These Tips Can Help You Simplify Your Finances Any Time of Year
While we’re just a few days into the new year a lot of people have set some new goals or made some resolutions as to how to improve their finances. The new year is a great time to begin making changes, you don’t need a calendar to tell you to do these things. Sure, there isn’t an instant cure for unemployment, the economy, or the housing market, but there are still some steps you can take today that will simplify and improve your finances.
One of the first things you can do that will help you improve and simplify your finances is some organization. Have you ever sat down to do your taxes and realized you don’t know where all of your receipts, statements, or tax documents are? It’s okay, we all do it, but being organized like this can prove costly. You could miss a deduction, waste time looking for things when you could otherwise be working, or even miss an important tax deadline. It’s not just for taxes, either. Just think about all of the financial documents you receive on a regular basis. Bank and credit card statements, investment account information, letters from your mortgage company, copies of your property taxes, utility bills, and the list just goes on and on. What do you do with this information as it comes in?
It’s time to organize all of these documents. At the very least you should be creating a safe place to store important financial documents. It could be in a lock box or file cabinet, but one way or another you want to keep these items tucked away safely and where you can easily retrieve them if necessary. Next, find a way to separate different types of documents. Usually, just a simple collection of folders can take care of this. Keep a folder for your receipts that might be used for tax deductions, keep your investment account statements separate from your bank account, and so on. It doesn’t matter how you develop your system as long as you are comfortable in using it.
If you haven’t been forced into paperless statements already I’m sure you’ve heard about it. Many companies are urging customers to go paperless, and it could be a good idea for you, too. For one, every account that you have setup as paperless is one less account you have to worry about organizing the paper when it gets mailed to your home. Instead, all of your information can be retrieved online 24 hours a day. Granted, the trade-off might is that you will have to rely on electronic reminders when it comes time to pay a bill, but you should be able to save time and money since you don’t have to buy stamps and you can make payments or account changes on your own time.
After you’ve organized your finances it’s time to automate them. In this day and age it’s usually harder to find an account or financial task that you can’t automate than ones you can. From getting paid to paying the bills, in many cases you can set it up so that you never have to cash or mail a check again. This can save you a lot of time and remove some of the worry when it comes to managing your day-to-day finances.
The biggest benefit of automating your finances is when you’re talking about automatic deposits into savings or retirement accounts. This is how you pay yourself first. If you have money automatically deducted from your account each week or month you’re ensuring that the money actually gets saved. Over time, this will really start to add up and you’ll be glad you did it. So, start with creating an automatic savings contribution. It’s easy enough to set up an automatic and recurring transfer of funds with your bank that will move money from your checking to savings. Once you set this up you’ll never have to worry about transferring money into your savings account again.
Next, look at your retirement contributions. If you have a 401(k) through work this is already automated. Your contributions are taken right out of your paycheck, and that’s great. But what if you don’t have a 401(k) or you use an IRA instead? You can still automate this process. Every brokerage or fund company will allow you to set up systematic contributions. So, just like with your 401(k) you could actually set up a weekly or bi-weekly IRA contribution that coincides with your pay day. And there you have it, the money is sent off to your retirement account before you even have a chance to spend it.
The real benefit is that automated contributions made frequently hurt your bottom line less than waiting and making larger lump sum contributions. For example, if you’d like to maximize your IRA this year you’d need to contribute $5,000. For many people, that is a lot of money to move all at once, but with automatic contributions each week that goal becomes much more manageable. In fact, if you start at the first of the year you can maximize your IRA by contributing just $96.15 a week. If you take into account that you actually have until April 15th to make prior year contributions you could technically stretch that out further and make it a 75 weekly contribution. As you can see, it isn’t going to hurt as bad making a weekly deposit rather than waiting until the end of the year and having to come up with a large chunk of money.
Automation doesn’t just deal with building savings and investment accounts. In fact, one of the most powerful financial tool is to automate your bills. Do you hate sitting down to add up what you owe each month and then either log in to a bunch of different accounts to manually make payments or physically mail a check? These days, you usually don’t have to. Whether you use automatic bill pay through your bank or directly with the vendor, you can set up automatic payments for most of your expenses.
