I’ve always believed that the basics of financial and retirement planning are ridiculously simple. I blame the financial services industry for complicating things – perhaps to create a mystique around what we do.
For example, the most important things you need to know about financial planning are these:
- Spend less than you earn;
- Pay yourself first, and;
- Protect yourself from personal disasters that can crush your finances.
Thousands of books have been written that tout those three ideas.
When University of Chicago professor Harold Pollack interviewed award-winning financial writer Helaine Olen he made the suggestion that everything you need to know about personal finance could fit onto a single index card. To demonstrate, he scribbled a list of rules onto a four- by six-inch card.
The two then collaborated on a little book called The Index Card: Why Personal Finance Doesn’t Have to be Complicated.
I appreciate simplicity and love the idea of a simple set of guiding principles. It can be far more effective than one of those monster financial plans of 20 or 30 pages that only engineers ever use.
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What you can do
Your personal card can include some basic principles such as my three numbered items above. Honestly, there’s nothing magical about living below your means and paying yourself first? They’re common-sense. The problem is that so few people actually do those things. Putting your principles onto a card and reviewing them periodically makes you accountable and more likely to achieve your goals.
You might start by writing down on a pad of paper what’s important to you about money. What do you need it to achieve? That’s not as glaringly obvious as you might imagine. Do you want to save as much as you can for an early retirement or do you want to spend everything you have (or more) with no concern for your future (in which case you’re probably not reading this anyway.)
What’s your income and your monthly spending. Perhaps you already have a budget or at least you have your spending under control. Write down all of your debts, what they’re for and the interest rates.
How is your retirement planning coming along? Are you on track?
What investments do you have and how are they managed? Have you considered the merits of RRSPs versus TFSAs and other means of investing? Is your investing automated so that your investments are made monthly from your chequing account – which discourages bad behaviour that can crush your investments?
The book advocates saving at least 10 per cent and perhaps up to 20 per cent of your income. This rule is huge but so few actually do it. Do this for many years and you should be more successful than 95 per cent of Canadians.
I’d say that for every five years that you delay you will need to increase your savings rate by two per cent. Don’t wait; it’s terribly destructive to your retirement planning.
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The authors also strongly discourage people from owning individual stocks, which is much like gambling. They say that you should have insurance to protect against life’s mishaps that can devastate your investments.
Pick this book up just for the advice on how to set up your own index card. It’s $33 and money very well spent.
The authors advise that you, “take a screen shot of (your card) so you can keep it on your phone. Carry it around in your pocket. Make it the default screen saver on your laptop. Heck, have it tattooed on your arm if you want.”
But create your own card. It’s a summary of your goals and what you need to do to achieve them. It’s important.