Nine Simple Rules for Money, as applied to Millennials

In 2013, University of Chicago professor Harold Pollack boldly stated that, when it comes to money, “the best advice for most people would fit on an index card.” Shortly after, he wrote nine simple rules for money management, which indeed fit on a standard 3×5 index card. For the most part, it is great advice. However, Pollack stated that this is the best advice for most people, and I believed his tips can be specifically tailored for millennial professionals.

Pollack’s Rule #1: “Maximize your 401(k) or equivalent employee contribution.”
Modified Rule #1: Maximize your 401(k) contribution or equivalent employee contribution, and HSA.

This is probably the single most important piece of advice from the index card, and it is even more important to young professionals with high incomes. 401(k) and Health Savings Accounts (HSA) are tax deferred accounts, meaning every dollar you put into these accounts, is treated by the government like money not earned.

That means that if you max out your 401(k) ($19,000 in 2019) and your HSA ($3,500 in 2019), your taxable income for that year decreases by a total of $22,500. Let’s look at how much money you would save for that year in federal income tax (the number increases even more if your state collects income tax):

Figure 1: money saved through tax deferred accounts based on tax bracket

That is a lot of money, even at the 22% tax rate. But wait! You are not allowed to touch this money until you are 59.5 years old without incurring heavy penalties. Yes, you should spend HSA funds for healthcare costs (think of it as a discount equal to your tax rate), but for the sake of simplicity, let us assume you don’t.

If you are 30 years old today, then your tax savings will be invested for the next 30 years. Let’s look at how much money you will have at age 60, accounting for a conservative 6% growth rate, and a historically accurate 8% growth rate.

Figure 2: value of savings after 30 years

I think the numbers speak for themselves. This value does not account for the full $22,500 you put into your 401(k) and HSA for one year. This is only the amount of money that was not collected by the federal government in one year.

Granted, this money will not help much with early retirement. However, responsible financial strategies like this will help you plan for the long term as well as the short term. It is better to wait longer to collect your money than give it to Uncle Sam.

Pollack’s Rule #2: “Buy inexpensive, well-diversified mutual funds such as Vanguard Target 20XX funds.”
Modified Rule #2: Buy inexpensive, well-diversified mutual funds such as S&P500 index funds.

Vanguard Target Funds are mutual funds for retirement planning, with the 20XX being the year you are aiming for retirement. Generally speaking, they are comprised of stocks and bonds, with the ratio of stocks to bonds decreasing as retirement approaches for a more conservative portfolio. For example, the 2020 fund will probably include 20% stocks and 80% bonds, while the 2060 fund will include 90% stocks and 10% bonds.

The Vanguard Target 20XX funds are fine, but they consistently underperform against the S&P 500 index funds, and charge higher management fees. Investing in the S&P 500 index funds is a more aggressive approach, and generates wealth at a much faster rate.

Pollack’s Rule #3: “Never buy or sell an individual security. The person on the other side of the table knows more than you do about their stuff.”
Modified Rule #3: “Never buy or sell an individual security. The person on the other side of the table knows more than you do about their stuff.”

I know everyone has that relative who invested in Amazon five years ago and brags about how much money they made, and you I know you hear stories online about Bitcoin millionaires. I have also heard these stories, and this does not change my stance.

For every bitcoin success story, there is also the untold story of a person who took out loans to invest in bitcoin right as it crashed. For every Amazon, there is a Boeing. It is so difficult for the average person to pick stocks based on current information because they are buying stock from people with much more information. You might win, but you will more likely lose.

The only way to consistently succeed in the stock market is to have a diversified portfolio and hold on to investments for extended amounts of time. Referring back to Rule #2, I encourage every young professional to buy S&P 500 index funds because it provides a diverse portfolio with a high ROI. Just keep investing every time your paycheck comes in.

Step 2: profit.

Pollack’s Rule #4: “Save 20% of your money.”
Modified Rule #4: Save at least 50% of your money.

20% is way to little if you have a high income. Earning more money should not be an excuse to spend more money. It means that a larger percentage of your income is “disposable,” but I would encourage you live below your means, and invest the difference, for a few reasons.

First, saving more money now allows you to generate more passive income in the future. Money invested responsibly is always worth more than money is today. Every dollar invested will more than double in value in just 10 years, even adjusting for inflation. Thus, you are crippling your ability to generate wealth by spending any money that you do not need to.

Second, if you get accustomed to living at a high income level, you will be unable to transition to a less stressful, lower paying job later on, while maintaining your lifestyle. This is also referred to as the “golden handcuffs.” As an example I see far too often, a big firm attorney will buy a fancy new car and a million dollar home with his $200,000+/year salary, only to end up chained to a job he hates in order to avoid bankruptcy.

Third, saving is fun! No material object in the world brings me as much joy as checking my growing investment accounts. I just keep picturing a morning in the near future, when I will wake up and know that I don’t need to go to work.

Pollack’s Rule #5: “Pay your credit card balance in full every month.”

I have no edits to this rule, but I will note how important it is. Credit cards, on average, charge an insane 19.24% in interest. If you do not pay off your credit cards, retirement is impossible.

As an important corollary to this rule: if you have credit card debt from before you started working, pay it off ASAP! Student loans have an average interest rate of 5.8% (and are easily refinanced), auto loans average 4.1%. Those rates are much more bearable than credit card rates, so you can make smaller payments for those loans in the meantime.

Pollack’s Rule #6: “Maximize tax-advantaged savings vehicles like Roth, SEP, and 529 accounts.”
Modified Rule #6: “Maximize tax-advantaged savings vehicles like Roth, and 529 accounts.

This is similar to rule #1. These are some of the tax “loopholes” that are available to everyone. Everyone should take advantage of it.

Pollack’s Rule #7: “Pay attention to fees. Avoid actively managed funds.”

This is great advice. Plenty of studies show that it is almost impossible for anyone to consistently beat the market without insider trading. Some hotshot broker might beat the market (or at least claim to) half the time, but she is likely to underperform the other half.

Even if she does consistently beat the market, it is likely only a small margin. Once you account for her fees, you almost always end up in a worse spot. Just put all your money into the S&P 500.

Pollack’s Rule #8: “Make financial advisor commit to a fiduciary standard.”
Modified Rule #8: Don’t use a financial advisor right now.

All the financial advice you need to know fits on an index card, so why do you need to pay someone else to manage your money for you? Eventually, as you collect assets and diversify your portfolio, it may become too complicated to manage yourself.

When you need to keep track of your income from investment accounts, rental properties, self-employment, etc. in addition to your salary, then you should definitely get a financial advisor and a great accountant. As a young lawyer focused on paying down loans and investing, you don’t need that additional cost.

Pollack’s Rule #9: “Promote social insurance programs to help people when things go wrong.”
Modified Rule #9: Promote social insurance programs to help people when things go wrong, if you feel you are in a position to do so.

I’ll be honest, this one is tough for me. Giving back to the less fortunate is something I genuinely believe in, but I acknowledge how difficult it can be to create space in a budget after accounting for savings, loan repayment, and cost of living.

That being said, I would gently encourage everyone to give something to charity. While we all work hard for every dollar, I feel it is important to acknowledge our privileges and give back to society. Personally, I believe I am making the world slightly better, so I am willing to pay for that “warm fuzzy feeling.” As a side benefit if you itemize your deductions, charitable donations are deductible, so it is like the government is paying a portion of your donation.

If anyone is interested, I periodically donate to the American Humane Society. I have always had a soft spot for animals, and they do great work.