Broker Check

Advice on an Index Card

| March 19, 2019
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Do you want to know why all of the financial/investment advice to follow should fit on an index card? Because that’s all you need. The advice you need to succeed in your financial life is not complex and is not that difficult to explain.

That said, I’ve come up with a list of things I would put on my index card, as well as a brief explanation as to what each item is and why it’s on there.

Pay Attention to Fees

Fees can and will eat into your returns over time. Though some fees are necessary (i.e. financial advisor fees) they should be kept reasonably low. The average advisor fee is just over 1%. A good advisor is worth at least that much, however, I’m an advisor so that opinion is biased.

Another fee that’s necessary, but should be kept as low as possible, is the fee charged by the funds you invest in. It’s listed as “expense ratio” and it would behoove you to keep this under .20% if not under .10%.

For example, if there are two people contributing $5,000 per year for 30 years. Person 1 pays a .25% expense ratio and Person 2 pays a .50% expense ratio. After 30 years, Person 1 has $482,065 and Person 2 has $459,946. (Source)

Invest in low-cost, diversified index funds

Low-cost is in reference to that expense ratio I alluded to in the section above.

The diversification has to do with allocating your assets in the appropriate amounts to a variety of funds that differ among asset class and geographic location.

Depending on your time horizon and risk tolerance, you should have a portion of your assets in a U.S. stock index fund, a portion in a non-U.S. stock index fund, and a portion in a total bond market index fund.

Avoid complex strategies

The best investment plans for long-term performance are rarely sexy. Complex strategies sell. Everyone wants to beat the market and terms like spreads, derivatives, and options grab people's attention because they think alternative strategies will lead to above average results.

The best kind of investment strategy is the one you’ll stick with no matter what the market is doing, and one that you can put in place for the long-term and only have to tweak periodically.

Pay credit card balance in full each month

This saves you money and can improve your credit score.

Most credit cards, unless there’s an introductory 0% APR, have high-interest rates. However, that rate will only hurt you if you carry a balance forward from month to month.

If you buy something with your credit card and pay the full balance right away, you will not be charged interest on that balance. This saves you money.

What’s more, you are paying your bill on time or early each month. Payment history (i.e. what percentage of time do you pay on time or early) is the most important factor when calculating your credit score.

Save for emergencies, then retirement

There are fewer things that can sideline financial progress like an emergency that you can’t pay for. What’s the solution you come up with when you’re in such a predicament? Why put it on a credit card of course!

Instead of falling back on this high-interest rate pain in the rear, plan ahead. Dave Ramsey says to have $1,000 in an emergency fund to start (Baby Step 1). After that, you work on non-collateralized debt (i.e. credit cards and personal loans). Then you go back and beef up your emergency fund.

Though I don’t totally agree with these specific steps, the principal is 100% on point. You need to have something set aside in case your car breaks down, your furnace needs to be replaced, or you lose your job.

Once you’ve done that, you have to start saving for retirement.

Ideally, you’d do a calculation to figure out what number you “want” to hit. You usually hear the magical $1,000,000 used in this scenario.

Then you will come up with a plan. You’ll factor in how much you make, how long until retirement, and a conservative estimation of how you’re investments will do from now until then.

Bottom line, save as much as you can while you can.

If you can’t afford it with cash, don’t use a credit card to buy it

This is just a good rule to live by. It’ll keep you out of credit card debt and if you don’t have credit card debt, you are way ahead of the game.

Max out tax-advantaged retirement accounts

Tax-advantaged accounts are things like 401ks, Roth IRAs, Traditional IRAs, etc.
And by tax-advantaged I mean your money either accrue tax-deferred (don’t pay taxes while money grows, but usually pay when withdrawn) or the money comes out tax-free (this is the case with Roth accounts).

By taking advantage of these accounts first, you can maximize your savings as well as protecting your tax liability.

Ensure your advisor is a fiduciary

By making sure your advisor is a fiduciary, you are doing yourself a great service. By definition, a fiduciary has to (legally) do what’s in their clients best interest before their own.

Additionally, advisors that act as a fiduciary, are usually fee-only. When an advisor is fee-only, it means they will make the same no matter what product or service they sell you, so they will (should) pick whatever is best for you.

Pay attention to taxes

Taxes are a pain in the backside and are unavoidable. However, there are things you can do to maximize your income and savings and minimize your tax liability.

This is where having a knowledgeable accountant/tax advisor comes in handy.

Ignore the noise

If you took the time, researched, and wrote down a sound investing plan that you’re comfortable with, don’t pay attention to what other people are doing and what the market is doing.

Do you want to know what the most difficult thing is about being an investor? It’s sticking to your guns and sticking with your plan when everyone else is doing something different and the market is in tatters.

Conclusion

Being able to set and stick with a financial plan is drastically underrated. Figure out what financial/investment advice works for you, get out an index card, and write it down.

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