The Index Card

by Helaine Olen, Harold Pollack

Troy Shu
Troy Shu
Updated at: May 01, 2024
The Index Card
The Index Card

Simplify your finances with the 'index card' approach. Discover practical tips to build financial resilience and explore how systemic issues impact personal finance. Get expert advice on investing and finding a trustworthy financial advisor.

What are the big ideas?

Embrace the Index Card Simplicity

The book endorses a simplified approach to finance management using an 'index card' metaphor, emphasizing that financial planning can be straightforward and manageable without complex strategies.

Focus on Financial Behavior Modification

It highlights the importance of financial actions over extensive planning, advocating for behaviors like saving a portion of income, automating savings, and paying credit card balances in full to foster financial resilience.

Systemic Issues Affect Personal Finance

The book explores how broader economic trends and regulatory failures impact individual financial health, suggesting that personal finance issues often stem from larger systemic problems rather than personal failings.

Invest in Indexed Funds Over Stocks

A key principle from the book is the recommendation to invest in low-cost, well-diversified indexed funds instead of individual stocks to reduce risk and improve returns, countering common investment strategies.

Prioritize Fiduciary Financial Advice

It advocates for seeking financial advisors who abide by a fiduciary standard, ensuring advice that genuinely prioritizes the client's best interests over potential advisor commissions.

Support the Social Safety Net

The book urges support for robust social programs as a means to ensure broader financial stability and security, emphasizing a collective responsibility towards maintaining and enhancing these protective measures.

Want to read ebooks, websites, and other text 3X faster?

From a SwiftRead user:
Feels like I just discovered the equivalent of fire but for reading text. WOW, WOW, WOW. A must have for me, forever.

Embrace the Index Card Simplicity

Embrace the Simplicity of the Index Card Approach

The key insight here is to embrace a simple, straightforward approach to managing your finances. Rather than getting bogged down in complex investment strategies and relying on "expert" financial advisors, you can take control of your financial life by following a few basic principles outlined on a simple index card.

The index card approach rejects the notion that personal finance has to be complicated. It recognizes that the financial services industry often profits by convincing people that investing and money management require specialized expertise. In reality, sound financial planning can be achieved through common sense and restraint, not elaborate schemes.

By sticking to the nine simple rules laid out on the index card, you can confidently make your own financial decisions, understand fundamental truths about investing, and develop a timeless strategy to weather any financial storms. This frees you up to focus on the other important aspects of your life, rather than constantly monitoring your investments.

The key is to embrace the simplicity of this approach. It may seem too good to be true, but the evidence shows that following basic principles like investing in low-cost index funds can outperform more complex, high-fee strategies. Trust the index card, not the slick financial salespeople, and take control of your financial future.

Here are examples from the context that support the key insight of embracing the index card simplicity:

  • The index card metaphor originated when Harold Pollack offhandedly noted that the correct financial advice for most people "fits on a three-by-five-inch index card and is available for free at the library." This simple, straightforward advice went viral when he wrote it down on an actual index card.

  • The index card contained "nine simple rules" for financial management, including saving 10-20% of income, paying credit card balances in full, and investing in low-cost index funds. These basic principles are described as "embarrassingly simple" but highly effective.

  • The book contrasts this simple approach with the complexity of financial products and services, noting that "the financial products we use in our day-to-day lives—credit cards, mutual funds, mortgages—are often quite complicated. But that doesn't mean the way we lead our financial lives needs to be equally complicated."

  • The book emphasizes that the index card rules provide "a timeless set of guidelines that you can turn to no matter what financial issues you may face or how drastically the winds of financial change shift." This simplicity and durability is presented as a key advantage over more complex financial strategies.

  • The book states that the index card approach allows readers to "have the confidence to make your own financial decisions" and "discover basic financial truths" without needing to rely on expert advice from the financial industry, which is often biased or self-serving.

Focus on Financial Behavior Modification

The key insight is to focus on financial behavior modification rather than extensive planning. This means taking concrete actions to improve your financial situation, rather than just creating detailed budgets or strategies.

The most important financial behaviors to cultivate are:

  1. Saving a portion of your income: Aim to save 10-20% of your gross income each month. This builds up a financial cushion to handle unexpected expenses and emergencies.

