A few months ago the Freakonomics podcast ran an episode titled “Everything You Wanted to Know about Money But Were Afraid to Ask.”
A major part of the show featured the author of The Index Card: Why Personal Finance Doesn’t Have to Be Complicated.
The book, a best-seller for sure, basically said that everything anyone needs to know about money can be written on an index card.
And that’s what the author did. He wrote out ten rules that were supposed to cover all the fundamental elements of good financial management.
I thought I’d share the ten rules, give my thoughts on them, and suggest an even shorter list that I believe will work better.
Why a Book?
Before we get to the ten rules, let’s address the elephant in the room: if all we need is ten rules written on an index card, what’s the need for a whole book?
As you might imagine, we aren’t the only ones to ask this question. The author does it himself:
“If the rules are so simple, why do you need more than an index card — heck, a book — to explain them?”
To make a boatload of money?
Ha! That’s one answer for sure and actually may be part of the reason for writing it.
But here’s how the author addresses the question:
“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.”
I can’t argue with these thoughts. Specifically:
- Yes, you can simplify the basics of personal finance success to a handful of topics (as I will in a minute) but you need to provide more explanation. Otherwise there’s not enough detail for people to act upon.
- Part of the process is education. There are vultures out there in the financial services industry who simply want to make your money their money. As such, you need to be educated about how to manage your money so they can’t take advantage of you. And you don’t get educated to the extent you need to be by reading a simple index card.
So while the index card idea is popular (after all, it promises two things people love: 1) becoming wealthy and 2) not putting a lot of time and effort into doing so (in other words, implying it’s easy to become wealthy)) the details do need explaining to really have an impact.
And BTW, the book is a very easy read — it’s small in size and a bit over 200 pages. Yes, it’s more than just a card but not really daunting compared to most books.
Ten Rules from The Index Card
Now that we’ve covered that, let’s move on to the rules.
1. Strive to save 10 to 20 percent of your income.
2. Pay your credit card balance in full every month.
3. Max out your 401k and other tax-advantaged savings accounts.
4. Never buy or sell individual stocks.
5. Buy inexpensive, well-diversified index mutual funds and exchange-traded funds.
6. Make your financial advisor commit to the fiduciary standard.
7. Buy a home when you are financially ready (at least 20% down).
8. Insurance — make sure you’re protected
9. Do what you can to support the social safety net.
10. Remember the index card.
Pretty basic, right?
There’s probably nothing new here that most ESI Money readers haven’t seen and/or put into practice.
Kind of Personal Finance 101. But I think that’s the point. Being successful in money management isn’t that complicated. If you get the basics right, you go a long way to being successful.
My Thoughts on the Ten
Here’s my take on the ten rules:
- Strive to save 10 to 20 percent of your income. Hard to disagree with this, though I might suggest a higher amount. The podcast noted that the author used to only list 20% then changed it to “10 to 20 percent” because he thought 20% was too high for some people. FWIW, I was able to hit 36% and many early retirement bloggers do much more, so 20% doesn’t seem overly aggressive.
- Pay your credit card balance in full every month. Of course. But I’d add to be sure and use credit cards with rewards to make some extra money. No use leaving free money on the table.
- Max out your 401k and other tax-advantaged savings accounts. The 401k up to the full match is a no-brainer. After that, it depends what you are trying to accomplish and by when. I maxed out all my tax-advantaged accounts and wish I had put a bit of that money into taxable accounts for easier access.
- Never buy or sell individual stocks. This one seems unnecessary. Rule #5 seems to cover it.
- Buy inexpensive, well-diversified index mutual funds and exchange-traded funds. Love this one as I have used index funds for decades.
- Make your financial advisor commit to the fiduciary standard. I don’t like this. I’d prefer, “Educate yourself to become your own financial advisor.” Even if you hire and advisor, you need to know the basics yourself to make sure you’re not taken advantage of.
- Buy a home when you are financially ready. I’d say this is “ok”, but not great. It implies that everyone should buy a home and I don’t think that’s a correct assumption. The book does say people should buy a house they can afford (which leaves room in a budget should an emergency arise) which IMO is the most important home-buying rule.
- Insurance — make sure you’re protected. Yes, of course.
- Do what you can to support the social safety net. They get a little political here, but I can live with it. My support has been contributing the max to Social Security for 20+ years.
- Remember the index card. A bit self-serving but I do agree that those who review their goals frequently do better at achieving them.
Overall, not bad. But I think there are better options.
I think there’s some fluff in here as well. We’ll get to the specifics of my preferences in a minute.
Seven Cures from The Richest Man in Babylon
Before we get to my list of “rules”, let’s consider another option.
IMO, The Richest Man in Babylon has a better list of “rules” with their seven “cures”.
Here they are:
Cure #1: Start Thy Purse to Fattening – Save 10% of your income.
Cure #2: Control Thy Expenses – Keep spending low.
Cure #3: Make Thy Gold Multiply – Invest to grow your wealth.
Cure #4: Guard Thy Treasures from Loss – Don’t lose money when you invest – protect your principal.
Cure #5: Make of Thy Dwelling a Profitable Investment – Own your own home.
Cure #6: Insure a Future Income – Turn your wealth into a retirement income.
Cure #7: Increase Thy Ability to Earn – Study to become wiser so you can make more money and manage it better.
Three Sentences from ESI Money
Now let’s get the ten rules and seven cures down to an even smaller list, shall we?
Certainly I can name that tune in fewer notes. 🙂
With that in mind, here are my three sentences that lead to wealth:
- Earn as much as possible through growing your career and developing side hustles.
- Save at least 25% of your income through practicing moderate and selective frugality.
- Invest initially for growth using low cost index funds then later consider diversifying into other investments like real estate, dividend investing, and the like based on your goals.
To me, these are short but also give enough detail to provide some direction. Of course we could summarize them into one sentence (as I did in an earlier post) as follows:
Earn, save, and invest as much as you can for as long as you can.
That’s my two cents. Let me know what you think about The Index Card, The Richest Man in Babylon, and my even shorter suggestions for personal finance success.
P.S. For those who prefer a video version of this post, see the ESI Money YouTube channel.