal financial industry. Pollack made a joking claim that all need-to-know financial information could fit on an index card, and better, that it was available free from the library.

Pollack’s off-the-cuff comment—at the time he hadn’t actually produced this index card—generated a lot of audience commentary with investors wondering what his advice would be. Pollack grabbed a 4-by-6 card, wrote down nine tips, snapped a photo, and posted it online.

The concept was so popular that Pollack teamed up with Olen to write a book, The Index Card: Why Personal Advice Doesn’t Have to Be Complicated.

Here are the nine tips Pollack offered on the original card and an explanation of what each one means:

1. Maxing your 401(k) or equivalent employee contribution

A traditional 401(k) is a retirement plan that offers various investment options and is often offered via your employer. (Not all employers offer 401(k)s as a benefit.) Sometimes your employer will make matching contributions to your 401(k) as well.

What makes 401(k)s particularly useful are the tax advantages that they offer. You can fund 401(k)s with pre-tax money.

Contributions can be taken straight from your paycheck before you pay any income tax, which in turn lowers your taxable income and potentially your tax bill that year.

Once inside the 401(k), your money grows tax-deferred. Your employer will likely offer a number of investment options for you to choose from such as mutual funds or target-date funds.

Because you aren’t paying taxes yet, you’re able to take extra advantage of compounding interest—the interest you earn on your returns—because the money you would otherwise be spending on taxes is left in your account.

When you make withdrawals from your 401(k), you owe income tax.

The more money you can put into your 401(k), the more money you have at work for you. If your employer offers matching funds, aim to at least save the minimum amount to max out the match if you can.

After age 50, you can start to make catch-up contributions, which increases the amount you’re able to save.

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2. Buying Inexpensive, Well-Diversified Mutual Funds

A mutual fund takes a pool of money from investors and buys a basket of securities such as stocks or bonds. They are an important tool investors can use to diversify their portfolios.

Diversification is a way to help reduce risk in your portfolio. Imagine that you had a portfolio that was only invested in one stock. If that company does poorly, your entire portfolio may suffer. Now imagine that you invested in 100 stocks. If one of the stocks does poorly, its effect on the portfolio as a whole will likely be much smaller.

Investors may choose to invest in a target date fund, which holds a diverse selection of stocks and bonds. Investors may use these funds to work toward a goal a number of years down the line.

Say you will retire in 2050, you may choose a target date fund with a provider called the 2050 Fund.

As the target date approaches—aka the date at which you’ll likely need your money—the asset allocation inside the fund will typically shift to become more conservative. For example, the fund might shift from stocks to a heavier allocation in bonds.

Mutual funds typically charge fees to pay for management costs. The fees may take a bite out of your eventual return. Consider looking for target funds that charge lower fees to minimize the amount that you’ll end up paying.

3. Not buying or selling an individual security

Buying and selling individual stocks can be tricky. It’s difficult to know how an individual stock will behave, and choosing stocks can take a lot of time and research. It may be easier for investors to use mutual funds, exchange-traded funds, or index funds to gain exposure to many different stocks.

Investors who are interested in adding individual stocks to their portfolio may want to consider their overall asset allocation and diversification strategy to be sure that the stock is the right fit.

4. Saving 20% of your money

Pollack’s savings tip dovetails nicely with a common rule of thumb known as the 50/30/20 rule. This rule states that 50 percent of your income should be used to cover your needs, such as car payments, groceries, housing, and utilities. Next, 30 percent of your spending should be used to cover your wants, such as eating out, vacations, or hobbies.

The final 20 percent is the money you save, which can be broken down into three categories. It can be the money used for paying down debts, the money you use to build an emergency fund, or the money you use to save for retirement.

Some recommend saving 12 to 15 percent for retirement and put the remaining five to eight percent towards paying off debt and building an emergency fund. You can keep track of your savings with various mobile and online savings and budgeting tools.

If it’s not possible for you to save 20 percent of your income—21% of Americans can’t save more than 15% , much less 20—the bottom-line is to save as much as you are able.

5. Paying your credit card balance in full every month

Credit cards can be extremely useful tools. They make reserving things like booking a hotel or renting a car easier, and they can help us pay for things that we may otherwise be unable to afford immediately.

That said, if you start to carry a credit card balance from month to month, your credit card debt may quickly spiral out of control. The average annual percentage rate, or APR, for credit card in 2019 hovers above 17 percent. This rate represents that amount of interest that you’ll pay on the balance of your credit card.

