At The Money Guy Show, we subscribe to the fundamental belief that complicated does not mean better when it comes to your finances. In fact, we work with our clients to keep finances as simple as possible, not just for your own convenience – but also for your benefit.
With there being so many different financial products out there for investors to choose from, personal finances can become confusing and disparate when they should be something you understand better than anyone. So, for that reason, we break down the five easy ways you can keep your finances simple and how this ultimately can contribute to your financial success as well.
Here are a few ways to simplify your finances that we also talked about on our show, “3 Steps You Can Take So You Don’t Screw Up Your Portfolio.”
1. Stay Well Organized
Staying well organized with your finances is easier than you might think. Consolidating your accounts is an effective way to organize your financial life so that you can keep track of your entire financial picture. If you have a few separate retirement accounts, for instance, because you opened separate 401(k) accounts with various employers over the years, consolidate them. You can rollover your 401(k)s into an IRA.
There are only three ways a retirement account can be treated from a tax perspective, so if you consolidate your accounts, the better. Taxes, estate planning, asset allocation, beneficiary designations – all of these details are much easier to manage when you consolidate.
2. Pay Yourself First
You can simplify your financial life dramatically when you make the decision to pay yourself first. This means that before you direct your money to anything else, you are always putting money aside for your future needs. Even if you start off paying yourself a small amount, this financial behavior can impact your financial future in very large ways down the road.
Allowing your money to grow over the long term can offer powerful returns by the nature of compounding interest. For this reason, we can’t encourage the ‘pay yourself first’ model more enthusiastically. Automatically saving a percentage of money toward your future means that you will be able to spend what’s left more freely because you know that you’ve already covered your future needs.
3. Automate Healthy Financial Habits
Speaking of automation, automating healthy financial habits is one more way to simplify your finances. Dollar cost averaging is a perfect example of what automation looks like. Dollar cost averaging is when you buy a fixed dollar amount of a particular investment on a regular schedule, regardless of the share price. Meaning, every month you use the same amount of money to buy into the market. Sometimes the market will be up and other times the market will be down, but you buy anyway and the result is dollar cost averaging.
Automating your finances helps to remove the emotion from investment decisions. You no longer worry about when to buy into the market or get crazy trying to time the market because you are on a schedule that will average out over the long term.
Another way to automate healthy financial habits and simplify your finances is automating how much you save for retirement each month, like we talk about in #2. You can determine how much you will save each month and set up automatic deposits to ensure it happens. You can also automate bill pay, particularly for your fixed expenses, so that you further streamline your financial life.
4. Never Invest in a Product You Don’t Understand
If you don’t understand a financial product someone is trying to convince you of, even after it has been explained to you several times – don’t invest. You always want to make sure that you understand any investment you’re about to make. If a financial product is so complicated that you just can’t quite understand how it works, what you can expect, or why you should invest in it – walk away.
We think it’s better to simplify your finances than hold complex investments that are not clearly understood. Remember, complex does not mean better; it just means complex. There could be other investment opportunities that do make sense and can serve you just as well.
5. Keep an Eye on Taxes and Fees
Lastly, and perhaps one of our favorites, simplify your finances by keeping an eye on taxes and fees. You may not be able to control the stock market or overall returns on your investments, but you can control the amount you pay in taxes and fees. This is an area where a financial professional can come in handy. They can review your finances and see if there are ways you’re invested, or could be invested, that could help either lower your tax bracket or minimize your tax exposure.
Additionally, be mindful of fees. Recurring fees can live on your credit card statements for months or even years if you don’t check your statements. You may also be paying fees for certain investments that you could avoid if you were to say consolidate your accounts. The less you pay in taxes and fees is usually the result, in large part, of staying well organized.
