Should you “simplify your finances"? No, just gain control & understand your finances
Truth is something which can't be told in a few words. Those who simplify the universe only reduce the expansion of its meaning.
After reading a recent article in Kiplinger’s Finance Magazine on simplifying your finances, I wondered if your personal finances can really be made simple. Sure, many of us hope so ....
But, I am not sure that “simple” is best.
However, gaining control of your finances and a better understanding does make sense.
Here are some ways that help you gain control that may also “simplify” your life:
Cash management and Debt management
Set up automatic payments with vendors so they use your bank or credit card, or set up payments using your bank website.
· If the payments are regular, and of similar amounts, you save time and can plan on the withdrawals.
· However, if you change banks, sorting and resetting auto-pay at the new bank can be a major headache. Similarly, if you change credit cards, you need to update information with all vendors.
You can also automate tracking of your spending by using websites like Mint or Personalcapital. Or, you can use Quicken or QuickBooks software from Intuit to track your bank and credit card accounts. You can download from your bank and credit card websites into the program and then review to analyze your cash flow and spending.
Setting up direct deposit for payroll into your checking is great. You can also split part so it goes to savings or even have some go to your investment accounts. You will then need to follow up to invest the cash that accumulates, but having money set aside saves it from being spent, and adds to your investments
Kiplinger’s recommended consolidating retirement accounts to avoid low balance fees. It also makes updating beneficiary designations easier.
While avoiding fees makes sense, am not sure that putting all investments into a single retirement account does. You cannot do this if you have Roth and pre-tax accounts like a 401(k) plan, and you probably should not do it if you have contributory IRA and 401(k) accounts that are subject to different tax rules.
Kiplinger’s also recommended using one broker for your taxable accounts. This makes more sense, in that you have a higher balance which should mean lower fees and more attention from the broker. However, I prefer using exchange traded funds, or ETFs, and avoiding most broker fees, which means essentially no attention from a broker.
One article said that your investment plan should be to “sign up and forget it.” While avoiding investment pitfalls like second-guessing yourself out of panic when a fund goes down is good, I do think you need to review and rebalance your investments once a year.
Another article recommended using an “all in one” fund for investing. Now, this really troubles me. If your sole goal is retirement, then an age-targeted fund could make sense. But, if you are saving for goals with different time horizons, this is a bad idea.
If you use an age-targeted fund, do your homework on the funds. For example, if the fund plans to suddenly shift to bonds when you retire, that will not serve you well because you are likely to have several decades for which you will need the growth from stocks.
Protecting your information
Having a master password for access to all your other passwords reminds me of the joke about the student who repeatedly distilled his notes down, first to an outline, then to note cards, and finally to one word. How did he do on the day of the exam? He forgot the word.
Nonetheless, having passwords is clearly important so having a way to manage them is as well. Check out this recent review of apps for managing your passwords PC Magazine Best Password Managers for 2015. You can manage the passwords yourself by creating a document that you save as a PDF and then encrypt. But don’t forget the password you used for the PDF!
Store files in one place
We did a post on using cloud storage when you do not need originals. Here is another site to check out: Shoeboxed
In addition to downloading transactions as noted above, you can track your credit score and credit history by using sites like Credit Karma
For insurance purposes, and for your estate plan, having a record of possessions, you can list all your property using sites like Know your stuff home inventory.
Conclusion? Too simple may be a bad result
Setting simplification as your primary goal risks distorting your finances. There are ways to gain better understanding of your finances that also make your finances simpler.