This is especially useful when it comes to regular monthly payments that don’t fluctuate much. Your mortgage, car loans, student loans, some utilities, etc. You know you have to pay these bills each month and they rarely, if ever change, so why waste time each month worrying about making the payments? Put these on autopilot! By doing so you’ll avoid late fees, stamps, and free up some of your time so that you can do more meaningful things. After all said and done, you should be able to limit your time paying bills to just a few minutes a month.
Now that you’ve organized your finances and put virtually everything on autopilot, it’s time to take some time to analyze how things are going. How are your investments doing? Are you really using the best bank? Is your money earning enough interest? And have your financial needs changed in the past year? If you don’t take the time to sit down and really analyze your overall financial situation at least a couple times a year it won’t matter if you’re completely organized and automated. You may still be headed down the wrong path.
Let’s start by taking a look at your investments. How are they doing? This is a bit of a subjective question, but if you take the time to understand what’s in your portfolio and compare that to what the expected return is given the economic conditions you should be able to get a rough idea of whether or not you’re doing well or not. But it’s not just about if you’re doing good or bad in the market. You also need to regularly look at your investments, see if the fees you’re paying are reasonable, whether or not you have the right allocation, and rebalance. A good portfolio from two years ago could be a nightmare today. The funds could have changed, added fees, and a dramatic market swing could have turned that perfect portfolio into a real dog. You want your investments to be simple, but remember–’buy and hold’ is not the same as ‘buy and forget.’
Don’t forget about your old accounts. Do you still have a small 401(k) left over from an old job? Sure, it might be doing just fine where it is, but why not consolidate? Moving it to an IRA, existing or otherwise, can make your life easier and give you more control over your money. A lot of times people just leave their old accounts open because it can be a bit of a pain to move the money. Even so, it goes back to the first tip above: organize. Consolidating may be good for your portfolio, but it also means less to track and file away. If you’re thinking about rolling over your 401(k) I’ve put together a helpful guide that explains how to roll over your 401k.
When was the last time you changed banks or credit unions? A bank that was good for you a year ago may not be best for you today. Banks are regularly changing accounts, adding or removing fees, and changing their overall level of service. I know, the thought of changing banks is pretty low on my list of things I want to do, but don’t let apathy cost you. If you are unsatisfied with your bank, go ahead and explore other options. At the very least, go into your current bank branch and speak to a banker or manager about your accounts and what your needs are. You may be able to make changes that save money without even switching banks.
Let’s talk about online savings accounts for a moment. A few years ago there were a ton of different banks offering attractive interest rates and signup bonuses. If you’re like a lot of people, you opened a lot of different savings accounts to make a few extra bucks. The online banking landscape has changed over the past year and the rates aren’t what they used to be and there are fewer bonuses. So, you probably stopped chasing rates, but what about all of those bank accounts? Do you have money sitting at 5 different online banks all earning virtually the same interest now? There’s really no reason to have money spread out all over the place. It just makes it harder for you to keep track of everything for little or no financial gain. Instead, find a good high-yield savings account and consolidate. Unless you’re able to get an interest rate more than 0.5% higher or are dealing with upwards of $100,000, the benefits of chasing rates these days don’t outweigh the cost.
Overall Financial Needs
Finally, you need to spend a few minutes analyzing your financial needs and how they may have changed. Our goals and financial ambitions don’t remain constant. We all go through major events in our life that will dramatically change how we value money. Having a child, getting married, getting a divorce, moving, or changing jobs are just a few things that can completely alter your financial needs. What has changed in your life, and do these changes require you to make any financial changes? This isn’t something I can help you with, but instead I can only tell you to take a look at your life and determine what changes may need to be made financially.
Author: Jeremy Vohwinkle
My name is Jeremy Vohwinkle, and I’ve spent a number of years working in the finance industry providing financial advice to regular investors and those participating in employer-sponsored retirement plans.