The Index Card

The Index Card

Why Personal Finance Doesn't Have to Be Complicated

Helaine Olen, Harold Pollack

Save 10 to 20 percent of your money—or as much as you can, if you can’t put that much aside. Pay your credit card balance in full every month. Invest in low-cost index funds.

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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.

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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.

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the more the wealthier people at the top of the income ladder spend on high-status luxury goods, the greater the pressure to keep up across the income spectrum. This “trickle-down consumption,” as they call it, reduces the savings rates for all too many of us.

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47 percent of us report that we could not come up with $400 if we needed to without selling something, resorting to increased credit card debt, borrowing from a friend or relative, or taking out a payday loan.

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To build your emergency fund, start stashing away three months of living expenses in an accessible savings account.

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Average credit card debt per U.S. household now exceeds $7,000. But it’s actually worse than that. A little more than half of us manage to pay off our credit card bill in full every month. The rest of us? Take the financial Boy Scouts out of the picture, and the remaining households owe an average of more than $15,000.

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It’s almost certain the secret to our grandparents’ extraordinary financial discipline was a result of the four Ls: lack of access to credit layaway plans loved ones loan sharks

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the real money for credit card issuers is in making sure people who can’t or don’t pay off their bills in full load up on credit, then charging them for the privilege. As a result, they don’t want you to manage your money responsibly.

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There is no better way to simplify and gain control over your financial life than by eliminating high-interest debt. So pay off your credit card and other high-interest loans ASAP. For most of us, this is by far the best investment opportunity we’ll ever receive.

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Pay your credit card in full—like one-third of all customers—and you are indeed receiving an interest-free loan.

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The fastest way of ending your debt drama and getting off the debt treadmill is to devote your resources to paying down the bill with the highest interest rate while paying the required minimum on the rest. When you’ve retired that bill, you move on to the debt with the next-highest interest rate.

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Companies like the Lending Club use sophisticated algorithms to determine who is most likely to pay the money back versus who is in danger of defaulting. It’s a great deal—if you can get it. Unfortunately, many are not able to utilize this method. The people who need help the least are the most likely to get it, thanks to those algorithms.

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You should always borrow from the federal government first. Why? Federal loans offer much more flexibility than privately issued loans.

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The Department of Education provides an informative website, StudentAid, that runs through the options and fine print on student loans and where to go for help.

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consolidating federal student loans is, in the vast majority of cases, a onetime offer. There are no do-overs, unless you return to school and acquire more federal student debt. The best place to begin the process of figuring out if consolidation is right for you is to check out the Department of Education’s website.

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Do not combine federal and private student loans. Why? Once again, federal loans provide more flexibility in the event of financial hardship, and you will lose those benefits if you consolidate those loans with a private lender.

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if you can’t keep up, don’t be an ostrich! Don’t go into default; that is, don’t simply stop paying your monthly bill. The penalty fees will pile up fast. Instead, look for help. A good place to start is the website of the Consumer Financial Protection Bureau,, or the Department of Education.

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If your employer offers a retirement account with a match, this is likely the best shot you will ever get at earning money for doing absolutely nothing. Don’t turn it down.

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you can put up to $5,500 into an IRA and another $1,000 if you are over fifty. The traditional IRA offers an immediate tax deduction, and the money grows tax-free, but withdrawals in retirement will be taxed as though they were earned income, like a 401(k).

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If you have a side gig or you operate your own business, you should open a Simplified Employee Pension IRA (SEP-IRA), which offers similar tax advantages. You can contribute 25 percent of your self-employment income to your SEP-IRA, up to a high limit that in 2015 totaled $53,000.

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myRA. Employees who work for firms that do not offer a retirement investing plan are eligible to contribute through direct deposit. The money is invested in guaranteed, low-expense, low-interest government funds. Your myRA balance is capped at $15,000. When you surpass that amount, the money will be moved to a financial services account.

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If you are financially stretched, consider taking an immediate deduction with the traditional IRA. You can use the savings to pay down credit card debt or pursue some other long-term goal. If you feel more financially secure, go for the Roth.

