The Index card

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  • personal finance
  • budegting
  • saving
  • financial advice
  • investing
  • housing
  • insurance

What I read

The Index Card: Why Personal Finance Doesn’t have to be complicated

Buy it on Amazon

256 pages

Authors: Helaine Olen and Harold Pollack

Book Cover
Book Cover

Summary

The book is based on the premise that all the financial advice you need to know can fit on an index card. The book is broken down into 9 chapters each of which corresponds to a rule on the index card. Each chapter explains how the rule works accompanied with detailed stories and examples. It is a good book to read if you are just starting to get your financial life in order.

Some of the advice is US-centric but can be applied to other countries as well.

Key Quote

This is your financial life. Take control of it.

Key Takeaways

Budgeting

  • If you are always worried about your immediate cash flow, you will make mistakes.
  • Do not wait for more than a week to assign expenses to proper categories in your budget.
  • Dividing every expense into categories allows you to see the big picture.

Saving

  • An emergency fund is a basic foundation for having stability.
  • To gain control over your financial life, pay down the bill with the highest interest rate while paying the required minimum on the rest.
  • Save for retirement after funding your emergency fund.
  • Take full advantage of the retirement account match offered by your employer. It is free money.

Financial Advice

  • Most financial advisors are salespersons or brokers even if their official title is different.
  • Your neighbourhood brokerage or bank is not the place to get unconflicted financial advice. If you want unconflicted financial advice, you almost certainly have to pay for it.
  • A fiduciary is a financial advisor who has a legal and regulatory duty to put your interests ahead of his or her own. They are also known as a certified financial planner (CFP), registered investment advisor (RIA) or fee-only advisor.
  • You want to seek out an advisor who works on a fee-only basis. This means the advisor is paid by you and only by you. Never assume someone is a fiduciary. Always ask. You need to ask and ask quite specifically: Do you work to the fiduciary standard at all times? This last part, “at all times” is important.

Investing

  • Don’t fall for stories that you can invest in more funds or that it will be easier to monitor your money if it’s all in one place.

  • Warren Buffet is an excellent stock picker but he also gets benefits from getting access to deals not available to mere run-of-the-mill investors like the rest of us.

  • “Alternative investments” is a nice way of saying “This is a risky investment”

  • Diversify so that not everything in your investment portfolio rises and falls by the same amount at the same time.

  • If you put money only in supersafe assets that earn low returns you will lose money relative to inflation and increase your risk of outliving your money.

  • Formula to decide how much money to put in stock market funds:

    • Percentage of your assets invested in stocks = 100 - your current age
  • Stock investment Breakdown

    • 70%: A good S & P 500 index fund for assured quick diversification.
    • 15%: A small-cap index fund because they have generally outperformed large-cap funds but have a greater risk.
    • 15%: A broad-based international fund. Make sure that you choose an international fund and not a global fund.
    • [Optional] (5-10%): If you don’t own property, a real estate investment trust index fund.

Housing

  • You should spend no more than a third of your take-home pay on housing.
  • Finance your emergency fund. Then think about purchasing a home.
  • Get your mortgage pre-approved by a bank before you look at the first house.
  • Your house is your home. It is not a speculative investment.
  • There are practical benefits to owning your residence but it is almost always a highly leveraged aka risky investment.
  • If your interest rate drops by less than one percentage point or if you are planning to move soon, it’s not worth refinancing.

Insurance

  • Insurance is a complicated but necessary evil.
  • Get a thirty-year level term life policy.
  • Understand exactly what kind of coverage is contained in the policy you are buying. You need to pose worst-case scenarios to the person selling the policy and then make sure to get their answers in writing.
  • Go for the high-deductible options when buying insurance.
  • Adequate liability insurance is at least twice the amount of your net worth.
  • If you have a high net worth get umbrella insurance which covers the amount of your potential responsibility if you exhaust your liability insurance.

Other quotes

  • Simplicity takes work and insight to achieve.
  • One of the most important biases is the overconfidence that comes with expertise.
  • Starvation budgets work no better than starvation diets.
  • It’s better to save 1 per cent consistently than try and fail over and over again to save 10 to 20 per cent.
  • If it’s free, you are the product.
  • If you sit down for cards, and you don’t know who the sucker is it’s you.
  • Popular advice is if we just give up a \$5 small luxury a day, we can retire millionaires. But if that were all it took, most of us would be millionaires already.
  • That’s the thing about bubbles and great market runs - Anyone can make money. Until times change or the bubble bursts.
  • The three most important things in a real estate purchase are location, location, and location.

Recommendation

This book is great if you are just getting started with sorting out your financial life. It explains the different concepts in a very easy to understand way. But for people who are in control of their financial life, this book does not offer anything new.

Ankur Sheel © 2020
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