  2. Automating your savings: Set up automatic transfers from your checking account to a dedicated savings account. This makes saving effortless and ensures the money is set aside before you can spend it.

  3. Paying credit card balances in full each month: Avoid carrying over balances and accruing interest charges. This protects your credit score and keeps your finances stable.

By modifying these core financial behaviors, you can foster greater financial resilience and security, without getting bogged down in complex planning. The key is taking consistent, actionable steps to improve your financial habits over time.

Here are examples from the context that support the key insight of focusing on financial behavior modification over extensive planning:

  • The story of Sam, who was overwhelmed by the options and uncertainties of personal finance and ended up doing nothing with his inheritance, losing out on potential investment gains. This illustrates how inaction due to complexity can be detrimental.

  • The statistic that 69% of people "never" balance their checking accounts, showing how simple financial behaviors are often neglected.

  • The advice provided in the "Index Card Story", which includes basic rules like saving 10-20% of income, paying credit card balances in full, and investing in low-cost index funds. These straightforward behaviors are emphasized over complex financial planning.

  • The experience of Harold and Veronica, who were able to improve their financial situation by following simple rules like the ones on the index card, rather than relying on financial advisors. This demonstrates the power of modifying financial behaviors.

  • The discussion of how financial advisors often encourage clients to make poor investment decisions, like investing in high-fee products, rather than promoting simple, effective behaviors. This contrasts the industry's focus on complex planning over practical actions.

The key insight is that cultivating positive financial behaviors, rather than getting bogged down in extensive planning, is crucial for achieving financial resilience and security. The context provides multiple examples illustrating this principle.

Systemic Issues Affect Personal Finance

The book highlights how systemic issues in the economy and financial industry can significantly impact individual financial well-being. It suggests that many personal finance challenges are not solely the result of poor individual choices, but are often exacerbated by broader economic trends and regulatory failures.

For example, the book discusses how wages have stagnated and jobs have become less secure, even as wealth has concentrated among the wealthiest. This has left many people feeling like they are "falling behind" through no fault of their own. The book also exposes how financial advisors often provide biased or conflicted advice that prioritizes their own commissions over their clients' best interests.

These systemic problems make it extremely difficult for individuals to effectively manage their personal finances. Rather than blaming people for their financial struggles, the book encourages readers to recognize the larger forces at play and seek solutions that address these underlying systemic issues. By understanding how the system works against them, individuals can better navigate the financial landscape and make informed decisions about their money.

Here are examples from the context that support the key insight that systemic issues affect personal finance:

  • Sam's Story: Sam was overwhelmed by demands of work, marriage, and raising children, and ended up doing nothing with his inheritance money out of fear of making the wrong investment decision. This paralysis was driven by the "myriad options and uncertainties of money, the economy, and the financial services industry" rather than just personal failings.

  • Veronica and Vincent's Story: When Veronica's mother passed away, Veronica had to leave the workforce to care for her brother Vincent, who has an intellectual disability. This led to a significant drop in their household income, coupled with mounting medical expenses, putting them under major financial strain through no fault of their own.

  • The Pound Foolish Story: The context discusses how wages have stagnated and fallen, even as jobs and paychecks have become less secure, while most income and wealth gains have gone to the wealthiest. This systemic economic trend has left many people feeling like they are "falling behind" financially through no personal fault.

  • The Index Card Story: The context highlights how the financial services industry often provides conflicted advice that steers people towards high-fee investments, rather than simple, low-cost index funds. This systemic issue in the industry leads to suboptimal personal finance decisions.

  • The Credit Card Story: The context discusses how credit card companies use tactics like introductory offers and rewards programs to encourage overspending, making it harder for individuals to pay off their debts. This is an example of a systemic issue in the financial industry impacting personal finances.

In summary, the key examples illustrate how broader economic trends, regulatory failures, and predatory practices in the financial industry can significantly impact individual financial health, rather than just being a result of personal failings.

Invest in Indexed Funds Over Stocks

Invest in Indexed Funds, Not Stocks

The evidence is clear - investing in index funds is a far superior strategy compared to picking individual stocks. Index funds track a market index like the S&P 500, providing broad diversification at very low cost. In contrast, actively managed funds that try to "beat the market" almost always underperform their benchmark index, even after accounting for fees.

