One of the reasons that most people hate dealing with their finances is that somewhere along the way things became way too complicated. Too many accounts, too many reports to look at and all it just seems to take up way too much time and mental effort. But how does it ever get any better if we don’t take the medicine and make the effort to simplify?

How did it get so messy?  Often when we sit down to solve a problem, we spend all our time looking backward, asking how? and why?  But is that important?  Unless you are looking for the learning experience of what not to do in the future it probably won’t.  I can give you a few experiences that made my financial life more complicated.

• Too many credit cards because of the deals each one offered opening new accounts.  Need an example? Amazon will give you $50 instantly!  Many have much better offers but many also know they can get you right when you need it, at checkout (“Of course I’d like to save $70 right now!”)

• Additional bank account required with Wells Fargo when taking out student loans.

• Not understanding roll-overs from 401k plans.

• Not closing accounts that I didn’t use

At one point I had almost 20 different credit cards.  I had used so many for the different deals and used several more for bonus offers with no interest for a year and free balance transfers that I had cards open that I couldn’t even find anymore.  Then I decided I wanted my financial life to fit into my wallet.  And I don’t want a Costanza wallet --  I like a very thin wallet, so I decided to clean it up.

Simplifying your financial life will take you some effort up front but the reward is that you will feel in control of your financial life.  If you follow any of Mari Kondo’s advice for cleaning up your house, the clean-up of your finances will be similar.  The experience may bring up past financial mistakes, translated into our new language as past learning experiences, but likely you are not going to enjoy the process, but you will enjoy the result.  The first question is: simplify to What?  What do we need for our financial life and a what is the easiest path to get us there?

If this tasks still feels daunting to you then break it up into 3 parts:  Checking/Savings accounts; Credit Cards and Investment Accounts.  You don’t have to tackle them all at once but sometimes it is easier to go through the process only once.  Do what works for you, I recommend a glass of wine and pen and paper to start the process.  Or make it an event – just like you would throw all your clothes on the bed to Tidy Up with Marie Kondo, put all the paperwork on the kitchen table and have your event to clean up your financial life. 

What a Simplified Financial Life Looks Like:

When you are young, you don’t need as many accounts.  Start out with what you need and try to keep it simple all along the way.  It’s easy to get more accounts and complicate your financial life, all you must do is sign up and there are people selling you every day.

            Starter Kit Accounts:

•                         Checking Account

•                         Savings Account

•                         Investment Account

Now, a lot of people don’t agree that an investment account is a requirement for starting out, but I like in there because if you can get kids to put money into an investment account rather than a savings account, they will learn about investments, returns and risk at a much younger age.  And if they learn the value of compounded returns early, hopefully they will be more averse to debt and more likely to put more money away to grow and that is exactly what we want.

            Simplified Financial Life Account Setup:

•                         Checking Account (zero fee)

•                         Savings Account

•                         Health Savings Account (if eligible)

•               Investment Accounts (preferably all at the same institution):

  • Traditional IRA

  •  Taxable Investment Account

  •   Roth IRA (optional)

•                         401(k) Employer Plan account (Only 1 at current employer)

•                         Credit Cards:  recommend no more than 2 personal cards.

•                         Additional Debt Accounts:  Car and Home

The Path to Simplification – Need the Info:         

How do we get there?  You will need to have copies of your credit reports so you can be sure you know all your credit accounts.  You will also need to know all your other accounts that don’t show on your credit report including bank accounts.  Many of us have several retirement accounts from former employers and almost all of us have multiple bank accounts, too many credit cards and too many other accounts we use to move money, like PayPal – did you forget that one when making your initial mental list?  I did!

A large part of our complication is determining what accounts are paying which bills.  We have our checking accounts tied to our credit cards to make payments.  We have our Netflix subscription going to one credit card, our utilities bills to a different checking account and our gym membership to a different credit card and our phone to another credit card.  We also have Venmo and PayPal attached to bank accounts and/or credit cards.  I had the same problem and that’s why we don’t want to clean it up, the mess seems overwhelming.

To clean all this up, we need to make a list.  Our financial life list.  If you did this after listening to Podcast Number 25, Current Financial Assessment, then you are ahead of the game.  If not, you need a list of all your bills, and which accounts they are paid from, so you don’t end up with bills not paid and your power shut off.  This may frighten you but could also be the collection of information that you need to adjust your budget and start saving.

Once you have your complete list of all the direct payments coming out of your accounts and a list of all your accounts you can begin the process of consolidation and moving accounts.  However, you also want to do this part in a systematic way so that it doesn’t hurt your credit score.  We have spoken a lot of credit score and its importance for you paying lower financing costs, so please keep that in mind when consolidating accounts and cleaning up our financial lives.

Step 1 – Simplify Bank Accounts:

Bank Accounts are often the first place where we give away the value of our money to big banks.  They pay us low interest, or no interest at all and use our money so they can give out loans.  Worse yet, they often charge fees for things that should be free.  Typically, the bigger the bank, the higher the fees and the more fees they charge.  Fees are just a taking of your money and you don’t have to pay them, so move your money to places where they don’t charge you fees, and the fees they do charge are reasonable for the transaction.

My recommendation is that your primary Checking and Savings accounts be with a Credit Union or local community bank.  While this may not ideal when traveling if you need to pull cash out, the lower fees and interest rates charged make this an easy decision.  We all say we don’t like big banks – prove it, close all your accounts there!  But before you close your bank accounts:

o   Make sure that all checks you have written have cleared

o   Make sure you have moved your direct deposit account.

o   Make sure any subscriptions or autopay bills have been moved.

If you don’t have a local credit union or community bank account, then your first job is to go set one up.  While you are there, inquire about rates for car loans (think refinance) so you can compare to your current rates.  I got to a credit union because of their rates.  I stayed because they rarely ever charge me any fees, so I keep more of my money.

