Note: On posts like these I like to restate my disclosure that The Family CEO is for general information or entertainment purposes only and does not constitute professional financial advice. For information regarding your specific situation, contact your financial advisor.
Many of us are looking to simplify: emptier calendars and cleaner closets is our battle cry!
But what about our finances? Aren’t finances meant to be complex? If they’re too simple aren’t we doing it wrong? Is it even possible to simplify in the financial area?
The good news is that simplifying your finances can be just as rewarding as simplifying in other areas. Here are four ways to get you started.
1. Have fewer accounts
Did that car loan from the credit union required you to open an account there? Have you applied for a credit card to get the bonus miles? Were your retirement accounts from previous jobs rolled over into IRAs at different brokers? It’s easy to end up with more accounts than you ever intended and each one comes with it’s own monthly statement, tax forms, and login/password combination.
Gather all your credit card, bank account, and investment account information in one place and if the number of accounts surprises you, maybe some cleanup or consolidation is in order. One word of caution on simplifying your credit cards: closing accounts – especially old ones – can negatively affect your credit score, so be sure to research first.
In our technology-driven world you can automate more financial tasks than ever. Automatic bill paying, saving and investing are all on the table, and they can free up time and improve your finances.
Automatic bill paying can help you avoid late fees or service interruptions. And automating savings or investing is an especially effective way to put money aside. Employers know this, which is why more than half of them are automatically enrolling employees in 401(k) plans rather than having employees opt in; more people participate when participation is automatic. Apparently we all have good intentions, but when left to our own devices we don’t get it done at the rate that automation does.
3. Don’t overthink investing.
There are a number of ways to do this, starting with dollar cost averaging. By putting aside the same amount each month, you’ll automatically be buying more when prices are low and less when prices are high.
You can further simplify by dollar cost averaging that money into an index fund. Not only is indexing (much) simpler than picking individual stocks, but study after study has shown that index funds outperform actively managed mutual funds. Even Warren Buffett wants his heirs to take their inheritance and put 10% in government bonds and the rest in a “very low-cost S&P 500 index fund.” And these Nobel Prize winners agree: simple wins.
Worried about diversity? Owning several indexed accounts (one for US stocks, one for international, ditto for bonds) can take care of that. Want it even simpler? A carefully chosen, low cost target retirement fund can take care of getting the mix right and keeping it that way.
4. Pay off debt.
As you pay off debt, you’ll have fewer statements arriving, fewer transactions to reconcile and fewer places for your money to go each month. Plus you’ll earn a guaranteed return on your money equal to whatever interest rate you’re currently paying.
It doesn’t get simpler than that.