What’s more, many credit cards only require that you make a minimum payment each month—often less than the balance you’re carrying. And if you only make minimum payments, your balance will continue to grow and you’ll owe ever-increasing amounts of money and make ever-increasing interest payments.

To avoid being sucked into this spiral of revolving credit, consider trying to spend only what you can afford each month on your credit card and paying off your balance in full, if possible.

6. Maximizing tax-advantaged savings vehicles like Roth, SEP, and 529 accounts

A 401(k) is not your only option for tax-advantaged accounts. If you’ve earned income—and even if you already have a 401(k)—you can take advantage of traditional or Roth IRAs.

Contributions to traditional IRAs are made pre-tax and then grow tax-deferred. Contributions to Roth IRAs are made after-tax and grow without being taxed.

Withdrawals from Roth accounts, when meeting specific criteria, are not subject to income tax.

Small business or self-employed workers can take advantage of SEP IRAs, which allow employers to make contributions in an employee’s name.

A 529 plan is a tax-advantaged account that helps people save to cover qualified education expenses, such as college tuition. These plans are sponsored by states, state agencies, and educational institutions. Contributions to 529 plans are made with after-tax money.

However, savings inside the account grow without being taxed and qualified withdrawals are not subject to tax. Contributions are not federally deductible, but some states allow deductions on state income tax.

Like 401(k)s, these tax-advantaged accounts allow you to supercharge your savings and can make your money work harder for you.

7. Paying attention to fees and avoiding actively managed funds

Actively-managed funds are run by portfolio managers who are trying to find ways to beat market returns. This requires time and manpower, both of which can be expensive.

Actively-managed funds pass this expense on to investors in the form of fees. Investors do have an alternative in index funds, which try to match the returns of an index, such as the S&P 500. They do so by buying all, or nearly all of the securities included in the index.

Managing this type of fund takes less time and effort and is therefore typically cheaper than active management. As a result, index funds often have lower fees than actively-managed funds.

The potential to outperform the market may make actively managed funds sound pretty tempting. With an index fund you’re likely not going to do better than the market; the funds are actually aiming to mirror the market.

However, despite the temptation to chase big returns, there isn’t a lot of evidence that active managers really outperform that market with enough consistency to make their higher fees worth it.

8. Making financial advisors commit to the fiduciary standard

A fiduciary standard refers to the duty of financial advisors to always work in their customers’ best interests. That may seem like a no-brainer. Wouldn’t all financial advisors do that? Yet, there are myriad opportunities for conflicts of interest to arise in relationships between financial advisors and investors.

For example, advisors may be paid a commission when their clients invest in certain funds. If advisors don’t disclose that information, clients can’t be sure the advisor is suggesting investments because they’re the right fit for their portfolio or because the advisor is paid to use them. Advisors adhering to a fiduciary standard disclose conflicts of interest or avoid them altogether.

Since Pollack’s index card made waves in 2013, the U.S. Department of Labor has tried to issue regulations that all financial advisors maintain a fiduciary standard when overseeing retirement accounts.

The Fifth Circuit Court decided that this ruling was an overreach and shot it down in 2018. It appears that the DOL plans to try to revive the rule at some point. However, until they do, investors can ask their advisors whether they adhere to a fiduciary standard, and if they don’t, ask them to commit to doing so.

Another option: Investors may turn to fee-only advisors, who accept fees from their clients as their only form of compensation. Fee-only advisors by definition operate under a fiduciary standard.

9. Promoting social insurance programs to help people when things go wrong

A rising tide lifts all ships. This final tip is about supporting social programs like Social Security, Medicare, and the Supplemental Nutrition Assistance Program, which help keep the population healthy as a whole—financially and literally..

You likely already pay into programs like these through Social Security and Medicare taxes. These are taken straight out of your paycheck if you’re employed, or if you’re self-employed you pay them yourself. (And even the savviest of investors may need to fall back on government support.)

In 2017, Pollack acknowledged his financial tips were directed towards people of at least middle class means, so he came up with a second index card .

What’s Missing?

Although Pollack’s advice covers a lot, there’s only so much you can fit on an index card. Tips like setting specific financial goals, simplifying your finances, keeping track of your spending (not just your savings), and setting a realistic budget, are also helpful in establishing and maintaining financial wellness.

There are ways to tackle these tips, as well. With SoFi Checking and Savings®, a checking and savings account, you can keep track of your spending in your dashboard within the app.

To learn more about how to keep your financial life organized and achieve your goals, download the SoFi app.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.
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