The Index Card: Why Personal Finance Doesn't Have to Be Complicated

by Helaine Olen

Why are so many of us paying only the minimum? Many of us probably can’t afford to pay more.

But others are likely falling prey to a concept cognitive psychologists call anchoring.

A study published in 2012 by two professors at Northwestern University’s Kellogg School of Management found that the more bills people were able to put to bed—no matter what the amount—the more likely they were to work their way out of debt. You have to know yourself. If you need the psychic boost

Quick note about consolidating student loans: This can be very tempting. For starters, it allows you to pay one or two bills a month instead of making payments to what could be several different lenders. It also reduces the overall monthly payment, freeing up cash for other uses. No-brainer, right? Not quite. As with other consolidated loans, the lower monthly payment might well come at the cost of lengthening the term of the loan and increasing the amount of money you are going to pay over time.

a onetime offer.

One other thing we learn from behavioral science: Men tend to achieve lower returns than women. It’s not because the ladies are better at stock picking. Rather, women are better at not picking stocks than men.

There’s no good reason to miss a child’s bedtime story or an evening out with friends so you can read Facebook’s annual report. There’s no good reason to let something slide on your day job because you are working on your investments either. Your time is valuable. Your happiness and economic security depend on your marriage, your family, your success at work and in your relationships. Investments in those areas are almost certain to pay off.

a few years ago, the now-octogenarian Buffett published a letter to his two sons and one daughter saying how he thought they should invest when he was no longer here. His suggestion? “A very low-cost S&P 500 index fund.”

passive management.

These fees really add up. We can’t repeat it enough.

The sooner you think you need the money, the less risk you should assume. If you have a pot of money put aside to buy a house, and you are planning to purchase it this year, you should probably move it into a short-term bond fund.

The same is true for your emergency money. Never make the assumption that a stock market that is going up will continue to go up until the day you need the money.

So how do you determine how much money you should put in stock market funds versus bond funds? Well, conventional advice goes something like this: 1. What’s your age? 2. Subtract that number from 100. 3. The answer is the percentage of your assets that should be invested in stocks.

As for bonds, once again, you don’t need to go out and research individual offerings from companies, not to mention all sorts of governing authorities ranging from the U.S. Treasury to local municipal construction projects. A long-term bond index fund will suffice. This is a fund where the bonds have a minimum maturity of ten years. The thirty-year Treasury bond is a classic long-term bond.

Remember Harold’s favorite phrase: “If it’s free, you are the product.”

saying: “If you sit down for cards, and you don’t know who the sucker is—you do.”

If you want unconflicted financial advice, you almost certainly have to pay for it.

Many studies indicate that commutes matter too. An easy commute (or no commute) makes people much happier than that fancy kitchen upgrade. Really. A group of economists and psychologists surveyed more than nine hundred people about their satisfaction with various life chores and choices. The activity that made them the unhappiest: their morning commute.

If you are looking to turbocharge your home equity, you might consider a fifteen-year loan instead of the conventional thirty-year loan. Fifteen-year loans come with a lower interest rate—usually by half a percent or so. The shorter lending period allows you to build up your nest egg faster, making for a better automatic savings plan. Harold has one of these.

We like what Elizabeth Warren calls the “plain-vanilla” options: the traditional fifteen- or thirty-year fixed-payment mortgage, preferably with 20 percent down. If you can’t afford that, chances are your budget is stretched in other ways too. You don’t want to make yourself more vulnerable to a financial setback.

Our advice: We think longevity annuities are a great idea, provided it is a fixed annuity. If you decide to go this route, make sure you are getting a low-cost annuity. The best way to do this is to turn to a low-cost provider like Vanguard or TIAA-CREF.

But it’s more than that. We need to admit we are the 96 percent. Be honest about not just what you pay in taxes but what you receive in

return. Almost all of us have been helped—or have friends or relatives who have been helped—by unemployment insurance, Medicaid, food stamps, Pell Grants to attend college, or other government offerings. All too often, we take them for granted, but without them many of us would be in worse financial shape. Acting together, we can protect one another against financial and health risks that would crush any one of us, were we forced to face them unassisted.

We must take care of ourselves and our immediate families through better planning, saving, and investing. When we do that, we are in a better place. But we must take care of our fellow citizens too. That’s the best way to ensure that all the new changes we’ve a...