Jim Yih: Four ways to simplify your finances
Pruning accounts, credit cards makes spending easier to track
We live in a world that has become increasingly complex and full of choice. Most people have multiple bank accounts to manage. I am constantly running into people who invest in things they don’t understand. Most people spend more than they make on things they don’t really need. Multiple credit cards, multiple properties and myriad passwords have all made our finances often too complex to handle.
After 21 years in the financial industry, I have become increasingly passionate about the belief that less is more and simplification is one of the keys to relieving money stress. Here are a few tips on how to simplify your finances.
FEWER BANK ACCOUNTS
I recently met a 72-year-old couple with nine bank accounts — chequing; savings; a joint account, a car account, a vacation account, a grandchildren’s account, a Christmas savings account and yes, even an “I don’t want my spouse to know about it” account.
More accounts means more statements, more passwords and more effort to track everything.
My wife and I only have one high-interest chequing account that pays us 1.55 per cent interest. At that rate, we don’t need any other bank accounts. We have a chequebook and a debit card and we do not pay monthly service fees.
In the new world, if you are already engaging in online or telephone banking, you may want to check out these high interest accounts as a means to simplify your banking and turn it into a profit centre. Banks such as ING Direct, President’s Choice Financial and Manulife Bank are great examples of institutions who are offering bank accounts that work more in your favour.
CONSOLIDATE YOUR DEBTS
Another couple I talked to recently had balances on four credit cards, two lines of credit and a car loan. Managing payments on these debts became increasingly frustrating for them. Consolidating that debt may be a good strategy to regain sanity.
Consolidating debts means combining all debts into one, hopefully with lower interest. The tool most commonly used to consolidate debt is a line of credit. In the example above, the couple went to the bank and wrapped the four credit cards and the two lines of credit together into one bigger line of credit. Now they make one payment instead of six and can focus on debt reduction.
The key to consolidation is to cut up the credit cards and get to the root of what created the problem in the first place — overspending. It does no good to consolidate and then rack up the credit cards again.
FEWER METHODS OF PAYMENT
Most people have no clue how much they spend in a given month. Part of this is because they use multiple forms of payment. Sometimes they use cash; sometimes debit; sometimes Visa, MasterCard or store credit cards. The only way they will know how much they spend is if they spend time in the month tracking spending or pulling all the data together on a spreadsheet. Let’s be honest ... most people are not wired this way and can think of a lot of things they would rather do than spend an hour or two budgeting and tracking expenses.
My wife and I use one credit card for everything. This makes it easy to know how much we spend and where we spend it. Our monthly statement tells us how much we spend and MasterCard has some online tools that break our spending down into key categories.
Not paying off your credit cards every month can be very dangerous. Instead, running all spending out of one bank account or even just using cash is preferred. The key is to use fewer forms of payments to make tracking and record keeping easier.
FEWER INVESTMENTS
When it comes to investing, we’ve all heard about the golden rule of diversification. We’ve all heard about the risks of putting all your eggs in one basket and why diversification is so important. For some people diversification has gone too far. They use not only multiple investments, but also multiple advisers and multiple institutions.
I once met someone with three different advisers at three different financial institutions. As a result, he had over 100 different investments including stocks, bonds and mutual funds. Although some might say he is well diversified, I would argue that he was over diversified and many of the different investments in his portfolio were redundant.
Over the years, the investment industry has become increasingly complicated. Even in my own portfolio I have moved toward consolidation and simplification for easier management, and I love it.