The most notable personal finance writing of 2013 wasn’t in a book by a Wall Street celebrity; it was a handwritten 4x6 index card by a professor of social service administration.
His name is Harold Pollack, and his great contribution to the field of personal finance took him three minutes to write. The only advice he put in all capital letters was to “MAX” contributions to 401(k) retirement accounts. He also advised not buying individual securities, paying credit card balances in full every month and saving 20 percent of income.
Praising an index card worth of advice may sound like I am making sport of a serious topic, but it’s long past time that somebody published what this University of Chicago professor did, via his iPhone’s camera. Personal finance is one of those areas of American life that has somehow become the exclusive domain of experts and gurus when a little self-directed common sense might be all that’s really required.
It’s a little like dieting. What to eat and how much is something else that seems to completely baffle many Americans. How else could anyone explain why a search on Amazon.com turned up 79,203 diet books.
Really, can it possibly be that hard? Is a physician’s book going to shed much new light on the wisdom of eating a bag of Doritos?
The journalist and food writer Michael Pollan once considered this vast collection of often-conflicting nutrition advice and came up with his own comprehensive guide in just seven words: Eat food. Not too much. Mostly plants.
Doritos, in Pollan’s definition, aren’t food.
The management of money could use an approach that’s just as simple, which is why the professor’s index card was so appealing. At over 90 words, however, it could have been far shorter. The best advice has to be so short and memorable that it’s top of mind when shopping and saving, every day all year.
Please understand that this advice is for people with jobs or other income to cover the basics. Once there’s enough for that there are choices to be made on spending, and for many people that’s when the trouble starts.
The only thing worth remembering on spending is never, ever spend all of the income that comes in during the month. When in doubt, wait, as it’s much less painful to spend money that was saved last month than it is to buy something and find out at the end of the month that it wasn’t affordable.
If not all the money gets spent, that means there should be a pile of savings that accumulates. A great way to make it easier to save — and more importantly, to not spend everything — is to sign up for an automatic program like a 401(k). The professor is right.
Forget about the tax advantages, it’s the automatic deduction that makes these programs so attractive. It’s possible to start thinking of take-home pay as money after withholdings and 401(k) contributions.
What to do with the money that did not get spent is also a lot simpler than the shelf of books at Barnes & Noble would seem to suggest. Once an investment account is opened, people can save, invest, trade or speculate, and it’s probably best to leave the trading and speculating to the pros.
And saving and investing aren’t the same. Money in a coffee can buried in the back yard is certainly saved, but it loses purchasing power over time, even with inflation as tame as it’s been.
Unless there is a specific near-term need for the money, like a tuition check for a child’s spring term or the start of a wonderful retirement, invest the money in things that produce growth or income or both. Leave it invested.
The next thing to think about is how to fund the big things that can’t reasonably be bought out of monthly income, like a house. Anti-debt zealots may squawk about allowing any debt, but the problem for many consumers buried by debt is taking on debt to buy the wrong stuff.
What makes Manolo Blahnik open-toe pumps that cost $755 the wrong stuff to put on a credit card is not the shocking expense. It’s that they are shoes.
They are what the chief financial officer of a business would book as an expense along with things like rent, electricity and payroll. Expenses are things that get used up in a month or quarter, and are bought and paid for mostly out of cash flow.
When a company cuts a check for a new machine, however, it is booked not as an expense but an investment. That machine is going to be productive for a long while, and so a lot of businesses borrow the money for these kinds of investments.
OK, I realize I promised simple yet dragged the idea of capital expenditures vs. operating expense into personal finance, but it is a useful way to think as CFO of a household. A 2014 model car will be productive over a long period of time, and taking on debt to fund it can certainly be justified.
Where to draw the line on what’s an investment and what’s plain old consumption is a tough call, never mind what a tax accountant says. A new iPad shouldn’t go on a credit card, for example, as it could be obsolete by the time the owner really masters it.
People don’t often plan to keep a car 11.3 years, the current average age of America’s fleet, but the idea is to only use debt to fund purchases that last well beyond the last scheduled payment. As a rule of thumb, if something isn’t expected to be around and in everyday use in 10 years, it’s an expense. It’s consumption. And make every effort to avoid taking on debt to pay for consumption.
That’s it. Taxes can wait. So can Roth IRAs.
So here’s my best effort at short and memorable financial advice: Spend far less than you make. Invest what remains. And never borrow to buy what won’t last 10 years.
Can’t see how it would hurt to give it a try.