The Index Card Theory


Back in 2013 University of Chicago professor, Harold Pollock told freelance journalist Helaine Olen that all you really need to know about personal finance in the United States could be written on one index card. She said really? Prove it. So he did, took a picture of it and sent it to her. The picture went viral.

indexcard

About a year later while out for a walk I thought of something similar and wrote it down on a sheet of standard eight and half by eleven note paper. My resulting picture did not go viral, life is so unfair…

Six Steps

Pollock is a professor at a world renowned University and a famous economist. I am a nobody financial security advisor in a smallish city. While the two pictures differ in the order of operations and the specific names of the vehicles used, I’m a Canadian so I can’t use or talk about things like 401ks or Roth accounts, the point of both of pictures is that personal finance doesn’t need to be complicated.

I call mine The 6 Steps to Financial Freedom and I keep it pretty general in terms of specific investment vehicles. Get out of debt, regulate risk, rule retirement, set-up sinking funds, take control of taxation and leave a legacy. Pollock is a lot more specific in terms of where to invest and what investment vehicles to use but his advice does not always translate across borders. So here is my Canadian Translation of Pollock’s Index card.
1 – Max your 401k or equivalent employee contribution.

    • The 401k is the US version of an employee sponsored Defined Contribution Pension plan. If you’re employer offers one, take advantage of it, it’s free money; you’d be a fool not to.

2 – Buy inexpensive, well diversified mutual funds.

    • This one does cross borders. But it’s important to note that not all mutual funds are equal. Just because you are in a diversified fund does not mean you will make great returns or that you will be taking on the right kind of risk. As a general rule you should be more aggressive (more stock based) at a younger age and more conservative (more bonds based) as you get older. But with interest rates (bonds) at all time lows that conventional wisdom is changing. A good financial advisor can help you determine what mix of stocks and bonds is right for you.

3 – Never buy an individual securities.

    • This one translates too. Pollock’s reasoning is spot on, the person selling the stock always knows more about the company than you do and they have a lot of incentive for you to purchase their stock than someone else’s. Remember, promoters of individual securities are sales people, they have a built in incentive for you to buy what they are selling.

4 – Save 20% of your money.

    • This is just too hard and impractical in a Canadian context. We get a tax break on the first 18% of money saved under the RRSP program but nothing beyond that. We also get taxed on any money taken out of these investments. There is no real incentive to save more than 18% across all of your investment programs. Especially if you’re just going to have to pay taxes on it later.

5 – Pay your credit card balance in full every month.

    • Another one that is pretty much universal. I question why Pollock has put it so low on the list, I think it speaks more to his personal situation that it does as a priority for most people. I doubt Mr. Pollock has much debt at this point in his career. For people who carry debt, or who know what it’s like to live under the crushing weight of high interest payments this should be the number one priority. Carrying any kind of debt, especially debt that grows faster than your investments is the single biggest drag on wealth building in the developed world. It’s like an anchor that keeps pulling you down, cut it away as fast as you can.

6 – Maximize tax advantaged savings vehicles like Roth, SEP and 529 accounts.

    • These are your American Versions of TFSA, RRSP and RESPs. The point is the same, pay less tax now, grow your money and pay less tax later.

7 – Pay attention to fees. Avoid actively managed funds.

    • Actively managed funds generally have higher returns. It’s a trade off that you have to be prepared for. The real issue isn’t the fees; it’s in understanding what you’re paying for and making sure you get value for your money. If the fee is 1% higher but the returns are 2% better than the market, you come out ahead. Rather than trying to avoid fees look for investments with a long track record, at least 10 years, of consistently higher returns than the average and stay invested for the long haul. Nothing erodes your returns faster than jumping in and out of the markets at the wrong time.

8 – Make financial advisor commit to a fiduciary standard.

    • This is the law in Canada. Everyone who sells mutual funds or any kind of investment product must be licensed to do so in their respective province. As a part of licensing we must all commit to a fiduciary code of conduct and can lose are license if we do not follow very specific and at times onerous compliance regulations. That being said many advisors will sign an additional code of conduct directly with you if you ask, in fact we welcome it. It shows you care and that you view us as professionals who are there to help you meet your goals and dreams.

9 – Promote social insurance programs to help people when things go wrong.

  • To be honest I’m not sure what Pollock means by this. The social safety net in Canada is a well established program and there is no sign that it is going away any time soon. Employment insurance, welfare and health care programs are part of the “welfare state” and are designed to protect citizens from the worst of a personal financial crisis but I am a huge proponent of philanthropy, especially when it comes to helping the poor. If you have extra, even if it’s only a little extra there is nothing more helpful and noble that you can with your excess than give it to those in need.

So there you have it, everything you need to know about personal finance really does fit on one Index Card and it really comes down to just three main points; get out of debt, save your money and take advantage of tax incentives.

Oh, and don’t be a selfish jerk about it.

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