9 Easy Tips to Manage Your Personal Finances

Tips to easily manage your personal finances can be hard to find – let alone find something that works for you.

Well-managed personal finances provide a level of flexibility in life. It can lead to providing a strong foundation to find your dream job, starting your dream project, or allow you to take a month-long sabbatical to travel the world.

During college, a lot of my friends studying finances were throwing entire paychecks into the stock market – betting on futures, buying IPOs, or cryptocurrencies. I didn’t know what any of that meant; yet, they were seemingly making thousands. Only to lose it the following week. It made investing seem risky and complicated.

Investing for retirement is important. However, this game of chance didn’t seem like the investing I was hearing preached by my professors.

To overcome this game of chance, I sought out to learn the bare bones of stock market investing in the hopes of growing my money safely and reliably.

What I stumbled across is Harold Pollack’s index card. I first read his blog post, heard him on a Freakonomics Podcast, and then checked out his book.

His investing advice, which all fits on an index card – helped me smartly save for the future. Basically, providing easy personal finance tips.

Saving for the future does not have to be complicated, or risky like my friends were making it seem.

The below nine points are from the index card, along with additional insights, all aimed at helping you easily manage your personal finances.

NOTE: Some of the below points are my personal expansion upon Mr. Pollack’s index card. I am not a financial advisor, use the tips below at your own discretion.

The 9 Index Card Tips – How to Easily Manage Your Personal Finances

1. Max your 401(k) or equivalent employee contribution        

Let’s say you make $100,000 and your employer offers a 5% match if you also allocate 5% of your paycheck into your 401k each month. Over the course of the year, you will put in $5,000, and your employer will match that $5,000. At the end of the year, you saved a total of $10,000.

The 401(k) contribution is the closest thing that comes to “free” money on this list.

2. Buy inexpensive, well-diversified mutual funds such as Vanguard Target 20xx funds.

There are funds called “Target Date Funds”. These are passively managed accounts for your age group. By age group, that means when are expected to retire. Think of your retirement date and pick the fund closest to the year you plan on retiring. When you are younger, you want to be invested in heavy growth, higher-risk stocks that have a chance to make your money grow exponentially because you have decades before you need that money for retirement.

As you get closer to retirement, you want to have fewer stocks and more bonds, because bonds are safer in terms of steady money at the cost of less chance for exponential gains.

An easy rule is to take 110 minus your age. If you are 25, you should invest in 85% stocks and 15% bonds. What the Target Date Funds do is automatically balance this ratio for you.

3. Never buy or sell an individual security. The other person on the other side of the table knows more than you do about this stuff.

Stockbrokers and others on Wallstreet spend 90+ hours a week focusing solely on the market. They have advanced, expensive tools to help them make predictions and forecasts. Plus they know the industries inside and out.

Stockbrokers are still wrong about half the time. Trading individual securities, say putting all your money in Apple, is extremely risky for personal finance. Hypothetically, if all your money is tied up in Apple stock and Apple gets hit with a scandal that causes their price to drop 50%, your decades of savings drop with the company. Some companies recover, but it is a lot of personal risks to leave up to a company you have no control over.

A safer bet is to invest in index funds that track the S&P 500. The S&P 500 fund will never outperform the stock market because, in a basic sense, it is the stock market. This fund is invested in the top 500 companies in the United States, and it will track to whatever they as a whole are performing. Also known as the S&P 500 Index, this index averages a 7% increase over the average working person’s lifetime. In several studies, it shows that only 2% of stockbrokers can beat the S&P growth in five consistent years. 

If you pick one S&P 500 index fund and invest in it consistently over five years, you will make more portfolio growth (money) than 98% of the people who make a living trading stock.

4. Save 20% of your money.

If you save 10% of your money, it will take over 40 years to hit retirement with your current salary’s standard of living. By saving 20% your personal finances are more in line to have a more stable, and quicker retirement. Keep in mind, this is total savings.

In the above example, the total 10% savings from the 401(k) (5% from you and 5% from your employer) already counts towards this. You just need to make up the difference in savings.

As food for thought, if you can save 50% of your salary, you could retire in 15 years at the same standard of living your current salary affords. Saving more moves up that retirement date drastically.

5. Pay your credit card balance in full every month

Credit cards are extremely convenient, but they must be paid off in full every month. If you pay the $25 minimum, it can take up to three ½ years to pay off a bill as low as $1000. Not only that, but the $1,000 is also hit with a 24% interest fee, so you are now really paying off $1,240. Paying the bill off in full avoids the feeling of debt, the cost of extra payments, and it is one less financial thing to worry about.

This was just $1000. If credit cards get out of hand, it can lead to a debilitating cycle of paying minimums and not being able to afford the interests that continues to grow. To avoid this headache, pay in full every month.

6. Maximize tax-advantaged savings vehicles like Roth, SEP, and 529 accounts.

These accounts give you tax-free money when you retire if you invest into them early. Taking the Roth IRA as an example. You open this account with your brokerage firm, and you can invest $6,000 into this account every year. Your money can be invested into the Retirement Date funds discussed earlier so it grows without you having to manage it. Hypothetically, if you contribute every year, for 40 years the max $6,000 a year, that total of $240,000 can grow into $1,340,000 of tax-free dollars for retirement to use at the age of 59 ½. Talk about a great retirement present to get yourself!

7. Pay attention to fees. Avoid actively managed funds.

The index funds we are talking about typically charge .02% to manage the fund, regardless of net gains and losses. If you save 10% of your income, after the index funds cost is taken out, you will have saved 9.98%. Active funds charge about 2%, which means if you planned on saving 10% you are now only saving 8%. This is also regardless of how the actively managed fund makes money; the 2% will be taken from your portfolio even if they lose your money.

2% might not seem like a lot, but in the Roth IRA example, if your active managed fund charges 2% of all your money every-year, by the time you retire, that $1,340,000 will be reduced to $800,00 or so. That 2% eats away hundreds of thousands of your dollars.

8. Make your financial advisor commit to the Fiduciary Standard

The Fiduciary Standard requires your financial advisor to be bound by law to putting your interests above their own. The fact this is even a law made in the 1940s shows that some financial advisors are out to rob people of their money, or at least grow their own money at the expense of their client. When seeking a financial advisor, look for one who offers to commit to the Fiduciary Standard or, when prompted, has no problem being held to it by contract.

 If the financial advisor tries to guilt you with things like, “don’t you trust me?” walk away. They don’t have your best interest at heart.

Financial Advisors can be a big help in planning your personal finance for the future and helping balance portfolios. Look for ones who will commit to the Fiduciary Standard, and preferably, charge by the hour, not by taking a percentage of your investment portfolio.

9. Promote social insurance programs to help people when things go wrong.

Pay your taxes in full, not a cent more, but pay your fair share. This helps your country run smoother. Also, set aside some money for causes you believe in. I once heard a quote that, “if you have a $100 but can’t give $10 to charity, what makes you think you will give $1,000 when you have $10,000?”. I know the notion of giving more when you have more to give, but that can be a slippery slope of never “having enough” to give to charity.

Main Take-Aways:

• Investing is not gambling; it isn’t picking stock randomly and betting they make you lots of money.
• Personal finance is pretty boring and simple. It means saving money, and using the saved money to invest in safe, and well-diversified index funds to promote continual growth

Action item

How is the picture of your personal finances looking? What is one tip you can start implementing this week to start saving for retirement and being smarter with your money?