The key advantage of index funds is their low fees. The average annual fee for an equity index fund is just 0.12%, compared to 0.89% for the typical actively managed stock fund. These seemingly small differences in fees can add up to tens of thousands of dollars in lost returns over decades of investing.

Rather than trying to outsmart the market by picking stocks, the smart move is to simply invest in a diversified portfolio of low-cost index funds. This passive approach has been proven to deliver superior long-term returns compared to active stock picking, with far less risk. It's the investment strategy endorsed by legendary investor Warren Buffett, and it should be the foundation of your own investment plan.

Here are examples from the context that support the key insight to invest in indexed funds over stocks:

  • The context states that "Stock picking doesn't work. But your friendly neighborhood banker and broker have no obligation to share that information with you." This suggests that actively managed funds and stock picking by financial advisors often underperform index funds.

  • The context cites a study where "over a five-year period more than 80 percent of domestic stock funds performed worse than the market index they were set up to surpass." This shows that actively managed funds struggle to beat the market index.

  • The context notes that "Research has repeatedly shown that less than 1 percent of actively managed funds were able to beat the index they were set up to surpass when trading and other expenses were taken into account." This further demonstrates the difficulty of actively managed funds outperforming index funds.

  • The context highlights Warren Buffett's advice to his family to invest in a "very low-cost S&P 500 index fund" rather than trying to beat the market. This endorsement from a renowned investor supports the recommendation of indexed funds.

  • The context explains that index funds have "much more reasonable" expense ratios around 0.12% compared to the average 0.89% for managed stock mutual funds. The lower fees of index funds contribute to their outperformance.

Key terms explained:

  • Index funds: Investment funds that track a specific market index, like the S&P 500, rather than trying to beat the market through active stock selection.
  • Actively managed funds: Mutual funds where a manager actively selects individual stocks in an attempt to outperform the market.

Prioritize Fiduciary Financial Advice

Seek fiduciary financial advisors who are legally obligated to prioritize your best interests over their own. These advisors must act with skill, care, and diligence, avoiding conflicts of interest and fully disclosing any unavoidable conflicts.

Avoid non-fiduciary advisors who operate under the "suitability standard" - they can prioritize their own bottom line by steering you into overpriced or unsuitable investments, as long as those investments are generally appropriate. This can lead to higher fees and lower returns for you.

To find a fiduciary advisor, look for those with credentials like Certified Financial Planner (CFP) or Registered Investment Advisor (RIA). You can also seek out fee-only advisors who are paid directly by you, rather than earning commissions on products they sell. Directly ask any potential advisor if they will act as a fiduciary at all times.

Paying for quality, unconflicted financial advice is worth it to ensure your investments and financial plan truly serve your best interests. While "free" advice may seem appealing, it often comes with hidden costs and biases that can undermine your financial wellbeing.

Here are examples from the context that support the key insight of prioritizing fiduciary financial advice:

  • The context discusses how Karen's financial advisor likely gets paid commissions every time he moves her money between investments, even though he claims to outperform the market. This shows the importance of working with a fiduciary advisor who is legally obligated to act in the client's best interests.

  • The context explains the difference between the fiduciary standard and the suitability standard. A fiduciary advisor has a legal duty to act in the client's best interests, while a suitability standard advisor only needs to provide "adequate or suitable" advice, which may be influenced by their own commissions.

  • The context provides the example of a clothing salesperson working under the suitability standard versus the fiduciary standard. The suitability salesperson may recommend a dress that needs expensive alterations just to earn a higher commission, while the fiduciary salesperson would prioritize finding the best, most affordable option for the client.

  • The context encourages readers to ask their financial advisors if they are legally bound to the fiduciary standard, as advisors who are fiduciaries will likely be happy to share this information.

  • The context suggests considering robo-advisors, which use algorithms to provide investment advice at significantly lower fees than traditional advisors. However, it cautions that even robo-advisors should be evaluated to ensure they are operating under the fiduciary standard.

Support the Social Safety Net

The book emphasizes the importance of a strong social safety net as a means to promote broader financial stability and security. It argues that we all have a collective responsibility to maintain and enhance these protective programs, which can help insulate individuals and families from the financial shocks and uncertainties that often arise.