Step 2 – Simplify Credit Cards (intelligently):

Besides travel/points hacking for credit cards, which can be worth it if you have the rest of your financial life in order, there are no good reasons to have lots of credit cards.  Simplifying our credit card financial life can be difficult, especially if you have credit card debt.  Paying off all your credit cards may take you a while and hopefully this process can help you with seeing your costs, developing a budget and paying off those debts.  For the sake of this process, closing all your cards is not a requirement and we will address credit card debt specifically in another post.

The plan to simplify your credit cards and not hurt your credit score has several parts.  First, identify which cards you like the most for their perks.  The 1.5% cash back, or airline mile points?  Maybe one of each.  Also, if you have accounts that have been open for a long time, consider keeping these because they can have a positive impact on your credit score.  After you have identified which cards you want to keep, you will want to call them and ask them to increase your credit line.  You don’t want to use this credit, you just want it available, so when you cancel the other cards it doesn’t negatively impact your credit score.  You can also tell them that you want to increase your credit line because you want to cancel other cards.  It may be exactly what they want to hear the most because it means you will be spending more money on the card you are keeping.  But not more than your budget allows!

Before you close the cards that you did not choose, you need to make sure you have moved all the automatic payments to the cards you are keeping.  Or, along the way, maybe cancel the service instead if you don’t need it.  This is an optimal time to close some of the membership accounts that you don’t want or need.

The next step is the most painful one; calling all the cards you have open to close them.  This will involve getting transferred at least once, maybe they will even hang up on you and they will all likely try to talk you out it.  Here are your answers, and be steadfast:

o   Why are you closing your account?  “To simplify my financial life,” or “I don’t want it anymore.”

o   What about if we offer you more benefits?  “No, thanks anyway.”

o   Will you fill out a survey of why?  “I only fill out surveys when paid to do so.”

As I mentioned earlier, if you have cards that are carrying a balance that you are working to pay down, you won’t close those cards immediately as you must pay off the balance beforehand.  Hopefully this process will give you a few more ideas where you can save and pay those debts off faster.

Step 3 – Simplify Your Investment Life:

Our investment life can often get complicated when we are using brokers and have family and friends that sell financial services.  As the popularity of EFT’s has risen and the cost to run them reduced, there are fewer reasons to have multiple accounts unless you are involved in your investments.  Another way they get complicated quickly is with multiple employer accounts for retirement.  When we don’t take the time to transfer these accounts to a personal IRA, they become part of the mess.

For most people, a single investment house with multiple types of accounts is the easiest way forward.  This way, you have one place where you can access all of your accounts.  The investment house knows why you would have multiple accounts, so they are prepared for you.  In the future I will go into greater detail on why you might need a Roth IRA, Traditional IRA, and an investment account but for now, you just need what you have open elsewhere and want to consolidate.

The first step is choosing your institution.  My recommendation is Vanguard.  They have the lowest fees and my analysis end there.  I recommend at a minimum an IRA account and a taxable account.  If you are saving money that you will need in the future or you have maxed out your retirement account contributions, then a taxable investment account is needed. Once you have opened these accounts, you have some paperwork ahead of you.  Start with the easy paperwork; transferring all your old retirement accounts.  Most employer sponsored retirement accounts have no problem with you moving your money out of the employer account an into your own.  Many may be charging you fees to keep the account open.  This transfer is commonly referred to as a Rollover, and as long as the account maintains its form as a retirement account, there are no taxes or penalties for rolling it over.  This is true with any retirement account.  When you do rollover accounts, DO NOT have them send you a check.  Have the funds sent directly to the new IRA account.  If you were in an employer plan that had both Roth and Conventional and you have amounts in each, those amounts will go into the similar accounts with your new institution.

Now for the hard part, getting your money out of any other financial investment accounts.  The main reason these accounts are difficult to move is that they are charging you fees and expenses and if you take your money out, then they no longer receive these fees.  And they want these fees.  These are the same type of fees that you are getting charged on the big bank checking account that you don’t want to pay and that do not help you with making more money.  It makes them more money.  They are going to try everything they can to prevent you from moving out your money.  Stay Strong, remember it is your money and they can’t prevent you from moving it.

You will have to get your Hard Hat on to go through the process, but it will be worth it.  You will have your financial life consolidated and you can see the investments and risk in each at once place instead of having money spread all over. 

Taxable Accounts Note:  There could be TAX CONSEQUENCES to move money from one investment account to another as you sell stocks or mutual funds you currently own in a taxable account.  There are no current tax implications for transferring any retirement accounts.

For most of us, those taxes would be minimal, but if they are big and you are waiting on timing, then maybe you keep those accounts open until it’s the right time to sell.  I like to make a few bets from time to time so I have a separate trading account that I keep open to make trades, but I’d probably be better off if I just purchased index funds through Vanguard.

Advantages of a Clean Financial Life:

In addition to being able to find all your financial information easier, have a clean financial life makes it easier to set budget and plan for retirement, college, or the trip you want to take.  The more scattered the information the harder it is to keep straight in your mind and that makes decision making difficult.  If you have 5 retirement accounts at different institutions, it is hard to have a cohesive plan to reduce the overall risk as you move closer to retirement.

One of my deal-breakers when dating was that the other person be financially responsible.  My wife was, but she also had a lot of accounts she rarely used that were open and she was carrying credit card debt despite having the savings to pay it off.  When we finally sat down with her credit report, she had credit cards opened that she didn’t even have the physical card anymore.  She was also banking with a national bank and was being charged fees every month, giving away her hard-earned money.  No more!

Now we have a simplified financial life that is easy to keep track of, it’s the business finances that we are now corralling, but that is for another day……

Don’t forget to listen to the podcast, too!