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. 

-Anais Nin

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

Investing

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

Credit cards

In addition to downloading
transactions as noted above, you can track your credit score and credit history
by using sites like Credit Karma

Estate planning

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.  

Use our website to improve your
financial literacy and if you get stuck, ask us questions!

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