When the economy experiences downturns or individuals face unexpected hardships, a robust social safety net - including programs like unemployment insurance, Medicaid, and Social Security - can provide a crucial buffer. This helps prevent financial crises from spiraling out of control and ensures a basic standard of living, even for the most vulnerable. By supporting these social programs, we can work towards a more financially secure and resilient society.

Ultimately, the book suggests that investing in a comprehensive social safety net is not just a moral imperative, but also an effective way to promote long-term financial stability and well-being for all. It calls on readers to advocate for policies and initiatives that strengthen these vital social protections.

The context provided does not contain any anecdotes, stories, or examples that directly support the key insight of supporting the social safety net. The context is focused on providing financial advice and discussing the personal finance industry, and does not mention social programs or a collective responsibility towards financial stability. Without relevant examples from the given context, I cannot provide any support for the stated key insight.


Let's take a look at some key quotes from "The Index Card" that resonated with readers.

What’s your age? 2. Subtract that number from 100. 3. The answer is the percentage of your assets that should be invested in stocks.

This investment strategy suggests allocating a percentage of your assets to stocks based on your age. The older you are, the less you should invest in stocks. For example, if you're 30 years old, you should invest 70% of your assets in stocks, as this will provide a balance between growth and stability. As you age, the percentage decreases to prioritize preserving wealth over growing it.

Comprehension Questions

0 / 25

How well do you understand the key insights in "The Index Card"? Find out by answering the questions below. Try to answer the question yourself before revealing the answer! Mark the questions as done once you've answered them.

1. Why is the index card approach considered beneficial for managing personal finances?
2. What are the core attributes of the index card approach to financial management?
3. How does the index card approach contrast with traditional financial service industry practices?
4. What long-term benefits does following the index card rules offer to individuals?
5. What is the significance of saving 10-20% of your gross income each month?
6. How does automating your savings contribute to better financial management?
7. Why is it important to pay your credit card balances in full each month?
8. What could be a downside of relying solely on complex financial planning?
9. How do broader economic trends and regulatory failures influence an individual's financial stability?
10. What role do financial advisors often play in exacerbating personal finance challenges?
11. How can understanding systemic issues help individuals manage their finances better?
12. What impact does the stagnation of wages and job insecurity have on individual financial decisions?
13. How do predatory practices in the financial industry affect individuals?
14. What is the primary benefit of index funds compared to actively managed funds?
15. Why should one prefer investing in index funds over picking individual stocks?
16. What have studies shown regarding the performance of actively managed funds relative to market indexes?
17. What approach to investing is often endorsed by experts for achieving better long-term returns?
18. How do index funds manage to have lower fees compared to actively managed stock funds?
19. What is the legal obligation of a fiduciary financial advisor?
20. What standard allows non-fiduciary advisors to recommend investments that might benefit them financially, as long as the investments are generally appropriate?
21. What are some credentials or indicators that a financial advisor is a fiduciary?
22. Why might 'free' financial advice not be beneficial in the long term?
23. What is the role of a strong social safety net in financial crisis management?
24. Why is it considered a collective responsibility to support social safety programs?
25. How can investing in social safety programs contribute to long-term financial stability for a society?

Action Questions

0 / 11

"Knowledge without application is useless," Bruce Lee said. Answer the questions below to practice applying the key insights from "The Index Card". Mark the questions as done once you've answered them.

1. How can you simplify your financial management using principles from the index card approach?
2. What steps can you take today to start automating your savings, and how can this simplify your financial management?
3. How can you ensure you pay off your credit card balances in full each month to avoid interest charges and improve your financial stability?
4. How can you become more informed about the broader economic trends and regulatory issues affecting your personal finance strategy?
5. How can you incorporate low-cost index funds into your existing investment strategy to achieve better long-term returns?
6. What steps can you take to educate yourself further on the benefits of index fund investments for your retirement planning?
7. What changes could you make in your approach to achieving better risk management and cost-efficiency through diversified index fund investments?
8. Consider how diversifying your investment portfolio with index funds can mitigate risks and improve returns. Can you identify any immediate changes to reduce the risk and enhance the return?
9. How can you verify that your current or prospective financial advisor adheres to the fiduciary standard before making any investment decisions?
10. How can you contribute to strengthening the social safety net in your community?
11. What steps can you take to ensure you and your family are well-informed about and making the most of available social safety programs?

