The Index Card: Why Personal Finance Doesn't Have to Be ComplicatedPaperback (2024)

Read an Excerpt

INTRODUCTION

SAM’S STORY

A few years ago, Sam received an inheritance after his dad died. Grief stricken and overwhelmed by the demands of work, marriage, and raising children, he placed the money in a local bank’s savings account. Every so often, Sam would make an effort to think about the money. He knew he should invest it in . . . well, something. A few times a year a very official-sounding officer from the bank, someone called a wealth officer, would contact him about it, suggesting a complimentary meeting.

So Sam would sit down at the bank, and an advisor would offer him coffee and muffins and talk to him about his children, his job, and where he next planned to go on vacation. Then he would offer a solution, the next-best thing to a guarantee, he said, as he started talking really fast about expected rates of return, risk, and the importance of the stock market.

The wealth officer, or wealth specialist, or whatever the heck he was called, wanted Sam to sign papers right there and then so the money could get to work, as he put it. But Sam held off. He knew there were unscrupulous money people out there, and he wanted to do his due diligence.

So Sam would call friends, and friends of those friends. Sometimes those friends were in finance or married to people in finance, and they would make suggestions based on what they had picked up from their jobs or their husbands or wives over the years. One offered to manage the money for him altogether but didn’t say how he would be compensated for his time and effort. Another said he should call Vanguard and put the money in something called index funds. Bonds, advised another. Others talked about allocating different percentages to different investments. Still another pal suggested a financial advisor named Kelly who had done amazing things for him.

Other people told Sam horror stories. There was the friend who had been persuaded to invest in tech stocks in 1999 and lost “a bundle,” as he put it. A coworker told him about the friend of the family who seemed so kind but put her mom in some sort of investment that didn’t do what it was supposed to and left her in a worse position than when she started out. Several people mentioned Bernie Madoff.

It was overwhelming. It seemed as if everyone contradicted one another. And they were all so sure . . . sure that they had the secret to how to make money grow or that it was all a rip-off. And Sam was scared. He needed that money. He wanted to send his children to college. He couldn’t bring himself to risk losing it.

So Sam ended up doing . . . nothing.

Not only did Sam’s nest egg end up losing a chunk of its value to inflation, but the stock market also did well during this period. Sam didn’t benefit from that run-up. He wasn’t running anywhere. He was stuck doing nothing because the combination of the myriad options and uncertainties of money, the economy, and the financial services industry had all but paralyzed him.

THE POUND FOOLISH STORY

Sam is hardly alone. Statistics and studies show that many of us choose not to deal or take a hands-on approach when it comes to our finances.

The roller coaster that is our economy only makes us even more hesitant to take control of our financial lives. In her book Pound Foolish: Exposing the Dark Side of the Personal Finance Industry, Helaine told the story of how for all too many of us wages began to stagnate and fall, even as jobs and paychecks became less secure. At the same time, almost all the income and wealth gains since the end of the Great Recession have gone to the wealthiest.

We feel as if we are falling behind because, frankly, we are, often through no fault of our own.

We’re convinced any financial mistake will send us on a downward spiral we won’t be able to recover from. Many of us walk around with a constant and growing sense that financial doom can arrive at any moment.

So like Sam we fret about our finances but remain frozen. Money feels complicated, boring, scary, and overwhelming all at once. Who wants to wade through competing budget apps? We want to be careful financial stewards but instead get caught up playing a losing game of financial Whac-A-Mole.

Desperate, we tell ourselves that someone out there must have the answer. All too many people working in the financial services industry market themselves as our friends who have special insights into the world of finance and future events. Even as we don’t trust many of the financial types we encounter, we are secretly convinced there is one person out there, one honest man or woman, who can identify exactly that magic investment for us, and guarantee that our money will grow, and that nothing will go wrong, not ever.

But as Pound Foolish showed, many of our financial problems were not the result of our financial missteps. They were caused by economic trends and recessions and then compounded by the failure of financial regulators to crack down on bad behavior by those who claimed to be offering us help.

Many of Pound Foolish’s readers contacted Helaine to thank her for not laying all the blame of their financial woes on their shoulders, and just as many had a simple follow-up question: If we all need to be wary of the financial services industry, and yet we also need to be proactive about our finances, what do we do?

For a long time, Helaine had no answer to that question.

Fortunately, Harold did.

HAROLD’S STORY

Like Helaine, Harold does not work in the financial services industry. A professor at the University of Chicago and a contributor to a number of media outlets and blogs, including the Washington Post’s Wonkblog, 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. As he explains,

For most of my life, I had no real savings to speak of. I didn’t even own a home until I was forty years old. My wife, Veronica, and I were not poor by any means, but we were starting a family. Like many people our age, we never displayed much financial forward thinking or savvy. I was putting money in my retirement account but basically treading water otherwise. We rented (and subsequently missed out on a historic real estate run-up). I invested in dot-com stocks. You can guess how well that ended. We had child-care expenses. We let some costly debts accumulate. We overpaid for a nice new car when a nice used model would have worked fine.

Then, as so often is the case, life happened.

Around the time of my forty-first birthday, Veronica lost her mother quite suddenly. Veronica’s brother Vincent, who lives with an intellectual disability known as fragile X syndrome, was living with Veronica’s mom. The issues were sad and complicated, but the bottom line was simple. After this untimely death, Vincent needed to move in with us and our two young daughters. Vincent moved in with us and our two young daughters.

