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The 4 x 6 Guide to Life

Over at the Washington Post’s Wonkblog, Ezra Klein provides a 4×6 index card compiled by University of Chicago social scientist Harold Pollack that claims to provide “all of the financial advice you’ll ever need.” Pollack’s recommendations are below:

Let’s lay that final recommendation aside, as it clearly wanders off from the world of personal finance into public policy. What do you think of Pollack’s recommendations? If you were compiling your own list, what would you add or subtract from his prescriptions? What do you regard as the most commonly made financial mistakes or the most infrequently exploited means of wealth creation? 

  1. Little Ricky Cobden

    I agree with and follow all of these prescriptions except the last. In fairness my views on the safety net have softened as I have grown older. I have made my peace with the earned income tax credit for example as well as other programs that promote work. I’ll never accept the social security system as currently constituted. It needs to be privatized.

    One suggestion I do have is to view your home as a place to live not an investment. Buy enough home to fill your family needs but carry no more than 25% of household income in mortgage payments. This means saving more for a down-payment and buying less home in most cases especially for young adults but it will avoid much stress and build a stronger financial position in the long run.

  2. Casey

    Obviously, he just needed that last one to fill out the 4×6 card.

    I’d swap it out with something like – Renting isn’t as bad as they say and home ownership isn’t as good.

    Troy Senik, Ed.: 

    What do you regard as the most commonly made financial mistakes or the most infrequently exploited means of wealth creation?  

    Borrowing and borrowing.

  3. Michael S

    I think Nassim Taleb’s suggestion (given on a recent EconTalk episode) that one shouldn’t take advice from someone without “skin in the game” (who stands to lose financially should the advice be wrong) is a wise one. A fund manager who doesn’t put his own money where his mouth is doesn’t believe his own advice and neither should you.

  4. Israel P.

    Pollard or Pollack?

  5. Mark

    Carry enough insurance to provide for your reasonable needs and cover reasonably probable risks.

  6. Scott R

    That last item on his list undermines all else on the list, since those programs subsidize NOT saving for a rainy day.

      

  7. Valiuth

    I think for many people saving 20% of their income isn’t that doable. I think it is also becoming less doable every year.

  8. Annefy

    @Valiuth: I laughed maniacally at that one. The instructions would be better identified as: what to do with your money … If you have any.

  9. robberberen
    Troy Senik, Ed.:

     What do you regard as the most commonly made financial mistakes

    Buying new cars.  It’s crazy to put a large percentage of your annual income into a rapidly depreciating asset.  It’s even a mistake if you’re paying in cash, but if you’re borrowing or (gasp!) leasing, it’s sheer idiocy.

    Most people’s monthly car payment, if invested in other assets, would probably make them a millionaire by the time they retire.  Hope you like that new Dodge Charger…because thanks to it, you’ll be living off social security when you’re 70.  Oh, and also — nobody’s impressed by it.

  10. robberberen
    Valiuth: I think for many people saving 20% of their income isn’t that doable. I think it is also becoming less doable every year. · 16 minutes ago

    If that’s true, then they need to cut their lifestyle.

  11. Barkha Herman

    I advise all the interns I work with and recent graduates to do just that – put 20% away.  If you don’t form the high spending habits when you first get your job, it becomes harder as time goes on.

    I would add that if you are a double income family, put one income away for a rainy day.

    The question is in what?  What happens when you’ve done all of the above and the monetary system and industry in your country collapses (I have friends from Argentina that this happened to)?

  12. Barkha Herman

    btw – someone told me about Dave Ramsey’s 7 steps.  I found that I was already following all of them, so I moved on…

  13. Miffed White Male

    Interest is the devil.

    Tax deductible interest is a lesser demon.

  14. John Walker

    If I were a young person in the U.S., I would be very wary of putting a large amount of my savings into the various tax-advantaged vehicles he recommends.  When a government is faced with bankruptcy, private pensions are an extremely tempting source of funds to be seized and converted into government annuities.  This has already happened in Argentina, Hungary, and Poland, so this is not a hypothetical situation.

    Tax-free compounding is an extremely attractive way to build wealth, but must be weighed against the risk of having your wealth confiscated or converted into something you can’t live on and/or repaid in depreciated currency.

    I would add to the list, “Learn the power of compounding.”

  15. Valiuth
    Blake

    Valiuth: I think for many people saving 20% of their income isn’t that doable. I think it is also becoming less doable every year. · 16 minutes ago

    If that’s true, then they need to cut their lifestyle. · 4 minutes ago

    Easy to say that if you aren’t the one that has to do it. I think what underlies that assumption is a certain level of income. Not everyone make that much money. If you just graduated and are pulling in 30K well between rent, car, loans, and food I don’t think you have 20% left. I guess the expectation could be that you just go for bare minimum. Ramen, dingy studio in bad section of town, used car. But, the cost of that is still felt. 

    I think the real thing people should be told is that there is no such thing as retirement. Plan on working until you die or get too sick to work. That is the future I foresee. 

  16. CuriousKevmo
    Barkha Herman:  What happens when you’ve done all of the above and the monetary system and industry in your country collapses (I have friends from Argentina that this happened to)? · 2 minutes ago

    I made some of the Ramsey mistakes as a younger man but have righted the ship and follow Dave’s advice and the advice on the card (save the last bit of nonsense).  However, since Lehman went under I just feel like a sucker.  I know people with massive debt and back taxes owed ($600,000) and they still are off vacationing in Mexico and living large.  Meanwhile, my nest egg inflates away to nothing. 

    It seems that so many, including the government, have made a mess of their financial lives such that they will have to go after those of us who were smart because that is where the money is.

    Whenever I hear the Demoncats talk of nationalizing 401(k) plans I shudder.  That might be the last straw for me.

  17. PracticalMary
    Barkha Herman: I advise all the interns I work with and recent graduates to do just that – put 20% away.  If you don’t form the high spending habits when you first get your job, it becomes harder as time goes on.

    I would add that if you are a double income family, put one income away for a rainy day.

    The question is in what?  What happens when you’ve done all of the above and the monetary system an · 2 minutes ago

    Unfortunately while this may be good advice there are no guarantees you will be able to keep enough of your money to make it worthwhile. That is the problem with socialism and is happening now.

    Some of these things may not be the thing to do if you want to start your own business. You have to take risks but need to be prepared if they don’t pan out. You may be dead later, afterall.

    I believe that most people should dedicate a good portion of their income to owning their home. Investments beyond a 401k aren’t for most people, you have to live somewhere, and real estate is a good long term bet.

  18. 1967mustangman

    I am not keen on number 2.  I was in a target retirement fund but found it too conservative for my tastes.  The general wisdom of 100% minus your age in stocks can be a recipe for running out of money before you die.  

    As long as you don’t become emotional about your money the 100/10 approach will earn you a great deal more (invest 100% of your money in stocks until 10 years before retirement then start diversifying).  In any given 40 year period you would be better off that way.  As long as you are willing to delay retirement by a few years if there is a crash you will make most or all of that money back anyway.  

  19. 1967mustangman
    CuriousKevmo

    Whenever I hear the Demoncats talk of nationalizing 401(k) plans I shudder.  That might be the last straw for me. · 6 minutes ago

    In all seriousness I believe that this would lead to the overthrow of the government.

  20. Dave

    What does make your adviser commit to a fiduciary standard mean?