Chapter Notes


  • Sam's Story: Sam received an inheritance but was overwhelmed by financial decisions and ended up doing nothing, resulting in his nest egg losing value to inflation and missing out on stock market gains.

  • Financial Stress and Inaction: Many people experience financial stress and conflict, fear outliving their retirement savings, and rarely balance their checking accounts, leading to financial inaction.

  • Pound Foolish: The book "Pound Foolish" showed that many financial problems were not due to individual mistakes but caused by economic trends and the failure of financial regulators to address bad behavior in the financial services industry.

  • Harold's Story: Harold, a professor, faced financial challenges after his wife's mother passed away and her brother with a disability moved in. Through trial and error, he developed a simple financial regimen that improved their financial situation.

  • The Index Card: Harold wrote down his simple financial rules on an index card, which went viral online and was praised by financial experts as an effective way to manage one's finances.

  • Simplicity vs. Complexity: The financial world is often complex, but leading one's financial life does not need to be. The index card provides a simple, common-sense approach to personal finance that can help people take control of their financial lives.

  • Key Financial Rules: The index card outlines key financial rules, such as saving 10-20% of income, paying credit card balances in full, and investing in low-cost index funds. These rules are designed to help people make sound financial decisions and avoid common mistakes.

  • Confidence and Resilience: By following the simple rules on the index card, people can gain the confidence to make their own financial decisions, understand basic financial truths, and have a timeless set of guidelines to rely on regardless of financial circumstances.

Rule #1: Strive to Save 10 to 20 Percent of Your Income

Here are the key takeaways from the chapter:

  • Wages have stagnated and income inequality has increased: Over the past few decades, the annual median income of American households has declined by about $3,000 after accounting for inflation, while almost all gains in household income and wealth have gone to the top 1% of the population.

  • Cost of living has increased faster than salaries: The costs of essential items like healthcare, housing, and education have generally gone up faster than salary increases and the costs of less essential items.

  • Society encourages overspending and luxury consumption: There is a "trickle-down consumption" effect where the more the wealthy spend on luxury goods, the greater the pressure to keep up across the income spectrum, reducing savings rates.

  • Financial scarcity leads to poor decision-making: When constantly worrying about immediate cash flow, people are more likely to make mistakes and turn to credit to get by, weakening their "money muscle" over time.

  • Tracking expenses is crucial for saving: Monitoring all spending, both necessary and discretionary, for 3 months allows you to create a realistic spending and savings plan.

  • Build an emergency fund first: An emergency fund of 3 months' worth of living expenses should be the top savings priority to provide financial stability.

  • Focus on controlling big expenses, not just small ones: While small expenses can be optimized, the biggest outlays like housing and transportation are harder to control in the short-term but important to get right in the long-run.

  • Use cash instead of cards: Studies show people spend up to 20% more when using credit/debit cards versus cash, so using physical money can help curb overspending.

  • Automate savings: Setting up automatic transfers from checking to savings accounts makes it easier to consistently save without the money passing through your hands.

  • Start small and build the savings habit: It's better to start with a 1% savings rate and gradually increase it over time than to try and fail at saving 10-20% immediately.

Rule #2: Pay Your Credit Card Balance in Full Every Month (and How to Deal with Other Forms of Debt)

Here are the key takeaways from the chapter:

  • Lack of Easy Credit: In the past, easy access to credit did not exist, and stores offered layaway plans instead. Today, credit is much more readily available, with the average American having 3.7 credit cards, and credit being offered by various institutions beyond just traditional credit card companies.

  • Paying the Minimum: Many people only pay the minimum amount due on their credit card bills, which can significantly increase the time and total cost to pay off the debt. Paying more than the minimum, even if you can't pay the full balance, can save a lot of money in interest charges.

  • Ranking Debt by Interest Rate: When you have multiple debts, it's important to rank them by interest rate and focus on paying down the highest-interest debt first, as this will save the most money over time.

  • Finding an Accountability Partner: Having a friend, family member, or support group to check in with regularly can help provide motivation and accountability to stick to a debt repayment plan.

  • Negotiating Interest Rates: Calling your creditors and attempting to negotiate lower interest rates on your existing debt can help reduce the overall cost and speed up the repayment process.

