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.
The list:
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.
In particular, the ten say NOTHING about growing your income, starting a side hustle, or anything else about making money. Seems like they ignored a big part of money success.
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.
If you want to know more about the book, here’s my summary. This book easily made it onto my list of the top five personal finance books of all time.
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.
Laurie@ThreeYear says
I much prefer the Richest Man in Babylon rules. Thanks for the reprint. It’s been awhile since I read them. I think I’ll go back and reread that book. Your Earn, Save, Invest statements gets to the heart of it. 🙂
Kristine says
I agree with you! The index card rules feel repetitive and don’t seem to encourage contemplating strategies. Very finance 101. I like the ESI Money sentence the most. 🙂
Mack says
Amazing Post.
Thanks for sharing.
Keep it up.
Mr. Freaky Frugal says
ESI Money – I like your rules the best! It just doesn’t get any simpler than that.
Now if we could just find a way to get more people to follow the rules. 🙂
FullTimeFinance says
I think the remember the card item is actually incredibly important. As you yourself have noted the hardest part of the three is keeping at it. That being said most of these lists are targeted at a different audience then you or myself. So the idea is some things are probably embellished just to get people over the hump to start, rather then a strict guideline. For example home ownership as an aspiration goal , unrealistic return assumptions, or people shouldn’t retire until 70. These seem to be the get your tail moving message rather then a rule.
Erik @ The Mastermind Within says
Simplicity is better. I like your 3 sentences 🙂
Dads Dollars Debts says
Good advice all around. The insurance can not be understated. I am currently dealing with a total loss and am happy to have good insurance (though others have even better coverage). Without this coverage my stress level would be through the roof right now.
HBW says
Thanks for the overview – I like your three and your summary statement is PERFECT. No need for buying books when you have your blog =)
Dave says
It is not a bad list. Like the other posters, I rather the richest man in babaylon. It is less redundant. The simpler the better. I also agree with being properly insured to protect your assets.
Richard Ryan says
Another vote for The Richest Man in Babylon. I insisted that all three of my sons read it.
One didn’t need to (he was hard-wired to save from the day he was born).
One absorbed it and I’ve been very pleased to see the change.
One read it, but I don’t know if it’s had an impact, I have yet to see it.
Kyle Brown says
In response to the rule about maximizing contributions to tax advantaged savings accounts, you said ‘I maxed out all my tax-advantaged accounts and wish I had put a bit of that money into taxable accounts for easier access.’
May I suggest this as a topic for a future post? Tax advantaged accounts are rightly touted as great tools, but I’m curious to hear your thoughts about how they relate to people who are targeting ‘retirement’ before age 59.5. Maybe the answer is as simple as ‘contribute to a taxable account.’
There seem to be conflicting objectives in the advice ‘max out your 401(k) so that you can retire early.
ESI says
I’ll add it to my list of future topics. 😉
Ways To Buid Wealth says
To get money before 59.5 without a 10% penalty isn’t all that difficult.
The Substantially Equal Periodic Payments (SEPP) rule is the exception to get into your IRA when you retire. You essentially “annuitize” your IRA from the when you retire until 59 1/2. Your life expectancy is calculated, and then take out an = amount each year = to the balance of the IRA divided by your life expectancy. Once started, you must continue to take these withdrawals for at minimum 5 years, or until age 59 1/2. When you do this, you DO NOT have to pay the penalty
Your 401k can be accessed penalty free after 55 when you leave your employer, but if you role that plan over this benefit is forfeited.
Also there are numerous exceptions to the 10% penalty
Unreimbursed medical expenses > 7.5% of your adjusted gross income (which may not be that high if you’re retired)
Inherited IRAs. (if your mother leaves you her IRA, you can take out the money before you get to 59 1/2)
Pay for medical insurance, Disability
Qualified Higher Education Expenses- for you, your kids, or your grandkids
A First Home. Keep in mind the IRS definition of a “first home” is that you haven’t owned one for the last 2 years. Also, it doesn’t have to be YOUR first home, it can be your kid’s or grandkid’s first home too. See how this works? You pull out $8K from your IRA to pay toward their home, and they gift you $8K for Christmas. No 10% due. Ethical? Perhaps not. Legal? Certainly. Keep in mind there is a $10K limit.
IRS Levy
Reservist Distribution. A military reservist can withdraw money while activated without paying the 10% penalty.
However you are right in that if you retire before 59.5 it would best be wise to drain a taxable account first and then a 457 before touching the others. Nevertheless if you are maxing out the other accounts it would be most advantageous to do that.
ESI says
Have you actually used the SEPP option?
