Simplyfing Your Financial Life
Good Ole Vivian. Vivian works for Edelman PR and for the last year (it seems) she has been emailing me articles to post on Dumb Little Man. To date, I have declined on 100% of the articles because they were either too deep or I simply didn’t think they applied to this site.
I am still not sure how my little site got on her radar screen but this last message contained some info that you guys may appreciate. The following was entirely written by Rande Spiegelman, Vice President of Financial Planning at Schwab Center for Financial Research.
– Begin –
It was a little more than 160 years ago that Henry David Thoreau decided to leave his home in Concord, Massachusetts, and take up residence in a remote cabin he’d built on Ralph Waldo Emerson’s land next to Walden Pond. “A mile from any neighbor,” the Harvard graduate wrote:
“Our life is frittered away by detail. I say, let your affairs be as two or dozen, and keep your accounts on your thumbnail … Simplify, simplify.”
Well, given modern-day complexities Thoreau couldn’t even imagine, his advice is as timely as ever. If your financial life has become a bit cluttered, consider the following seven steps:
- CONSOLIDATE YOUR ACCOUNTS
Having too many accounts scattered among different providers creates a twofold problem: It’s harder to track your investments, and you may be paying more in fees than necessary. Consolidating your accounts (including your banking services), with a single provider makes managing your financial affairs that much easier. In addition, you may be more likely to meet minimum balance requirements and pay less in the way of fees and service charges.
- CUT DOWN ON YOUR CREDIT CARDS
If you have more than one or two major credit cards, plus a bunch of department store and gas station cards, then you may have too many. Even if you don’t use them all, a large number of cards could hurt your credit rating because lenders may be wary of all that available credit. And if you do use more than one or two cards, you could end up making a whole lot of minimum payments each month, burying yourself in interest.
If you currently carry a balance from month to month, consider consolidating all outstanding credit card debt into a single tax-deductible home equity loan or line of credit. Then, just keep one or two major credit cards and use them only for purchases you can pay off each month. All else being equal with respect to fees and rates, keep the major cards you’ve had the longest to protect your credit history.
- MUTUAL FUNDS — ENOUGH IS ENOUGH
Some people collect mutual funds like others collect baseball cards or beanie babies. Too many funds, particularly in a single asset class style (large-cap growth or small-cap value, for example), could turn you into a “closet indexer.”Being a closet indexer means you’re paying higher fees for active management, when, if you put all your mutual funds together, you’d get pretty much the same thing if you just went out and bought a much cheaper index fund. Even worse, all those different managers could end up being concentrated in similar positions, increasing your risk and exposure.The Schwab Center for Financial Research found that holding more than three funds per asset class style could be too much. By consolidating your portfolio into fewer funds, you could find your portfolio is both easier to track and less costly, to boot.
- MULTIPLE RETIREMENT ACCOUNTS
There’s little reason to have more than one traditional IRA. The IRS looks at all your traditional IRAs as one, whether they include deductible and/or nondeductible contributions. It’s called the “aggregation rule.”
If you have more than one traditional IRA, consider consolidating them into a single account. And if you have an old 401(k) still sitting with a former employer, consider rolling it over into your traditional IRA. You’ll find it easier to keep track of your investments and you might even end up paying less in fees overall.
- TOO MANY INVESTMENT BUCKETS
Some investors like to compartmentalize their investments into multiple buckets. That’s fine, as long as you don’t get carried away and end up with a dozen different asset allocations for each of a dozen different short-term and long-term goals.
Consider taking a “total portfolio” approach that includes all of your accounts, both taxable and tax-advantaged. With fewer accounts, that should be easier to do. You can always earmark certain funds for certain things, but putting it all together provides you with a one-portfolio, big-picture view of where your overall asset allocation lies. This could help you manage the overall risk you might be taking at any given time.
- FILTER THE NOISE
We all seem to suffer from information overload these days. Between newspapers, magazines, radio, television and the Internet, we have access to more financial news and information today than previous generations could ever dream of.
However, access to lots of information doesn’t always lead to wise decision making. In fact, following the day-to-day noise too closely can be bad for your financial health if your goals are measured in years and decades. Be discerning — seek out sources you find truly informative, reliable and worthy of your attention, then tune out the rest of the clatter.
- FOLLOW THE KISS PRINCIPLE (KEEP IT SIMPLE, SWEETHEART)
It seems like Wall Street is forever coming up with fancy new financial products, and the more complex they are, the better they seem to sell. But do you really need to concern yourself with the latest derivatives, specialty funds, or any of the other new-fangled gimmicks for (supposedly) making money? Maybe. Then again, maybe not, especially if you believe that the simpler you can structure your financial life, the better.
In closing, keep in mind that “simpler” should not be confused with “simplistic,” just as “buy-and-hold” should never be confused with “buy-and-forget.” Simplification doesn’t mean you ignore the sound principles of investing, and keeping things simple should never lead to neglect.
Still, there’s no reason to make things more complex than they need to be, and wouldn’t it be nice to structure your financial affairs without having to worry about how your portfolio is doing at any given moment in time? Why not choose a diversified asset allocation that fits your personality, goals and objectives, implement it as simply and efficiently as you can, resolve to revisit your plan periodically to keep it on track, and then just relax? After all, there are enough things to worry about already.