  • Avoiding Debt Consolidation Pitfalls: While debt consolidation can simplify payments, it can also come with hidden fees, longer repayment periods, and the risk of putting up collateral like a home or car. Proceed with caution.

  • Considering Bankruptcy: Bankruptcy should not be seen as shameful, as it can provide a fresh start and relief from overwhelming debt, especially in cases of medical bills, job loss, or family collapse.

  • Handling Student Loans Carefully: Federal student loans offer more flexibility and options for repayment than private loans, so it's important to understand the differences and prioritize federal loans over private ones.

  • Maintaining Discipline After Debt Payoff: Even after becoming debt-free, it's crucial to continue paying credit card balances in full each month to avoid falling back into the debt cycle.

Rule #3: Max Out Your 401(k) and Other Tax-Advantaged Savings Accounts

Here are the key takeaways from the chapter:

  • Start Saving for Retirement Early: Saving for retirement early in your career is crucial due to the power of compound interest. For example, saving $104 per month starting at age 25 can result in $200,000 by age 65, assuming a 6% annual return. Waiting until age 45 to start saving would require contributing $430 per month to reach the same $200,000 goal.

  • Take Advantage of Workplace Retirement Plans: Workplace retirement plans like 401(k)s and 403(b)s offer significant tax advantages that can boost your long-term investment gains. Contribute at least up to the employer match, as this is free money that you should not pass up.

  • Understand Different Retirement Account Types: In addition to workplace plans, you can also contribute to Individual Retirement Accounts (IRAs), including traditional IRAs, Roth IRAs, and SEP-IRAs. Each has unique tax advantages and contribution limits to consider.

  • Avoid Withdrawing from Retirement Accounts: It's generally best to leave retirement account funds untouched until retirement, as early withdrawals often incur penalties and taxes. Only withdraw in true emergencies when you have no other options.

  • Don't Roll Over Workplace Retirement Accounts: When changing jobs, it's usually better to leave your retirement savings in your former employer's plan rather than rolling it over to an IRA, as workplace plans often have lower fees and stronger regulatory protections.

  • Consider College Savings Accounts: Coverdell Education Savings Accounts (ESAs) and 529 plans offer tax-advantaged ways to save for your children's college expenses, but these should be secondary to maxing out your retirement contributions first.

  • Take Control of Your Financial Future: Ultimately, it's up to you to take an active role in managing your tax-advantaged savings accounts and ensuring your financial security in retirement. Don't let inertia or complexity prevent you from making the most of these valuable opportunities.

Rule #4: Never Buy or Sell Individual Stocks

Here are the key takeaways from the chapter:

  • Investing in individual stocks is a losing game: The chapter provides multiple examples of individuals who invested in seemingly promising individual stocks, only to see those investments fail. The authors argue that individual investors do not have the expertise or ability to consistently pick winning stocks and outperform the market.

  • Financial advisors are not better at stock picking: The chapter notes that financial advisors are also subject to behavioral biases and overconfidence, and are not necessarily better at picking winning stocks than individual investors. Their expertise may lie in other areas, but not in superior stock-picking abilities.

  • No one on TV or the internet can predict the future of stocks: The chapter calls out financial personalities like Louis Rukeyser and Jim Cramer, who provide stock-picking advice, as well as various online sources, as being unable to reliably predict the future performance of individual stocks.

  • You're not a billionaire, so you can't invest like one: The chapter argues that the people promoting individual stock-picking strategies or "alternative investments" likely have something to gain, and that regular investors should not expect to be able to invest like the ultra-wealthy.

  • Alternative investments are highly risky: The chapter warns against investing in "alternative investments" like cryptocurrencies, collectibles, and other non-traditional assets, as they tend to be highly volatile and subject to unpredictable price swings.

  • Buy and hold indexed funds: The chapter recommends that the best investment strategy for most people is to buy and hold a diversified portfolio of indexed mutual funds or exchange-traded funds (ETFs), rather than trying to pick individual stocks.

Rule #5: Buy Inexpensive, Well-Diversified Indexed Mutual Funds and Exchange-Traded Funds

Here are the key takeaways from the chapter:

  • Actively Managed Mutual Funds Underperform Index Funds: Actively managed mutual funds, where professional managers try to beat the market, have consistently underperformed index funds that simply track the market. Over 80% of domestic stock funds underperformed their market index over a 5-year period.