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You can withdraw money with no penalty to pay for college tuition and medical bills—provided, that is, your unreimbursed bills total more than 10 percent of your income. You can also take $10,000 out to be used toward the purchase of a home.

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you are allowed to “borrow” your own money from a 401(k) for up to five years before you are subject to withdrawal penalties.

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The vast amount of money in retirement accounts is shielded from creditors in the event of bankruptcy.

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College financial aid offices often exclude retirement accounts when determining how much a family can afford to pay for college.

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Not only will individual stock picking not lead you to beat the market, but it will likely leave you behind—possibly way behind.

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Men tend to achieve lower returns than women. It’s not because the ladies are better at stock picking. Rather, women are better at not picking stocks than men. As a result, ladies trade less, saving money on investment fees and boosting their returns. Your great advantage as an investor is that you can be boring and methodical, rising with the overall market and not wasting money on costly trading that tends to underperform the market.

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CNBC’s entire business model is based on encouraging individual stock picking.

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One academic analysis found the best way to make money off his show was to immediately short (that is, bet against) any stock he screams viewers should buy. That’s not totally because Cramer doesn’t get the fundamentals, by the way.

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Alternative investments tend to be highly subject to trends, manias, and erratic or dramatic price swings. They bring unpredictability into your life. You don’t need that.

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Buy and hold a small selection of indexed mutual or exchange-traded funds for the long haul.

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Buffett published a letter to his two sons and one daughter saying how he thought they should invest when he was no longer here. His suggestion? “A very low-cost S&P 500 index fund.”

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There are two ways to invest in index funds. The first is via a mutual fund. The second is what is called an exchange-traded fund (ETF).

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Exchange-traded funds almost always have lower expense ratios but higher trading costs than mutual funds.

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The sooner you think you need the money, the less risk you should assume.

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if you are twenty-five years old and this is your retirement savings, an aggressive growth strategy is likely better.

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Seventy percent: A good S&P 500 index fund.

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Fifteen percent: A small-cap index fund such as the Russell 2000 Index.

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Fifteen percent: A broad-based international fund like Vanguard’s Total International Stock Index Fund. You will want an international fund that has access to both developed—think Europe and parts of Asia—and emerging—think South America, Africa, and other parts of Asia—markets. Make sure that you choose an international fund and not a “global” fund.

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we recommend that your bond allocation roughly equal your age.

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A long-term bond index fund will suffice.

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if you don’t own a house, condo, or other property, you might want to consider putting a small percentage—maybe 5 to 10 percent—of your money into a real estate investment trust index fund, also known as a REIT.

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A fiduciary is a financial advisor who has a legal and regulatory duty to put your interests ahead of his or her own.

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“If it’s free, you are the product.”

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women were treated resoundingly worse than men and were more likely to receive financial advice from someone who didn’t even bother to ask about their overall financial profile.

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There is only one way to avoid falling victim to a fee-based advisor. Never assume someone is a fiduciary. Never assume he doesn’t ever work for commissions. Always ask.

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You need to ask and ask quite specifically: Do you work to the fiduciary standard at all times? This last part, “at all times,” is important.

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Never mind asking about the fiduciary standard. “Ask them to sign an oath stating they will act as fiduciaries,”

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Check most brokers at the Financial Industry Regulatory Authority. If you are thinking of working with a certified financial planner, the CFP Board maintains disciplinary records on its members. State regulatory authorities also maintain databases.

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Currently, half of renters in the United States are paying more than the recommended 30 percent of income for their housing,

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The best type of insurance to protect your loved ones, at the least cost to your pocketbook, is called term insurance.

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Nothing—and we mean nothing—can send you into bankruptcy faster than the lack of health coverage.

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We think longevity annuities are a great idea, provided it is a fixed annuity.

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What you want to avoid are variable annuities and equity annuities, which are also called indexed annuities.

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Most car insurance policies cover rental cars, so you probably don’t need to pay for that when you rent a car.

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When it comes to life insurance, stick with term. When it comes to property insurance, the higher the deductible the better. Always double-check that your hospital and doctor are on your health insurance plan. Adequate liability coverage is at least twice your net worth. Avoid complicated annuities. Keep an emergency fund.

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