Five Steps to Peace of Mind
There’s little question our financial lives are getting more complicated--so much so that many people hate to even think about their money and bills, for fear of being overwhelmed.
Others go to opposite extremes, setting up so many systems and accounts to handle their finances that they might be just as out of touch with their real money situation as the first group.
It doesn’t have to be that way. With a little footwork, most people can streamline their finances, make sure their bills get paid and still have time for a life.
Here are five steps to get you started on simplifying your financial life:
1. Trim your credit card count.
The average American carries 4.9 credit cards, according to the Federal Reserve survey of consumer finances; American Consumer Credit Counseling says its clients tend to have 10 or more. That’s five to 10 separate sets of due dates, minimum payments, interest rates and annual fees to keep track of--and that’s way too much for most of us. Most people can live with just one card, or two if they carry a balance. The first card would have no annual fee (or rebate rewards) and would be used for new charges that are paid off in full each month. The second card, which would have a low interest rate, holds any unpaid balances and would not be used for any new purchases.
If your balances are too big to consolidate onto one card, that’s a pretty good sign that you need to step up your efforts to pay off your debt. Other warning flags: difficulty making minimum payments, anxiety or fights with your partner over money, or spending an increasing percentage of your income on debt. You might be surprised how much stress, worry and bill-juggling you can avoid when you’re debt-free.
2. Plan for the big bills.
Speaking of stress, some people constantly find themselves scrambling to pay their auto insurance, car registration, homeowners insurance, property taxes and other big non-monthly bills.
To avoid this chaos, add up these less regular expenses, dividing them by the number of paychecks you receive and setting up an automatic transfer of that amount to a savings or money-market account. Include a budget for holiday spending and for home and auto repairs. If you’re not sure how much to put aside, look at last year’s bills for a guideline. Homeowners can also use a rule of thumb that home repairs typically cost about 1% of the home’s value each year.
3. Direct-deposit your paycheck.
Unbelievably, about 30% of workers who could take advantage of this timesaver still refuse to do so, according to the Direct Deposit and Direct Payment Coalition. There’s no reason to stand in line at the bank to deposit your paycheck. It’s safer, faster and more convenient to let your employer send it electronically to your bank account.
4. Put your bills on automatic.
Many people also resist this powerful simplifier--until they try it.
Mortgage companies, utilities and many other companies will gladly help you set up electronic debit plans that automatically take your monthly payments directly from your checking account. You don’t need a computer or Internet access; direct payment works like direct deposit, only in reverse. The plans are usually free and eliminates the cost and hassle of mailing checks.
Direct payment works even for accounts that vary considerably each month, such as credit card bills. Many credit card companies will set up automatic plans that deduct the card’s minimum payment from your account. Many also allow variable payments by phone or with a click of a mouse on their Web sites.
Some people resist automatic payments, saying they want to “control” when they pay their bills. Given that a due date is a due date, “control” doesn’t amount to much, other than the possibility of delayed payments, late fees and possible dings to your credit rating.
Others worry about companies taking unauthorized payments, but Federal Reserve banking rules prohibit vendors from debiting more than the agreed payment or from taking it before the date specified by the consumer. If a mistake is made, consumers have 60 days to stop or reverse a payment.
If you’re really nervous about automatic payments, try it with one or two of your smaller, most regular bills, such as cable TV. You’ll soon add others.
If you’re concerned about overdrawing your checking account, set up an overdraft protection plan with your bank (something you should have anyway) and make sure you keep a large enough balance to cover upcoming bills.
5. Consolidate your financial accounts.
There’s little reason to have 10 different IRAs, 50 mutual fund accounts, five checkbooks and a dozen life insurance policies, but people do.
Financial planner Judith Martindale of San Luis Obispo had one client who kept separate checking accounts for each of three rental properties, plus her personal checkbook. When she was short in one account, she just transferred money from another, and never quite knew where she stood financially. One carefully annotated checkbook, or financial software such as Quicken or Microsoft Money, could have helped the client keep better track of her finances.
People who have investment portfolios bulging with individual stocks or too many mutual funds often face similar problems--too much information to process and no clear idea of how well their portfolios are doing. What’s worse, they could be losing valuable tax savings because they aren’t keeping track of when they bought what, and at what price.
“We’ve all had clients that own so many individual stocks that they’re overwhelmed,” Martindale said. “They don’t keep records because it would be so exhaustive and exhausting.”
Generally, people who don’t have time to monitor individual stocks--and the accompanying paperwork--are better off sticking with mutual funds. Even those who want to play the market should consider using low-turnover mutual funds for taxable accounts and doing their trading of individual stocks in tax-deferred accounts, to minimize the tax paperwork.
Consolidating accounts can save money in other ways. Kathy Buxton of Chatsworth was keeping five separate IRA accounts: a traditional IRA for contributions, another one for a rollover from a 401(k), a Roth IRA for contributions, a Roth IRA from a traditional IRA conversion and a Simplified Employee Pension IRA. She was able to reduce the custodial fees she paid on her IRAs by merging the two traditional IRAs with each other and the two Roth IRAs with each other, reducing her total number of accounts to three.
Since Buxton is decades away from retirement, she envisioned herself drowning in IRA paperwork unless she took action to prune her accounts.
It’s “helpful to simplify matters at this point, rather than waiting until they get even worse!”