  • Follow Warren Buffett's Advice and Invest in Index Funds: Warren Buffett recommends investing in low-cost S&P 500 index funds, which simply track the overall stock market, rather than trying to beat it with actively managed funds.

  • Beware of High Fees: Fees charged by mutual funds can significantly erode investment returns over time. Index funds have much lower fees (0.12% on average) compared to actively managed funds (0.89% on average). This difference of 0.77% can cost an investor over $100,000 in potential gains over 30 years.

  • Not All Index Funds are Created Equal: Even among index funds, expense ratios can vary significantly. Investors should look for the lowest-cost index fund options, as the differences in fees can add up over time.

  • Asset Allocation and Diversification: A simple portfolio should be diversified across stocks and bonds, with the stock allocation roughly equal to 100 minus your age. This provides exposure to both growth (stocks) and stability (bonds) based on your risk tolerance and investment timeline.

  • Recommended Portfolio: A sample portfolio for a 40-year-old investor could be: 40% bonds, 70% in an S&P 500 index fund, 15% in a small-cap index fund, and 15% in an international index fund.

  • Target-Date Funds are Not Guarantees: While target-date funds offer simplicity, they often have high fees and many investors mistakenly believe they provide a guaranteed return, which is not the case.

  • Keep Investing Simple: The recommended investment strategy is designed to be simple and low-maintenance, allowing investors to focus on other aspects of their lives rather than constantly monitoring their investments.

Rule #6: Make Your Financial Advisor Commit to the Fiduciary Standard

Here are the key takeaways from the chapter:

  • The Fiduciary Standard vs. the Suitability Standard: A fiduciary is a financial advisor who has a legal and regulatory duty to put your interests ahead of their own, while the suitability standard only requires that the advice be "basically okay" for the client, even if it benefits the advisor more.

  • Beware of Financial Advisors Affiliated with Brokerages or Banks: These advisors often prioritize selling financial products that benefit them over providing objective advice in the client's best interest, even if they appear friendly and trustworthy.

  • Pay for Unconflicted Financial Advice: If you want truly unbiased financial advice, you will likely have to pay for it, as "free" advice is often accompanied by hidden fees or commissions that benefit the advisor.

  • Beware of "Fee-Based" Advisors: These advisors may charge a fee, but they can also receive commissions, creating a conflict of interest.

  • Look for Fiduciary Credentials: Certifications like Certified Financial Planner (CFP) and Registered Investment Advisor (RIA) indicate the advisor is legally bound to the fiduciary standard.

  • Ask Directly if the Advisor is a Fiduciary: Explicitly ask the advisor if they are a fiduciary and if they will act as a fiduciary at all times when providing advice.

  • Consider Robo-Advisors: These automated, algorithm-driven advisory services can provide low-cost, conflict-free investment management, but you should still verify if they are operating under the fiduciary standard.

  • Do Your Due Diligence: Even with a fiduciary advisor, you should still research their background and disciplinary records to ensure they are acting in your best interests.

Rule #7: Buy a Home When You Are Financially Ready

Here are the key takeaways from the chapter:

  • Home Ownership is Not a Guaranteed Investment: Home prices can go up or down, and owning a home is a highly leveraged investment that carries significant risk. The housing market crash during the Great Recession demonstrated that home prices do not always appreciate.

  • Owning a Home is an Expensive Automatic Savings Plan: While owning a home can serve as an automatic savings plan, it comes with significant expenses such as interest payments, property taxes, and maintenance costs that make it an expensive proposition compared to renting and investing the difference.

  • Renting Also Carries Risks: Renting long-term can expose you to the risk of rising rents, which can price you out of a neighborhood, and the lack of control over your living environment.

  • Know Your Budget and Stick to It: Experts recommend spending no more than a third of your take-home pay on housing. Getting pre-approved for a mortgage can help you determine your budget, and it's important to prioritize your needs over wants when house hunting.

  • The 20% Down Payment is Best: The more you can put down on a home, the lower your monthly mortgage payments and the less likely you'll be to fall "underwater" on your mortgage. If you put down less than 20%, you'll have to pay private mortgage insurance (PMI).

