A few years ago, a social scientist from the University of Chicago made grand headlines with his simple formula for success in personal finance. He had written down 9 money rules on a standard library index card, taken a picture and posted it on online. The photo went viral and the rest is history.
Pollack’s premise for writing the nine points down in the first place was a single thought. He surmised well-researched, academically sound, historically accurate information about any topic, including personal finance, to be available for free in any library across the world. He concluded, therefore, that when paying someone for financial advice, almost by definition, you’re probably getting wrong advice as the correct advice is straightforward and easily accessible.
Is the answer to our personal finance woes effectively summarised into only nine rules? People of the world seem to think it is a distinct possibility. Here are the 9 money rules Harold Pollack wrote on his library index card:
Max equivalent employee contribution
He actually wrote “your 401(k) or equivalent employee contribution,” but South Africans may be hazy on the 401k. Think of it as a forced or facilitated investment of personal funds. It comprises deductions from a salary by the employer, every month, before tax, which are invested into a fund for the future (like a pension fund).
Harold advises maximising your employee contribution, an automatic way to save money, to gain the most benefit over a lifetime. By increasing the amount invested early, you create a greater interest-earning capacity on a larger capital base, over the longest period of time possible. It is a delayed gratification response. If you can make do with less now to make (lots) more later, the future looks bright.
Buy inexpensive, well-diversified mutual funds such as Vanguard Target 20xx funds
The keywords here are inexpensive (or better value for money) and diversified (for a less risky, or wider spread of risk in the portfolio). Again, this seems logical. Too many of us are drawn into the glitz and glamour of ‘popular’ funds, charismatic fund managers or smooth-talking brokers who tell us what we want to hear.
Never buy or sell an individual security. The person on the other side of the table knows more than you do about this stuff
The flow of information is what makes the world go round. Supply of information is withheld by “experts” and “professionals” who make a living by leaking just enough insider information to make it seem like the deal is awesome. The real estate market is probably one of the most prominent examples of how this careful hold on ‘insider information’ can influence the price levels and bargaining structure of an entire marketplace.
Save 20% of your money
Take a fifth of your earnings and put it away. Whether it is in a savings account, an investment account or a brokered portfolio, the money needs time to sweat for you. You will thank yourself in the future.
Pay your credit card balance in full every month
Pay it in full. This means no rolling credit from one card to another, or paying the bare minimum because an unplanned purchase ruined your stringent budgeting plan for the month. Paying credit off fully each month will prevent you from slipping into a perpetual state of overdraft, paying unnecessary interest (an added expense) or developing bad money habits, which quickly pull you down into a dire personal finance dilemma.
Pay attention to fees. Avoid actively managed funds.
Be wise about tax. Ask a broker, or trusted financial consultant, or a SARS tax expert about better options to suit your situation. Minimise the tax you pay on your investments by understanding your own position and if possible, restructuring your payment package to minimise the final tax you have to pay each month.
Maximize tax-advantaged savings vehicles like Roth, SEP and 529 accounts
Read the fine print – on everything. When it comes to managing your personal finances take careful note of regular and irregular charges, terms and conditions, ‘special circumstances’ mentioned and penalty clauses.
Be wary of brokerages who encourage short-term perspectives (chopping and changing investments with the fluctuations in the market). Biding time in a measured long-term position is guaranteed to produce better results. My broker always reiterates “wise investments are not about timing of the market, but time in the market.”
Make financial advisors commit to the fiduciary standard
The fiduciary standards are in place for a reason. A broker, financial advisor, bank manager or tax consultant, for example, falls under legal and moral obligations when placed in a position of trust; like managing your money. The guidelines ensure your best interests remain a top priority, so why should you tolerate any deviation from the standard expectations?
Promote social insurance programs to help people when things go wrong
Personal finance has the ability to transform not only your own world, but the lives of others. A sense of gratitude and a spirit of generosity takes us away from self-centric musing to a community-building perspective, which benefits us all. Social insurance is one way to contribute to the upliftment of the world around you, so that your life is also a little better in future.
What do you think of Harold Pollack’s 9 Money Rules?
A few years in the spotlight and a published book later, Harold Pollack’s advice is still making the rounds on social media platforms and in financial and educational circles. It is practical, intuitive, logical and most importantly, free. All this from a man who admitted he had a “very lackadaisical attitude about personal finance until I was about 40 years old.”
Sources:
1. Friedman, Z. (March 9, 2017) 9 Simple Money Rules All on 1 Index Card. Forbes. [Online] Available: https://www.forbes.com/sites/zackfriedman/2017/03/09/9-money-rules-index-card/#762455d72c09. Accessed 28 August 2017.
