Simplify Your Financial Life

06/22/2012 8:30 am EST


The longer you invest, the more chance there is that your financial life has become increasingly complicated, so it's important take a look at the big picture and put some simple fixes into place to make your finances simpler and clearer for you and your heirs, writes Bob Carlson in Investing Daily.

Many people are overwhelmed by the financial options and decisions they face. That’s clear from both the feedback I receive from people and studies I read.

When people are overwhelmed and uncertain, they procrastinate. We need to prevent procrastination in financial matters. It’s too expensive.

One of my goals is to simplify your financial life. One reason is to reduce procrastination. I also don’t want you to have to work full-time on your finances. The point of financial security is to be able to spend time doing the things you really enjoy. That’s why I constantly am searching for ways to simplify financial matters, and the best ways to do that are to consolidate and automate as much of your financial affairs as you can.

You start by having as few financial service providers as you can. The simplest structure is to have a discount broker where you keep all your investment accounts (taxable accounts and IRAs), checking accounts, and safety funds. Many brokers now have an affiliated bank, so the accounts are managed seamlessly, and some even issue credit and debit cards.

An alternative is to do all or most of your financial business through the same mutual fund firm. I’m less partial to this solution these days, because no fund firm meets all our investment needs. We have a broader scope than straight stock and bond funds.

Some of the larger fund firms have a brokerage arm that gives access to many funds from other groups and might offer limited checking account-type services. But the discount brokers tend to have a broader range of offerings and lower expenses.

A third alternative, which is becoming more attractive because of technology changes, is to have your financial accounts at different firms but aggregate the information in a central location. You can do this through either a Web site or computer-based software.

I’m more partial to aggregation now. It allows you to invest directly in funds that don’t have good substitutes at the major fund families, such as DoubleLine Total Return Bond, Hussman Strategic Growth, and Marketfield, and avoid the trading fees charged by brokers and fund company brokers. Yet, at the same time the aggregation lets you view all the holdings as though they are one portfolio or account.

That makes it easier to see how your portfolio is positioned and decide which actions to take. The disadvantage of aggregation compared to concentrating at a discount broker is you still have to contact each investment provider separately, either through the web or telephone, to make portfolio changes. I’ve discuss details about consolidating your finances and using aggregation services in past issues of Retirement Watch.


Don’t stop with consolidation. There are other steps to simplifying and automating your finances.

Many bills now can be paid automatically, and that’s a good idea for recurring, regular payments such as utilities. You can have the provider draft the amount automatically from your checking or other account.

An alternative is to have it charged automatically to a credit or debit card. When the amount is the same each month, you can set up automatic payments through your checking account or through personal finance software such as Quicken. A potential advantage of automatic payment through your checking account or personal finance software is you might find it easier to cancel or change the payment amount at any time.

Automatic payments mean you spend less time on your finances. You don’t sit down with your bills, sift through them, and pay them. Instead, others do that work. You review things. You determine if the bills are accurate and compare the bills received to your checking account statement (either on paper or online).

Another way to simplify finances is to put all other expenditures on a debit or credit card. Or you can use different cards for different types of expenses. Expenditures to consider for this treatment are groceries, restaurants, gas, clothing, travel, and entertainment.

The advantages are you make only one payment per month (or none if you use debit cards) and can see where all your money went. You’re likely to avoid any late payment penalties and interest charges. You also can have the credit card bill automatically drafted from your checking account if you want.

There are other advantages to making payments on a credit card. You might earn points in a reward program. You also receive some consumer protection, because a credit card company intervenes in disputes with merchants.

When you’re still working, have saving and investment decisions made automatically to the extent you can. Amounts should be deducted regularly from your paycheck or checking account to be invested in your 401(k), IRA, and taxable account. Most people have automatic 401(k) contributions, but not the others. It’s better to have investments made automatically instead of waiting for you to find the time to transfer money from checking to the investment accounts.

When money is transferred to your investment accounts, it should be invested right away according to instructions you set in advance, not kept in a money market account waiting for you to make changes. Most fund families and brokers let you set up automatic investing. You always can change automatic investing plan on short notice or move money after it is invested.

Automating your finances doesn’t mean ignoring them. It means having most of the routine moves performed in the background by others. That frees your time to focus on reviewing, planning, and making changes.

Procrastination is reduced when you set up automatic alerts or reminders about actions that need to be taken. You can do this the old-fashioned way by making notations on your calendar. Web sites or software usually allow you to set alerts that are either e-mails or alerts that pop up on the screen when you open the program or log on to the site.

You should have reminders to review your accounts in the middle and at the end of the month. You want to review the checking account to be sure all the money flowed as planned and mistakes weren’t made. You also want to be sure there’s enough in there to cover upcoming expenses and outflows.

Review your investment accounts for several points. See what your asset allocation is and be sure it isn’t too far from your targets. When part of the portfolio is too far from the target, it’s time to rebalance.

For the portion of your portfolio that is not buy-and-hold, you want to consider whether changes should be made. Are there investments that are overvalued and should be reduced or eliminated? Are some investments looking more attractive because of lower prices or shifts in the economy?

These last two actions, rebalancing and tactical portfolio shifts, are the best uses of your time. These actions increase returns and reduce risk. Too many people spend the time they have for their finances on the routine actions of moving money between accounts, paying bills, and determining how their portfolios are invested. They don’t have enough time or energy left to analyze their finances and make high-level decisions.

I recommend automating and simplifying your finances. Once the process is completed, you’ll have more time to analyze your spending and investing and increase your wealth.

Read more from Investing Daily here...

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