  • Fifteen-Year Mortgages Can Turbocharge Equity Building: While fifteen-year mortgages have lower interest rates, the higher monthly payments may not be suitable for those with tight budgets or limited emergency savings.

  • Avoid Complex Mortgage Products: Adjustable-rate mortgages (ARMs) and interest-only loans may seem appealing, but they introduce more risk and uncertainty into your finances.

  • Build an Emergency Fund First: Before buying a home, it's crucial to have a fully funded emergency savings account to cover unexpected expenses, as homeownership comes with many potential financial surprises.

  • Get Debt Under Control: Lenders will scrutinize your debt-to-income ratio, and high levels of debt can make it difficult to qualify for a mortgage or put you at risk of financial distress.

  • Shop for the Best Mortgage: Comparing offers from multiple lenders is essential, as they may have incentives to steer you towards more profitable but more expensive mortgage products.

Rule #8: Insurance—Make Sure You’re Protected

Here are the key takeaways from the chapter:

  • Term Life Insurance: Term life insurance is the best type of life insurance to protect your loved ones at the least cost. It offers coverage for a set period of time (usually 1-30 years) and the premiums remain the same throughout the policy period (level term). Avoid whole life or universal life insurance policies, as they have higher commissions for the salespeople and are more expensive.

  • Disability Insurance: Disability insurance is essential, as one in four 20-year-olds will become disabled before retirement age. Social Security Disability Insurance (SSDI) payments are often not enough, so consider getting private disability insurance through your employer.

  • Property Insurance: For homeowner's and auto insurance, opt for high-deductible plans, as you likely won't be filing many claims. This can result in substantial savings on your premiums. Make sure your homeowner's policy covers flood and wind damage, not just burst pipes.

  • Liability Coverage: Liability coverage in your auto insurance should be at least twice your net worth, as it can protect you from financial ruin if you are found liable for injuries in an accident.

  • Rental Insurance: Rental insurance is inexpensive and protects your possessions and provides liability coverage, even if you don't own your home.

  • Health Insurance: Health insurance is essential, as medical bills can quickly lead to bankruptcy, even for those with insurance. Comparison shop for health insurance plans annually, ensure your preferred doctors and hospitals are in-network, and maintain a strong emergency fund to cover out-of-pocket costs.

  • Annuities: When considering annuities for retirement income, stick to low-cost, fixed immediate or longevity annuities. Avoid variable and equity-indexed annuities, as they have high fees and commissions.

  • Unnecessary Insurance: Avoid unnecessary insurance, such as insurance for new appliances, credit card balances, or life insurance for newborns. The exception is cell phone insurance for teenage children.

  • Insurer Reputation: Buy insurance from reputable, well-rated companies, as there is no guarantee they will honor claims, even with a valid policy.

  • Emergency Fund: Maintain a strong emergency fund to cover unexpected expenses and the deductibles on your insurance policies.

Rule #9: Do What You Can to Support the Social Safety Net

Here are the key takeaways from the chapter:

  • Budgeting, Saving, and Investing: By following the rules outlined in the book, you have likely made important and lasting changes to your financial life. You have a better understanding of your income and expenses, have set financial goals, and are saving more money. You have also invested in low-cost index funds and simplified your financial management through the use of budgeting software and automatic savings.

  • Financial Security and Protection: Your financial foundation is now firmer, allowing you to rest easier. You have an emergency savings fund to cover unexpected expenses, and your insurance coverage has been optimized to provide better protection at a lower cost.

  • Reliance on Government Programs: Even with good financial planning, many people still need to rely on government social programs like Social Security, Medicare, Medicaid, and unemployment insurance to get by or improve their financial situation. These programs are a crucial "last-resort insurance" that allows people to weather financial shocks and hardships.

  • Acknowledging Government Assistance: Many people are unaware or unwilling to admit that they have benefited from government social programs. It is important to be honest about the role these programs play in supporting our financial lives and to advocate for their continued existence and funding.

  • Collective Responsibility: While we must take care of ourselves and our families through good financial planning, we also have a responsibility to support our fellow citizens and ensure that everyone has access to the financial protections and assistance they need. This collective approach is the best way to ensure the long-term success of the financial strategies outlined in the book.


What do you think of "The Index Card"? Share your thoughts with the community below.