Simple Money Advice For Grown-Ups

Financial advice isn't hard. It's so simple that most of it fits on a single 4x6 index card. Really.

Back in 2013, University of Chicago professor Harold Pollack wrote down all the basic financial advice a person might need on one index card  and posted a photo to the internet. That image went viral. 

In a new book, The Index Card , Pollack teamed up with personal finance columnist and author Helaine Olen to flesh out each point from the card picture. The pair explain how to do things like find a financial advisor who will work in your best interest, or what it means to be financially ready to buy a home. 

The Huffington Post sat down with Olen to talk about the book and how to keep personal finance advice simple.

Why did you decide to write the book?

Personal finance is not complicated, but everyone wants to make it out like it is. When Harold interviewed me for my last book, Pound Foolish, during the interview he said, “Everything you need to know about personal finance could go on an index card.” And then he more or less did it.

People really responded to that message. At the same time they would still ask, “What should we do? What should we do?” People wanted a bit more of an explanation, so that’s why we decided to write the book. People don’t always want to be told what to do, after all, they also want to be told why they should do it.  

What’s the most common mistake that people make with their money?

I think there’s a lot of mistakes you can make with your money, and I think we all make some of them -- all of them -- at different times. And that was sort of the goal of the book: to lay out what the right way to do this to get the best outcome would be.

For instance, I find over and over again, that people seem to have barely any idea of how their retirement money is invested. They just don’t have any clue when I ask. So for me that was a really important chapter, to point out that the best way to invest, the most cost-effective way to invest, I should say, is through index funds.

Similar question, but is there a particular common mistake that young people make that sort of sets them up for a lifetime of money issues?

Well, yes and no. I think probably the mistake that young people make the most is, first, not always paying down their debt. The number of people I’ve interviewed over the years who don’t prioritize that is huge. And I don’t just mean young people, I think that’s across the board.

And second, for young people especially, it’s just so important to get some money saved in retirement accounts. The benefits of compound interests in there is just extraordinary. Letting that go, or even foregoing that for even 10 years can really cost a lot of money.

The parts of your book I liked most were the chapters on index funds and paying for financial advice, because it’s less intuitive than the first couple of chapters, which are basically saying, “Save more!” and “Pay down your debt!” Assume that I’ve got some money in the bank, but don’t know anything else, where do I start?

The best way is to try to find someone who gives advice in your best interest. That’s called the fiduciary standard. When you meet with a financial planner or someone who is giving financial advice, you’re going to have to ask about that. There doesn’t seem to be any way around that.

People who don’t have to give advice in your best interest, who work to what is called the suitability standard, simply don’t have to tell you that. So you’re going to have to ask.

That’s the most important part here. Then, of course, there are organizations -- not organizations, that’s the wrong word -- there are outfits where you’re going to get those people. National Association of Personal Financial Advisors, that’s one. The Garrett Planning Network, that’s another. But you always, always, always have to ask. Never assume.

If I were to invest money by myself, maybe I don't have enough in the bank to want to pay someone for financial advice. Where do I find low-cost index funds?

If you’re just doing this in your workplace retirement account, you’re going to have to look at what’s there. It’s not like you get a choice of what’s in your fund. But if you’re doing money on your own, usually the best places to go are Vanguard, T. Rowe Price, they’re usually the ones with the lowest fees. But you’re going to have to look. You can look these up in Morningstar , can look them up online. And again, index funds are generally the lowest fees.

It’s becoming more common these days to move from job to job fairly frequently. So then you end up with multiple 401(k) accounts. Is that something that you should be thinking about or be worried about?

Absolutely not. Just keep track of them. Moving them over into an individual retirement account (IRA) is going to cost you money. The way that fees work, the more money someone is managing, the lower the fees. It’s like any bulk purchase.

You are almost certainly better off moving your money into a 401(k) than pulling it into an IRA. In addition, the advice given under the 401(k), these are run under the best practices standard, the fiduciary standard. The IRA is coming along, but it’s still not there yet. The rules have still not been put in place.

Over the last few decades, incomes adjusted for inflation have been going down for most people. That’s a problem that people can’t change. What’s the best way to adjust spending when your paycheck is the same, but everything’s getting more expensive?

Besides fighting for change, you mean? (Which is really the most important thing of all, because we shouldn’t really accept the situation.) The only way you can really adjust is ultimately to try to live within your means, if that is possible. And I use the word "if" here because, in fact, with things like education, it’s going to be very hard to truly live within your means on things like that. It’s an extraordinarily difficult proposition, and it’s why people are often in financial trouble.

That being said, obviously the more savings you can accumulate, the better off you’re going to be, should you encounter a downturn or should you be unable to keep up.

Slightly related to this, you’ve written a lot about the Latte Factor, and I saw it pop up in the book. Can you explain that for our readers?

We all have this idea that it’s our small expenses that are doing us in -- that our financial woes are because of these. The famous example is the Starbucks latte. You buy too many lattes, you’ll be in trouble. It can be any little luxury you want. The dinner out that you shouldn’t have had, or the night you met a friend at a bar when you could have been at home.

In fact, what is really getting people into trouble is the fact their salaries aren’t keeping up while things like education, healthcare and housing are going up at a fairly high rate historically.

The idea of what I call the non-latte factor, is to recognize that if you are going to cut back, it’s your big expenses you need to look at, not your small expenses. I say that knowing that it is rather hard to do. But I say it because I think we get into this cycle where we constantly blame ourselves, and I don’t think that is very good for anybody. I don’t think it gets us anywhere, or it really addresses our problem.

How do you feel about consumption smoothing -- spending more than you might have, assuming your income is going to go up?

I think it depends on what you are spending it on. Obviously if you are spending on education, that’s probably a good thing. If you are spending it on a lot of vacations because you are afraid you might not travel again after you have children, you might want to be a little more conscious of putting money aside. It really comes down to what the expenditures are.

This interview has been lightly edited for clarity.