The reason I ask is that I’ve never met anyone who has, but there are lots of people with the “it’s not that difficult” opinion. So I’m wondering if you’re speaking from experience or just hypothesizing.
Ways To Buid Wealth says
I personally have not, but it makes filing your taxes no more difficult than normal. You could even run through TurboTax’s self guided feature and answer each question truthfully and your done. It would get funky if you missed the deadline on a distribution or something. If that happen I have no clue what kind of nonsense one would need to go through.
Ways To Buid Wealth says
Excuse my typos
ESI says
I asked because anything involving government rules and taxes (potentially) is usually a nightmare.
Dwayne says
I was told by my 401k provider that if you go the SEPP route you have to take those equal payments for 5 years minimum… even if you turn 59.5 during those 5 years. That’s what scared me away from doing it. Being “forced” to take some predetermined distribution could put you in a bad place if the markets tank during those 5 years.
The seemingly better and more likely route for us, since we’re currently retired now at 57, is to use the “take a lump sum, roll the rest over into an IRA” option. The only caveat is you then have to wait until 59.5 to take more as needed.
We plan to exercise extreme flexibility in regard to our 401k draws based on market performance. No gains=no draw.
BTW Great post ESI!!
Mile says
Just only need to follow one rule.
Save 50% of your income and invest it in index funds.
It cracks me up with everyone doing “side hustles”,it’s called a second job and the reason you need to do them is because you didn’t follow rule one.
Specialize your knowledge base and don’t waste time reading about what other people do,love what you do and the money will come,see rule one.
I read so many blogs all saying exactly the same thing and using it as their “side hustle”.Dont blog about,become a financial advisor.
About me;save 50% gross pay,FI for a while but love what I do so don’t see quitting soon!
Ways To Build Wealth says
But side hustle sounds so much cooler. Haha
mike says
Ways to build wealth,
Not really, when people tell me they have a side hustle it just shouts out insecurity and if they make their “side hustle’ into a fulltime job they never call it a fulltime hustle. Just like the term life hacks, trying to make themselves sound smarter than they are.
Also you visit a lot of these bloggers sites and they are full of advertising and financing options that no one in their right mind would ever use on their journey to FIRE ,once I see that I immediately put it on my do not visit again list. They claim to help people on their journey but their sites advertising is a stunning example of financial hypocracy.
All is good in the name of “side hustle”
Miles
Ways To Buid Wealth says
I like the way you said “full time hustle”
Also I can’t agree more about the whole leading people astray. I have personally been itching to get private advertisers on my blog but the only ones that contact me are basically scams and If I wouldn’t use them myself then they don’t make the cut. Sounds like we are two like minded people.
J Savvy says
“Earn, save, and invest as much as you can for as long as you can.”
Who needs an index card when you can have have a sticky note!
Mr Groovy says
Love all three contributions to the annals of simplicity. But yours is the simplest and best. Bravo, Mr ESI.
Alaska49 says
There are free copies of The Richest Man in Babylon all over the web. Here is one version I like: https://ia600307.us.archive.org/2/items/RichestManInBabylon_650/the_richest_man_in_babylon.pdf
Good reading ya’ll
Jason@WinningPersonalFinance says
The initial 10 seemed a little lacking to me. 10%-20% is arbitrary. I’d be okay with at least 10% but if you make 20% a “best in class” amount it may actually discourage saving more. I also think it’s possible for a financial advisor to be a fiduciary but not actually be worth their cost. Are they really going to fire themselves for being too expensive if it’s in your best interests?
Your three rules are spot on though. Nice job.
Deanna says
I like your 3 rules. They are doable and you, obviously, have proven they work. I really am valuing #1 right now. I am starting late (mid 40’s). I am already doing #2 & 3 and I see the real way to speed this thing up is by growing my income!
Sean @ FrugalMoneyMan says
Great breakdown ESI!
The Richest Man in Babylon is definitely one of my Top 3 favorite personal finance books. I am also a big believer in your first step. As important as investing/compound interest is, let’s make it even simpler. The more money you earn, the more money you can invest. I always like to think of my investments in the light of “how can I add another 0 at the end of that statement?” It leaves me in a constant growth mentality of wanting to become better and learn more, so that eventually those skills can produce more money and “make thy purse fatter.”
Thanks for sharing that condensed list!
Jake Jones says
I know I will get flack for this (since I blog about personal finance), but I am just now about to listen to “The Richest Man in Babylon”. Seeing the list of rules makes me excited to hear the stories.
Also, I have to agree with the statement that it seems like the index card idea makes becoming rich easy. I am only working on getting out of debt at the moment and I can tell you that in itself has been painful over 10 months. Just wait til I watch slowly growing investments. 🙂
Persistence and consistency is key, I think.