Monday, December 18, 2006

Simplify Your Finances

A few posts ago I told you about where I keep my money. When I sat down to do that exercise, I realized that my accounts had a sort of scattershot feel to them. I have an Ameritrade brokerage account I opened up way back in 1998, I have a Chase account for the bills, I have 2 credit cards, a couple of store credit cards, a TreasuryDirect Account, an old employer's 401k, an ING direct account, my wife's accounts, etc...

These accounts are fine for their purposes, (allthough I really think ING Direct has been lagging in terms of the interest rate on its orange savings account) but way in the back of my head, there was this thought: Wouldn't it be great if I could just simplify all of this and put it into one account? I had this dream of one password, one login ID, and one screen where I can go every once in a while to check everything out.

I know that Quicken or Microsoft Money do this, but to tell you the truth, I see financial programs like that as yet another step in the process, and I don't feel like I need any more links in my chain!

This got me thinking more broadly about simplifying my finances, but I never really had a chance to organize my thoughts. Fortunately, the great Jonathan Clements over at wsj.com had a chance to organize his thoughts, and I was happy to come across his "Getting Going" column as I was browsing on wsj.com today. The column, entitled "Give Yourself a Present: Simplify Accounts" (subscription), laid out his thoughts on simplifying the various accounts you use to do business. He throws out these seven ideas for simplifying your accounts, with the goals of making it easier for you to track your finances and for those of us that think about such things, making it easier for your heirs to find and divvy up your money when you give up the ghost.

1) "Get a Life" - Clements recommends you invest in a lifecycle fund (investopedia.com) to avoid having to rebalance your portfolio as you age. This way you only need to invest your retirement nest egg in one single fund, rather than trying to diversify into an international fund, a large cap index fund, a smallcap fund, etc...

Personally I am not a big fan of the lifecycle fund because I take a perverse pleasure in allocating my own retirement dollars. However, for someone looking to cut this step out of the process, or someone not very financially inclined, I think a lifecycle fund is a fantastic idea.

2) "Playing Favorites" - here he got to what I alluded to earlier. Clements thinks it might be a good idea to keep all of your investment money at one firm. Why have a fidelity 401(k), an ameritrade taxable account, and a Roth IRA at your local bank? Why not find a place that gives you a single source to sock away all of that money.

Clements stresses that you should still diversify where the money gets invested, just not the bank/brokerage/financial firm you use to do the investing.

3) "Make it Automatic" - When I saw the name of his third tip, I became extremely worried that Clements was going to suggest using direct deposit for your paycheck. I think is the cheapest piece of financial advice out there. I think this has officially moved from the realm of financial advice to common sense. Bloggers can stop blogging about it. People can stop writing books about it. We know. We know. Direct deposit your paycheck.

But true to form, Clements doesn't offer you the same old recycled financial advice. He goes a step further and notes that many utilities are now offering automatic bill payments that get deducted from your checking account every month. You still get to view the bill, but you don't have to go through the payment process.

This is something I am considering, but I'm not convinced. I like to look at my utility bill every now and then because six months ago, for the first time in my life, I started getting my own utility bill (I previously lived with my parents after college, then in an apartment where utilities were included in the rent payment). I think the process of paying the bill gives me a good excuse to actually look at it, so for now I'm sticking with the online bill payment function I have set up with my Chase account.

4) "Counting Cards" - Clements has a pretty interesting idea here. He says people should consider carrying only one credit card and only using it in case of emergencey. Instead, he suggests that you run all of your purchases through a debit card, particularly if your bank offers a cash-back feature.

This isn't the idea for me, though. I am extremely responsible with my credit card payments, and I run as many purchases as possible through my card so I can earn me some frequent flyer miles! Plus, my bank doesn't offer cash back on debit card transactions. If your bank does, though, you might consider it.

5) "Cashing out" -nothing inspiring from Clements here. He pretty much just says you might want to make bigger, less frequent withdrawals from the ATM. This hopefully helps you to budget and to avoid paying fees when you have to use a non-network ATM in an emergency.

6) "Charitable thoughts" - This is an idea I like. Clements recommends focusing on 1 or 2 well run charities and giving your donations to them. If you itemize deductions (which I don't, mainly because I rent and my charitable givings are not bigger than the standard deduction), it makes it much easier to go back and find your one or 2 big checks vs. hunting and pecking around for email confirmations and slips of paper.

I give money to a certain charity every week. I have often considered instead giving this in the form of one lump sum on an annual basis. When I do eventually start to itemize, I might start doing this.

7) "Dodging trouble" - Clements recommends thinking twice about putting money into more complicated investments such as limited partnerships and purchases of rental real estate. These come with a load of paperwork, tax considerations, landlord considerations etc...

I don't know what to tell you here. If you find a once-in-a lifetime limited partnership (such as the Buffett Partnership back in the 1970s) or a great rental property and know what you're doing, you might as well go for it. Then again, you could end up losing a lot of money. I don't think simplifying accounts is a big factor when deciding whether or not to invest in assets like these.

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Unsolicited Plug: The Wall Street Journal seems to have been placing more emphasis on personal finance as of late. I used to think of it purely as a source of business news, but more and more I am finding it has a bunch of handy articles on personal finance. Clements is a regular in the WSJ and is one of my favorite personal finance columnists because he really eschews the sensationalism you get from other personal finance folks like Suze Orman (she gives some good advice but she is a little too much for me) or the EVER FABULOUS DONALD TRUMP AND ROBERT KIYOSAKI!!

For some reason I can't mention a Trump project WITHOUT PUTTING IT IN CAPS, THE MOST LAVISH, THE MOST ELEGANT, THE MOST FANCY ADVICE IN THE WORLD- TRUMP ADVICE!

Clements seems like he's basically a guy you wouldn't mind having a beer with, but he is plugged in on many finance topics. He understands the limitations of investing, and he is definitely intelligent and conservative. If you listen to Clements, I'm confident you won't be steered in the wrong direction.
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After giving this some additional thought, I decided that I am going to make cleaning up my accounts one of my 2007 goals. I am going to start by rolling over my previous 401k plan into my current employer's plan and work from there. Why don't you think about doing the same thing?

As always- if you want to discuss this further, offer me some advice, or just toss me some old fashioned comment spam- feel free to talk back in the comments section below this post.

2 comments:

TFB said...

I'm a fan of Jonathan Clements too. Here's a free link to the article. For simplicity, I'm closing my ING and HSBC savings accounts.

TFB
The Finance Buff

Super Saver said...

Money Man,

Agree with you on Jonathan Clements. He has good practical, kitchen sink logic advice. I look forward to reading his column. I think the WSJ did a great job adding new Personal Finance section.