Seven years ago, I saw this column by Ezra Klein in the Washington Post. “This 4×6 index card has all the financial advice you’ll ever need.” Sounds too good to be true, but it really wasn’t. All these years later, in an industry whose guidance seems to change every year, everything on that index card lines up well with advice I’ve heard from Ramit Sethi, on the Bigger Pockets podcast, and in some of the more responsible corners of the internet.
I’ve ended up with some general finance principles of my own, pulled together from resources like these. Here they are:
- Pay yourself first
- Dollar cost average
- Don’t pay fees
- Use credit cards / don’t use credit
- Need vs. Want
- Don’t sweat the stuff you love
Pay Yourself First
This is above and beyond the most important financial rule I live by: I auto-save money from my paycheck each month, taking it out before it even touches my checking account and before I can make the stupid decision to spend it. The idea behind “pay yourself” is that you’re essentially giving yourself a direct deposit, choosing a deliberate use for the money, rather than spending it on an Xbox or some other spontaneous buy. I’ve taken this a step further in the last year, and only give myself a fixed amount in my checking each month to spend. Essentially the same concept, but it means my spending stays flat as my income grows.
Dollar Cost Average
In 2016, not long after I graduated from college, there was a lot of talk on the internet about an impending recession. So what did I do? For about three to six months, I kept my 401K in cash. Not only did I keep my principle uninvested, but I wasn’t buying anything with the money I set aside each month. Lo and behold, I wasn’t able to time the market, and I missed out on months of purchases that would have done well over the course of the four year bull market that followed. Lesson? Don’t try to time the market. I buy the same amount of stocks every single month, which means I buy when stocks are a bargain and when they’re overpriced – but it averages out in the long term. In 2016, I was spending a few hours a day reading about the stock market, which I generally wasn’t interested in, and seeing absolutely no benefit in returns. Today, it takes me a couple of days to find out whether something bad has happened in the market. It doesn’t impact anything I do, so it’s irrelevant.
Don’t Pay Fees
I remember the first time I read the chapter in The Intelligent Investor about fees. I felt like I was witnessing highway robbery, and everyone else around me was doing nothing. Growing up, my dad taught me about picking mutual funds, and it seemed like the practical, “smart” way to invest at the time. Fast forward to adulthood, and it turns out the difference between a passively managed index fund, like SPY, and an actively managed mutual fund, like PRCOX, is substantial. The average expense ratio for index funds is 0.09%. For mutual funds? 0.82%. That difference alone, on $1,000 invested annually for 30 years, adds up to $13,000 more in fees paid. Seems like a no brainer, particularly when you see that on average, after fees, mutual funds perform worse than passively managed funds. Read Nerd Wallet’s comparison for more details.
Use Credit Cards / Don’t Use Credit
This is where I will differ the most from the majority of personal finance blogs out there. I don’t see any benefit to using rewards credit cards, and here’s why: Their influence on my spending behavior causes me to spend more money than I would otherwise make in “free” rewards. One of the most fundamental pieces of personal finance is knowing what you’re spending, and when you’re putting $500 group dinners on your card for the points, you lose sight of that pretty quickly. I now have roughly five credit cards in my “wallet” (i.e. desk), and four of them are used to pay individual subscriptions each month (cloud storage, NYT etc…). It keeps the lines of credit open and the utilization extremely low, which juices my credit score. The rest of my spending I put on a cash back card, and I pay it off multiple times throughout the month, effectively using it like a debit card. There are certainly people out there who can take advantage of the rich rewards landscape, but I don’t have the time or the restraint to do so without compromising on my other goals.
Need vs. Want
A while ago I realized something that should have been extremely obvious: I only get an urge to buy something when it’s thrust in my face. I’ll be mid-buy at a site like J. Crew before remembering I only went to the site in the first place because I got an email. I had zero – ZERO – need to buy anything before getting that email. Even so, my mind just unconsciously clicked the link and found something it liked. Need vs. Want. I find myself using this dichotomy (with about 75% success, if we’re being honest) whenever I’m about to buy something. Do I really need this? I try to sleep on whatever purchase I’m about to make for a couple of days, and usually my so called “need” dissipates with sleep. Example? I’ve “needed” new dress shoes on and off for the last year, but miraculously, over that period of not pulling the trigger, I’ve gotten by just fine with the pairs that I have. The reality for many of us, who are fortunate to have good, high paying jobs out of college, is that our disposable income seems a lot higher than it is, and the material goods we feel we need seem a lot cheaper. You can only buy so many pairs of cooltech, yoga-ready, stretch chinos before you’ve eaten away all the money you could have saved/invested. This mantra is made a lot easier by “paying yourself first.”
Don’t Sweat the Stuff You Love
Ramit Sethi says that his guilty pleasure purchase is a cashmere sweater. More power to him. My guilty pleasures are books, running equipment and races, and food. I figure if I learn one thing from a book, it’s well worth the cost of a movie ticket, or Chipotle burrito; running equipment is still cheaper than a gym membership and races are what motivate me to keep training; and luckily my food splurge is on $5 bagels, dumplings and other “street foods,” rather than the $295 tasting menu at Eleven Madison Park. In any event, if you spend the day at work, making money that you entirely sock away for some undetermined future, you will be very unhappy. So I do two things: I don’t sweat the stuff I love, and I spend time crystallizing the future I’m saving for.
Next Steps
At the end of the day, personal finance is an iterative process. If you try to go out and emulate every single piece of advice all at once, you’ll find yourself burning out in no time (like any other habit). I have gradually fine-tuned my own principles over the last five years, incorporating things I find interesting and then implementing more aggressive changes as I become comfortable. Below are some of the resources I have found extremely helpful along the way:
I Will Teach You to Be Rich – Ramit Sethi
Nerd Wallet (ignore the points gaming, read the blog posts)
The Intelligent Investor – Benjamin Graham