Immediately, we felt the financial strain. Veronica had to leave the workforce to address Vincent’s needs. Yet even as our income fell, our expenses mounted. And mounted. Vincent had multiple hospitalizations and medical challenges, many related to his morbid obesity. The La-Z-Boy chair we bought to support his 340-pound frame cost nearly $1,000. Not long after, Veronica developed a serious heart infection that landed her in the cardiac ICU. We weren’t in financial free fall, but things were tight, and we were living a fundamentally different kind of life than we had ever expected.

I needed to quickly find some real answers to right our financial life.

I didn’t have much financial knowledge. I did draw upon the tools of my academic trade to help guide me as I tried to distinguish the useful advice from the useless or worse. I consulted financial advisors and read books and academic papers on managing one’s finances.

Through trial and error, conversations with friends and other academics, I slowly pieced together a new financial regimen. Some was common sense. Some involved teaching myself insights that were actually well known to financial economists but underemphasized in the cacophony put out by the financial services industry. The most important advice was embarrassingly simple. It included the following:

By following these rules and a handful more, we saw our financial picture begin to brighten. Life didn’t change overnight. But it did change. We had more money in the bank. We could afford to take a vacation without fearing what would become of us the next month if we encountered an unexpected home repair. We could exploit the various tax-advantaged savings offerings we could never use before. And putting money away allowed us to get lucky in the stock market; investment returns from the most recent bull market will help pay the college tuition for our daughters. We could refinance our mortgage on favorable terms. We found ourselves able to help out our relatives who were struggling. We felt financially secure, even though our house is still worth notably less than it was when we bought it in 2003.

THE INDEX CARD STORY

When Pound Foolish was published, Harold contacted Helaine and interviewed her on the Reality-Based Community blog. During their Internet chat, Harold offhandedly noted that the fundamental dilemma facing the financial services industry is that the correct advice for most people fits on a three-by-five-inch index card and is available for free at the library.

A surprising number of people wrote to Harold, asking for the card. Because he was speaking metaphorically, this was a problem. But he had promised. So he pulled one of his daughter’s index cards out of her backpack, picked up a pen, and in maybe three minutes wrote down some of the simple and basic financial rules he and Veronica had been living by for the past decade. He then snapped a crude picture with his smartphone. This is what it looked like:

Harold posted the photograph on his blog, and things quickly went viral. There were hundreds of thousands of hits around the Internet. A life coach copied it word for word and read it aloud in a YouTube video. The card was even translated into Romanian. There were also shout-outs from people who have deep knowledge about personal finance, economics, and investments.

“Pollack’s right. Follow these principles and you’ll be in much, much, much better shape than most Americans—or most anyone,” wrote Ezra Klein over at the Washington Post.

“Your new financial advisor is Harold Pollack’s index card,” declared the website Boing Boing.

Marketplace, Forbes, the Huffington Post, Reddit, and Lifehacker discussed it.

The MacArthur fellow Sendhil Mullainathan tweeted the card out. So did top economists like Justin Wolfers. Vanguard mentioned the index card on its blog and e-mailed a picture of it with accompanying information in a “MoneyWhys” New Year’s investment advice message to its subscribers. Money magazine called it one of the “best new money ideas” of 2013. The Minneapolis Star Tribune wrote, “The most notable personal finance writing of 2013 . . . was a handwritten 4 × 6 index card.”

There were thousands of comments and tweets, Facebook likes, and LinkedIn shares. Among the index card’s many fans? Helaine, who knew she finally had an answer for her readers. Rather than people relying on the so-called expert advice of the financial industry to dig them out of their money troubles and provide them with a magic bullet, she and Harold knew instinctively that the answer was much simpler and that it lay not with the experts but within ourselves.

One quick note: You’ll notice we made a few alterations to the original index card. Most of these changes were either organizational or for wording, but a few are more significant. Most important: Harold originally suggested that people save 20 percent of their pretax income. It’s a terrific goal. It’s also all but impossible for many of us. Aiming for 10 to 20 percent is a more realistic long-term strategy. We also eliminated the recommendation to use target-date funds—read on to find out why. Finally, we felt it was important to include insurance and housing, both of which didn’t make it onto the original card.

KEEP IT SIMPLE—THE ONLY STORY YOU NEED TO KNOW

So a question: If the rules are so simple, why do you need more than an index card—heck, a book—to explain them?

Most of us don’t want to follow rules unless we know why they are rules. This book explains how the rules work and why we chose them. They may be simple, but they aren’t always self-explanatory.

Simplicity—as anyone who has ever tried to perfect a golf swing knows—often takes work and insight to achieve. Just telling you financial rules to follow is not the same thing as showing you how to master them so that you can follow them with confidence. And you will need to because . . .

There is a whole industry of financial services advisors out there who make their living by convincing you that it’s naive to believe that simplicity, common sense, and restraint are potent enough weapons with which to deal with the whirlwind of financial chaos facing any of us on any given day. They make their money by convincing you that investing is so complicated, you need to turn it over to them. Or they convince you that they—as insiders, as “professionals”—have the ability to outsmart everyone else and know exactly what investment scheme will outperform the S&P 500.

The financial world offers an odd juxtaposition. The financial products we use in our day-to-day lives—credit cards, mutual funds, mortgages—are often quite complicated. But that doesn’t mean the way we lead our financial lives needs to be equally complicated.

Between Helaine’s experience covering the pitfalls and traps of the financial services industry and Harold’s proven practical solutions to his own financial problems, we can help you take control of your financial life.

So by following the nine simple rules as outlined on our index card, you will

Ready to finally take action and begin the next phase of your financial life?

Good. Let’s get started.