Four years ago, in a blog conversation with finance writer Helaine Olen, I joked that the best financial advice for most people is available for free in the library and would fit on an index card.
Then people started asking: "Where is the index card?" So I grabbed one of my daughter's 4x6 index cards and wrote out some basic rules. I snapped an iPhone picture and posted it online. The whole exercise took maybe two minutes.
In that weird Internet way, the card went viral. Helaine and I went on to expand the card into a little book, "The Index Card: Why Personal Finance Doesn't Have to be Complicated."
The advice was good, but it had one key limitation: The card has a decidedly middle-class shading. If you're a cashier earning minimum wage or a senior citizen on a low fixed income, you're not obsessing over the proper investment mix in your 401(k) account. I received many colorful emails of the sort: "Dear Prof. Pollack, I am a 28-year-old single mom. You just told me to save 20 percent of my income. If I could do that, I wouldn't need your card."
The critics were right. I have been trying since then to provide better advice for people of modest means. This is my best shot. Chunks of my first card are based on conversations with staff at the Financial Clinic, a group that helps to build financial security for people of modest means. They focus on how to get the basics right:
(Thanks to the Financial Clinic's Sasha Ostojic and Viviana Steinberg for sharing their insights. Also, thanks to Satori Bailey at the Center for Economic Progress.)
Most of this simple advice is useful at any income. But some items are more specific, too. Financial coaches explained to me that undocumented immigrants with employer identification numbers don't have to rely on check-cashing services, unreliable relatives or friends, or otherwise go unranked. They can open accounts at many credit unions. It's also especially important to make the best use of the earned-income tax credit and other public programs, such as the low-income assistance programs for food or home energy. The EITC is especially important as a strategic reserve and source of savings to be used wisely.
I added a second card with budgeting tips. Financial coaches emphasize the value of saving something, even though it generally won't be a whole lot. And follow whatever strategy gives you the mojo to save. Maybe that's an account you've mentally earmarked for your 4-year-old daughter's college or next year's vacation. Whatever moves you.
Once you have a strategic cash reserve (ideally, two months of living expenses), you have the breathing room to really plan.
If you have access to a 401(k), take advantage of that. It's easier to save when it's automatic. You can often get a match from your employer. Buy the cheapest index fund your employer offers. A target-date fund based on your 65th birthday is also a good option.
A Roth IRA is a further option if you can swing it. There are no immediate tax savings. But if your income is modest, this is no obstacle. The long-term investment gains are untaxed, and you have access to your contributions if you really need them without penalty for an emergency or a child's college.
As for budgeting, your goal is not a financial starvation diet, but to find a realistic and sustainable spending path. Keep a diary of everything you spend, including on your credit card statement. It's often surprising what you find.
You want to target your spending on the things that matter most to you, not on ephemera. If you love coffee or going to baseball games, there's nothing wrong with the occasional skinny mocha latte or Cubs ticket.
Check out your phone and cable bills, too. And seek cheap thrills. Outside Chicago where I live, great tickets to the Windy City Thunderbolts cost $9. Bad tickets to a Cubs game often cost $100. Chicagoland also has great high school basketball with future NBA stars.
Be most strategic about the big purchases, such as your housing and car. (Health insurance deserves its own column. All I will say here is: Don't go without.) The big things account for most of your spending. And you can always stop going to Starbucks if you hit money trouble. You can't stop paying your rent or for your car.
Don't rush into homeownership. Buy when you know you'll stay in an area for at least five to seven years, and when you have a 20 percent down payment without having to dip into your strategic reserves. A house is the most leveraged and undiversified investment you'll ever make. Don't get cute on financing, either. If you can't afford payments on a boring 30-year fixed-rate mortgage, you can't afford the house.
It's unfortunate that car buying is a ridiculous hassle. A late-model used car is a better deal than a new one. Consumer Reports is an excellent source of information. You can get quotes there from multiple dealers. If you know a local mechanic, ask him to evaluate a car you're interested in buying. Finance your purchase at a bank rather than at the car dealer if you can. Dealers offer a better price to cash buyers. Negotiate your trade-in separately, too.
