All the Financial Advice You’ll Ever Need?
In the recent weeks, a list of financial advice circulated the Internet by being popularized on the Washington Post in an article written by Ezra Klein. The advice was gathered by Henry Pollack, a Washington Post contributor, after a discussion he had with personal finance expert Helaine Olen.
What made the advice unusual is that Pollack was able to fit it all onto a 4"x6" card, and he noted he may have been able to fit it onto a 3"x5" card if he had one handy at the time.
The nine pieces of advice given were:
- Max out your 401k or equivalent employee contribution.
- Buy inexpensive, well diversified mutual funds such as Vanguard Target 20XX funds.
- Never buy or sell an individual security. The person on the other side of the table knows more than you do about this stuff.
- Save 20% of your money.
- Pay your credit card balance in full every month.
- Maximize tax-advantages savings vehicles like Roth, SEP and 529 accounts.
- Pay attention to fees. Avoid actively managed funds.
- Make a financial advisor commit to a fiduciary standard.
- Promote social insurance programs to help people when things go wrong.
The maxims were touted as "all the financial advice you’ll ever need," but is it enough advice for sound financial planning?
Because the card really made the rounds online, many people weighed in on the value of the advice. While the consensus strongly favored the information, many noted preventative financial tools such as property and casualty insurance were not mentioned on the card. For example, a strong homeowner's insurance policy can keep a physical catastrophe from turning into a financial catastrophe as well, much the way a good health or disability insurance policy can help avert a crisis.
Paying off your credit card balance
Not all of the advice, while sound in principle, may be right for everyone. Paying off a credit card balance in full every month results in the convenience of carrying a credit card without paying the interest. However, if one is trying to establish credit, doing so can keep a credit score from strengthening, as the goal of financiers is to earn money on interest. Even if you're paying on time every month, if you're not a likely candidate to contribute to interest, you're not a highly desirable customer in the interest business.
Save 20% of your money
The advice to "Save 20% of your money" is a bit vague. Twenty percent of all earnings, or what is left over after the bills are paid? Or after the bills and other investments are paid? Ideally, everyone should try to put away as much as possible into savings, but for many, once the bills are paid, food is purchased, and other expenses are funded, 20 percent of a household income may not be left over.
In this case, it is a wise idea to really scrutinize one's budget to see if any areas can be trimmed to meet the 20 percent goal. Cutting random purchases, like eating out every now and then might be enough to make up the difference for some.
If not, ask yourself what amount is realistic and set goals accordingly. See where you can eliminate some expenses or debt over time in order to make the 20 percent benchmark more realistic, and develop a plan on paper to get there. Review the plan periodically to make sure you're sticking with it, and make sure you have accessible funds set aside for emergencies like car or home repairs.
Promote social insurance
The last bit of advice, to promote social insurance, isn't really personal finance advice, and may not even involve money, but rather voting, writing to elected officials, volunteering at a soup kitchen, or other means.
However, some commentors around the Internet made the case that taking steps to promote social safety, promotes overall security. For example, in any given society, the reduction of homelessness or hunger would be expected to result in the reduction of crime. Likewise, if one were to fall on hard times, having programs are available to cushion the blow would be beneficial.
Overall, the response to the advice from financial gurus and wonks was very positive. Perhaps the most important takeaway is that financial advice need not be complicated. It proves the most important things can be distilled into some basic principles, which are straightforward enough to fit on an index card.
MyBankTracker readers, what do you think about this advice? Leave a comment below or tweet us @MyBankTracker.
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