Index Card Finance: Is It Really That Simple?

January 15, 2022

Investing, Planning & Saving

Can the answers to all her financial questions really be written on one index card? wondered Sima Issac. Professor Harold Pollack claimed the answer is yes. To prove it, he’d once jotted down 10 rules of personal finance on a slip of paper in an attempt to free people from having to trust financial advisers. After his card went viral, Pollack teamed up with Helaine Olen to write The Index Card, a slim book explaining the origins and meaning of his simple index card rules. Pollack boldly posited, “Just follow these simple ten rules and all will be fine financially.” It seemed a bit far-fetched to Sima.

Was an index card her new financial adviser, as one review gushed?

I’m a big fan of simplicity, and Pollack’s list is pretty good. But I believe the “index card” premise is way oversold—the very fact that a book is needed to explain the card highlights how it’s far from a total financial adviser solution. The book also contains some gaping holes, even errors, in its oversimplified advice. And the author clearly has a peripheral populist agenda—not something that belongs in a book offering financial advice. The list is useful, though, and we’ll briefly review it and the book too, so you can take the good while filtering out the useless or incorrect information offered.

Rule #1: Strive to Save 10–20% of Your Income

This rule is definitely an important one— without saving, there can be no investing or wealth creation. Of course, putting this rule into effect is easier said than done. Saving requires earning more than enough to cover one’s expenses and maintaining the discipline to live below one’s means. This foundational rule is simple but not easy for most.

Rule # 2: Pay Your Credit Card Balance in Full Every Month

It’s almost impossible to get ahead when paying massive credit card interest, and too many get sucked in due to lack of foresight. But life sometimes gets in the way of living by the book, and people may need help navigating debt reduction or even settlement or bankruptcy. Seek help ASAP if you’re burdened by high-interest loans.

Rule #3: Max Out Your 401(k) and Other Tax-Advantaged Savings Accounts

401(k) plans are my business, and I definitely recommend using them along with IRAs and 529 plans to lower taxes and maximize investment returns. But “maxing out” these accounts can be a mistake. If you need to remove cash from a tax-preferred account for house repairs or a simcha, there’s usually a penalty involved. And the rules governing these accounts and guidance for selecting which to use are well beyond the scope of an index card or the author’s book.

Rule # 4: Never Buy or Sell Individual Stocks

Most investors should indeed stick to simple things like mutual funds or renting out a house (see next rule). But never say never. If someone has insight and interest in a particular stock, it’s fine if they buy some. (And adding a never-sell admonition here totally makes no sense. If someone broke the author’s rule, shouldn’t they correct it ASAP and sell?)

Rule #5: Buy Well-Diversified, Inexpensive Index Mutual Funds and ETFs

I’m a huge fan of index funds, which offer any long-term investor a simple, reliable path to wealth. The author got tripped up, though, when recommending which of the thousands of index funds to utilize. For example, investors can get badly damaged by selecting a random long-term bond index fund that they didn’t clarify. He also trashes target-date funds, which are generally fantastic, based on very flimsy arguments. We’ve offered better index options over here.

Rule #6: Make Your Financial Adviser Commit to the Fiduciary Standard

(Full disclosure: As a fiduciary adviser, I’m especially nogei’a b’davar on this point.)

From a legal perspective, financial advisers may be brokers with a much lower obligation to look out for their clients’ interests versus fiduciary advisers. Most people don’t know the difference, and the book is right to point out that there can be a benefit to requiring advisers to be fiduciaries. But it’s very difficult to stick with only fiduciaries—insurance fiduciaries are almost nonexistent, for example. In general, finding a fee-only fiduciary adviser is much harder than the book acknowledges. And you can get amazing service from a broker and terrible service from a fiduciary adviser. The person matters more than the title.

Rule #7: Buy a Home When You Are Financially Ready

This rule is a strong example of how putting a sentence on an index card, or even a chapter in a book, is often woefully inadequate in real financial life. Buying a house is most people’s largest financial transaction which needs to be carefully considered from multiple angles, such as when to buy, where to buy, how much to buy, financing options, and refinancing questions. There are no professionals offering unbiased, savvy advice on basic real estate for the regular Joe. But there should be.

Rule #8: Insurance—Make Sure You Are Protected

Insurance is a vital but confusing topic. Most people are over-insured in some categories and under-insured in others. To be properly protected, you need to do a lot of homework and work with ethical and knowledgeable brokers. There are many good brokers, but with multiple insurance categories, each with its own lingo and pricing structures, it’s important to become an educated consumer—which requires a lot more than what Professor Pollack offers.

Rule #9: Do What You Can to Support the Social Safety Net

Here is where the author really tips his hand. The book is stemming from an antipathy toward the financial industry and capitalism as a whole. And, Pollack’s co-author, Helaine Olen, is a journalist with a clear anti-Wall Street agenda. This political spin is the makkeh b’patish which moved this book’s recommendation from my “good with caveats” list to the “you can do much better; skip it” list.

Rule #10: Remember the Index Card

Chazarah, chazarah, chazarah. As Mesilas Yesharim famously warns in the hakdamah, the most important knowledge is often well known but ignored because it’s so well known.

A good rule in a solid, if flawed, list featured in a bad book.