A simple assertion for most working individuals, myself included, is that as a cohort, we engage in labor-intensive activities to reap financial rewards to seek and establish market buying power. Gone are the days when one could barter a chair for vegetables or rare-metal coins for a three-course meal. Instead, transactions are now based on denominations and multiples of “money,” allowing for clarity, uniformity, and transparency. Reciprocated five times a week, every morning, working individuals wake up with a plan to arrive and perform the necessary tasks at hand to earn a rewarding paycheck at the end of the week. Of course, what happens with that paycheck is the beholder’s prerogative, but what if the beholder had little personal finance background and was looking for a place to start. From this spot, I started and applied something I heard in Freakonomics, investigated further, and altered it to fit my needs. The episode was Everything You Always Wanted to Know About Money (But Were Afraid to Ask) and the tool- an index card.
The podcast discusses an index card created by Dr. Harold Pollack, Helen Ross Professor at The University of Chicago, Crown Family School of Social Work, Policy, and Practice. The index card served as the impetus for the book Dr. Pollack coauthored with Helaine Olen called The Index Card: Why Personal Finance Doesn’t Have to Be Complicated. A Must Read. Paul Solman interviews Dr. Pollack in a PBS Newshour segment, narrating the story behind and the index card details.
The Index Card is divided into Ten Rules which are as follows-
- Strive to save 10-20% of your income.
- Pay your credit card balance in full every month.
- Max out your 401-k and other tax-advantaged savings accounts.
- Never buy or sell individual stocks.
- Buy inexpensive, well-diversified indexed mutual funds and exchange-traded funds.
- Make your financial professional commit to a fiduciary standard.
- Buy a home when you are financially ready.
- Insurance- Make sure you are protected.
- Do what you can to support the social safety net.
- Remember the index card.
Of the ten, numbers one and ten are understandably tough to accomplish. While the latter can be achieved with a rigorous, disciplined, and dogmatic agenda, the former involves a commitment towards a discipline that might include short-term pain with the hope of future rewards. If the 10-20% range seems unthinkable, even a single-digit contribution towards saving income creates an appropriate foundation to build something. For example, let’s say one earns $990 per week. Why $990? According to the Bureau of Labor Statistics, as of July 26, 2021, the median weekly earnings was $990. Noting that the median weekly earnings account for pre-tax income and adding the 28.3% tax wedge, “a measure of the tax on labour income, which includes the tax paid by both the employee and the employer,” from the OECD, one can derive that the median weekly take-home pay turns out to be around $700. Saving 10-20% of that $700 entails saving between $70 and $140.
While $70-$140 might seem like a lot, a simple way to approach it would be through a cup of joe. So let say, every morning, on your drive to work, you stop at your favorite drive-thru, gas station, or barista and buy a hot cup of coffee, light cream, and two sugars for $3. You work five days a week, and a coffee every day adds up to $15 at the end of the week. Now that $15 might not be $70, but it still adds up to around 1.5% of your total income. Thus, when analyzed through the perspective of a larger goal, small habits can help clarify their importance. For example, if the larger goal is to save 10-20% of your income, I would argue that contributing even 1.5% is better than contributing nothing. Moreover, I would challenge readers to evaluate their spending to identify patterns to help move the needle higher from 1.5%. Spending is essential, but religiously spending on refinable behavior creates fissures that can be long-lasting.
Two other rules I would like to provide my take on- rule 2 and rule 4. First, rule 2. Instead of paying your credit card balance in full every month, which I think is more reactionary, a proactive measure would be opening and monitoring your credit card account daily. I use my credit card almost for every purchase, big or small. I find it convenient than carrying and using cash. Since I use my credit card every day, I open my account every morning at sunrise, and every time the balance reads over $100 or $150, I pay it off, not waiting for the following balance due date. By isolating my purchases on a credit card, I can better monitor the dollar value of spending categories and accumulate rewards points. Those rewards points, depending on the credit card provider, can be reserved and translated to cash. Why not use that mechanism to benefit rule 1. Permitting that the credit card provider allows the accumulation of rewards points, the credit card user can significantly benefit from rewards points accumulation if the balance is left alone. While this practice takes a disciplined and daily approach with a credit card, a tricky financial instrument, I would argue that this curated perspective allows one to be on top of their cash flows and better monitor the associated ebbs and flows.
Second, rule 4. I would argue that there is always a place for individuals stocks, but what that requires is due diligence, and as my favorite Financial Commentator, Mr. Tom Keene of Bloomberg Surveillance, would say, “courage.” Picking a stock is extremely difficult. Stock picking resources discuss why a specific stock is better than the other and predict winners and losers. Instead of looking at it as a game with winners and losers, what if you applied the following Peter Lynch method of Invest in What You Know. According to Maria Crawford Scott, former editor of the AAII Journal, the famed Magellan Fund Manager was “a strong advocate of investing in companies with which one is familiar, or whose products or services are relatively easy to understand.” Much like Mr. Lynch, I apply a similar framework to my investing thesis when looking at stocks, try to find stories that make sense, and invest in things I know or can develop an understanding of. To get a sense of my current holdings, click here. Since starting in Q3 2018, I have held around 57 stocks, which I have narrowed to 27. I double-down on Rule 5 with my tax-advantaged accounts and invest in individual stocks through simple brokerage accounts.
Having this approach does isolate me from investing in cryptocurrency. Much like the bond and fixed income market, I do not understand cryptocurrency as an asset, so do not dabble in it. As far as I know, no cryptocurrency is underscored with financial disclosures speaking to the health of the underlying asset. Moody’s Corporation (NYSE: MCO) provides industry-accepted ratings for the bond and fixed income market to formulate a researched opinion, whereas there is no equivalent for the crypto market. Even though the broader story of cryptocurrency speaks to market disruption and innovation, the asset class appears to me as a financially flawed asset based on sentiment and hearsay. Economics 101 teaches us that there must be a buyer and a seller for a transaction to occur. While there might be current buyers and sellers of cryptocurrency, I do pause to wonder how much buying and selling can continue with an asset class where certain coins have a limited supply.
Overall, personal finance is supposed to be, as the name suggests- personal. Therefore, what applies to me cannot be superimposed or translated onto every other person. What is entirely applicable is keeping things simple like the rules suggested on the index card and adjusting them accordingly to fit our needs. As working individuals, we dedicate eight hours (sometimes more) to the tasks at hand to reward ourselves with a paycheck that benefits our desires and needs. A strategic and disciplined plan of personal finance going further on the x-axis can catalyze equity. The accounting equation Assets = Liabilities + Equity is significant in further driving this point. By keeping Liabilities to a minimum, Assets can be translated to Equity to balance the equation. Therefore, equity can be beneficial, especially in the stock market, through individual stocks and low-cost funds.
If you like this, I think you should give Equity Building- Beetle Style and Savings Account-A Relic of the Past a read. The former uses Assets and Liabilities across three different age groups and lessons learned from a Beetle’s Horn. In contrast, the latter speaks to the history of Saving Account and how a current savings account is a hollow version of its predecessor.