Shop around for your auto insurance. Get the largest deductible you can. This saves money in two ways. It's inefficient for insurers to process small claims. More important, people who buy high-deductible insurance tend to be safer drivers, and thus are charged lower premiums. The same goes for your homeowners or rental insurance. You need insurance for the $25,000 problem. You don't need it for the $250 problem. That's what your strategic reserve is for.
As for the rest of your budget, a few insights can help. Credit cards are obviously a huge issue. Pay your credit card bill in full -- or as much as you can -- every time. Your credit card interest rate probably exceeds 15 percent. There's no better investment than to pay that down. Whatever you pay, pay on time -- always. Late payments trigger big penalties and fees. They also damage your credit score.
Beware the psychology of credit cards. There's a reason casinos take chips rather than cash at the poker tables. Most of us are more restrained when we use old-fashioned cash rather than credit for luxuries and binge purchases.
Paying cash means paying in full upfront. When a seller offers to help smooth your cash flow, she's really offering you a loan. These can be surprisingly pricey. Suppose, for example, your gym gives you a choice of paying $1,000 upfront for an annual membership or 12 monthly payments of $99 starting now. You're only paying $188 extra. But the equivalent interest rate exceeds 40 percent. It's probably worse than your credit card, especially if some other bargain is unavailable with the payment plan.
Also beware of the money sinks that disproportionately affect low-income people: Aside from their other obvious problems, smoking and heavy drinking are surprisingly costly.
Particularly when I talk with seniors, some of the toughest issues concern the need to avoid overpriced financial products and scams. "Affinity frauds" are depressingly common in every ethnic, religious and political group. Be wary.
It's a red flag when anyone asks you to invest your money through a church or community group, or through any product advertised on your favorite political TV. Vanilla investments such as target-date funds offered through Vanguard, Fidelity or other national firms are much better and safer places to put your money.
Then there are more straightforward scams. When someone calls or emails, you really don't know who is communicating with you. Don't give that stranger your credit card number, bank account number, or a password to anything over the phone or email. If an email says that it's from your bank and that a check just bounced or your account was hacked, don't reply directly or click any link in that email. Go to your bank's website or to the bank itself to investigate the alleged problem. The same applies when a charity or political cause contacts you.
Be smart about computer security and passwords, too. Don't use your birthday, your address or some lame combination like 1234.
Some further tips:
Have your paycheck or public benefits direct-deposited. This reduces the temptation for binge-spending. It's also more secure. Pay attention to the physical security of your key documents. Don't leave bank statements, credit cards and statements where strangers can access them. A locked fireproof box is a good investment. Shred such documents when you no longer need them, too.
You may face more complicated financial challenges. Don't be embarrassed to seek expert help if you are having financial difficulties or are considering some intimidating transaction such as a home-equity loan.
It's a huge red flag when anyone pressures you to sign something or to rush before you are ready. It's always OK to slow down, and to discuss things with a neutral trusted party who has your best interests in mind.
If you experience serious money difficulties, or you need more information about some financial concern, the federal government's Consumer Protection Finance Bureau is an excellent source of help. You can call them at 855-411-CFPB. They have an excellent website, ConsumerFinance.gov. CFPB staff developed an acronym SAVED, which has some useful tips. I modified and condensed their advice in the card above.
Finally, free financial coaches can be a big help. They help you methodically stay on a budget, work toward your financial goals, pay your bills on time and do other basic things right.
The Working Families Success Network is one way to find such services. You can also call your local United Way. The Financial Clinic is an impressive organization that offers these services. The Center for Economic Progress's Project Money is another.
Financial coaches are often linked with nonprofit social-service agencies and can often help you with other needs you might have, such as job assistance, legal aid or free tax preparation. They can set you up with other help -- for example, if you're considering bankruptcy or must renegotiate heavy debt from credit cards.
None of these index cards is the polio vaccine. They certainly don't replace the social safety net if you hit real trouble. If you have a modest income, you will probably face financial challenges. But following a solid plan can help.
By methodically attending to the basics of personal finance, millions of people improve their lives.
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Pollack is the Helen Ross professor of social service administration at the University of Chicago. He is co-author, with Helaine Olen, of "The Index Card: Why Personal Finance Doesn't Have to Be Complicated."