Building up financial “stuff”

I get a great deal of visibility into other women’s finances.  It’s equivalent to be invited into their homes as it is on a day-to-day basis and not as it is occasionally all spruced up for guests.  One of the key things I’ve noticed consistently is the sheer amount of “stuff” many women have in their “financial house” (if you will):

·      Multiple (old) 401k, 403b, 457, and, more often than not, each with a different financial institution  (Ditto for the subsequent accounts, credit cards and policies.) 

·      Traditional IRA and rollover IRA

·      Roth 401k and Roth IRA

·      Multiple checking and saving accounts 

·      Various/multiple debit and credit cards 

·      Various/multiple insurance policies – life, disability, etc.

·      Occasionally, multiple properties – primary home, rentals, etc.  

 

When I ask prospects and clients for why they have all this stuff, the common responses are:

·      I haven’t found the time, energy, and motivation to clean up.

·      I’m not sure how to consolidate accounts and with whom. 

·      I’m afraid that I might unknowingly do something that may have adverse consequences, such as trigger taxes. 

·      There’s safety in numbers.  Three 401ks with three different financial institutions are better than one 401k with one institution, right?  

·      I don’t really know what I need and what I don’t need.  So, I hold onto everything just in case.  

 

Do any of these comments sound familiar to you?  

 

Complexity versus simplicity  

As within a home, I understand how financial stuff builds up over time.  Moreover, it’s easy to get used to the stuff as they’re often collected one by one.  Eventually, it may feel like they’ve always been there – inconvenient, but familiar.  Unfortunately, clutter can be inhibiting, if not a quiet drain or danger on your finances:

·      It takes up precious space – mentally and physically.

·      It doesn’t allow you to see readily what you have and, more importantly, what you really need.

·      It may be costing you money needlessly to hold, maintain, and insure things you don’t need.

·      It could be exposing you to risks that you may not be aware of. 

·      It keeps you from making the most of your time, space and resources.  

·      It slowly and unnoticeably drains your resources, much like old windows that allow heat to leak out during winter.    

So, the seemingly inconvenient financial clutter is neither inconvenient nor just clutter.  Moreover, within our capitalistic society, more is often considered better rather than simply more…or worse, less.       

 

Ways to simplify your finances

Women reach out to me for help, because they’re ready to make a change and take (greater) control over their finances.  One simple, but powerful way to do so is by decluttering.  Here’s a simple “template” that I recommend for cleaning up and organizing one’s finances:
      

Banking* 

·      One checking account  

     o  Repository for paychecks, earnings, etc.

     o   Vehicle for paying day-to-day living expenses     

     o   Offers ATMs to withdraw cash

      ·      One online savings account (high-yield)

     o  Repository for emergency fund (6-12 months’ worth of living expenses)

     o  Earns higher interest rate versus brick-and-mortar checking/savings account    

Credit cards*                                                                                                                                                                                                                                                              

·     One debit:  For cash withdrawals via ATMs

·     One credit:  Consider using reward cards (e.g., cash back, mileage, hotel points) to pay all other living expenses and get extra “returns,” if you’re responsible and pay off monthly bills in full.  

 

Retirement accounts:  Consider consolidating “tax-like” accounts with one or two financial institutions, at the most, for greater simplicity, efficiency and transparency in terms of managing and rebalancing investments. 

·      Old tax-deferred accounts – 401k, 403b, SIMPLE IRA, SEP IRA, Traditional IRA: Rollover into a rollover IRA.  

·      Old tax-free – Roth 401k, Roth 403b, Roth IRA: Rollover Roth 401k into Roth IRA.   

·      Taxable brokerage accounts: Do an in-kind transfer of holdings to one brokerage account with one financial institution.      

 

Insurance:  This is typically the key coverage that most working professionals need:

·      Private policy:  Home/auto; umbrella policy (possibly, if your net worth is greater than one million dollars)

·      Group policy via employer (typically):  Healthcare; disability (“own occupation”); life insurance (possibly, if you have dependents and debts that exceed your net worth)

 

Once you have all the key pieces in place, it’s important to see the big picture so as to track your financial health and progress.  Consider leveraging financial software, such as Personal Capital, which allows you to link your various accounts quickly and easily so you can track your finances (e.g., income, expense, debt, investment total, investment allocation) just-in-time (more or less).  

 

Conclusion 

Life happens.  You get a new job.  You buy a new house.  You make more money.  You start a family.  With changes, comes opportunities but also the likelihood of acquiring more stuff on top of your old stuff.  For many women, the default is to hold onto everything.  First, do no harm. Unfortunately, doing nothing often results in (self) harm as more stuff often results in greater complexity, lower efficiency, higher cost and increased anxiety.   

 

As with most things in life, with respect to your finances, the goal is to find your “sweet spot” in the midst of opposing forces: more versus enough; complexity versus simplicity; risk versus reward.  To an extent, your sweet spot is dependent upon your situation, personality and preferences.  Still, it’s important to get a sense of a basic, working financial “template” upon which to model/arrange your own finances.  This template can serve as an important guideline and guide post to help you find and establish a financial “system” that works best for you.    

 

Marie Kondo, the organizing guru, is known for asking clients this question to help them determine whether they should keep or let go of an item: Will this spark joy?  Based on my observation, at the heart of true change is an emotional decision and, therefore, commitment to begin living a life that supports who you are now as well as who you aspire to be.  Decluttering your finances is one powerful way to support this transformation.  Ultimately, the goal is to arrange your  finances in a way that serves your life rather than silently drain it.  Get clarity, so you can be intentional.