Feel overwhelmed by your financial life? Here are 10 ways to simplify, organize, save money—and tame that paper dragon
(MONEY Magazine) – You know the feeling. You have eight credit cards, six insurers, three phone companies and four brokers. The $100 you got from the ATM yesterday is gone, and you can't think where the money went. You have only a vague idea of what's in your portfolio. And the daily flood of bills, catalogues, credit-card solicitations and bank statements simply migrates from your mailbox to your desk. Your financial life has officially spun out of control.
Trouble is, the price of disorganization can be far greater than an unsightly desk. Chances are you're paying too many fees, missing tax deductions, lowering your investment returns—and undermining your wealth. A recent study by New York University professors Andrew Caplin and John Leahy along with John Ameriks of Vanguard's Investment Counseling and Research group found that people who have control over their finances—particularly those with the propensity to plan and budget—are, on average, 39% wealthier than their less organized peers.
Getting on top of your finances takes work, but it doesn't have to be hard. You can conquer most of these 10 common financial problems in less than an hour. Start with simple jobs that can be tackled quickly and build from there.
Your bills are always due yesterday
Solution: Bank online
You open 'em, toss 'em on the desk...and forget 'em. If you frequently find unpaid bills weeks past their due dates lying beneath a pile of papers, it's time to automate. Not only does postponing bill paying put you at risk of needless late fees and tarnished credit but it also leaves you grimacing at the end of the month when you're forced to empty your bank account to cover an entire stack of bills at once. And consider this: Research has found that people who pay their bills immediately are happier than those who wait.
These days, nearly every bank, big or small, is online, and most offer electronic bill paying for free or, at most, the cost of a month's worth of stamps. To get started, all you need to do is enter your account and Social Security numbers and pick a password. Even inputting your biller's address and phone number has become pretty easy. Many banks have information on hundreds of billers stored at their sites. You simply pick your cable company or insurer from a menu and enter your account number. If setup still feels daunting, take three minutes to input each bill when it arrives, thus spreading the job over the month.
Once the data entry is out of the way, see if your bank will let you schedule automatic payments for bills that don't change from month to month. Aim to pay the rest as soon as they come in. Most sites let you schedule payments for a later date. Just don't cut it too close. Even though your account will be debited on the day you select, your biller may not receive the money for three to five business days.
INVESTMENT: Five minutes to set up the account; three minutes to enter each bill
THE PAYOFF: No more stressing over lost bills or getting socked with overdue charges
You have three phones, two computers, cable TV and five bills
Solution: A package from one provider
Even if you've neatly hidden the jumble of cords behind your desk, you can't ignore your telecom mess. And considering that all those bills can add up to more than $200 a month in charges, you shouldn't. You can simplify in one of two ways: Cut down on the number of services—your cell phone can double as your long-distance service; your teen may be as happy to instant message as to have his own phone line—or get the equivalent services from fewer providers.
Bundled plans, from unlimited local and long-distance calls for one price to single-provider cable TV, phone and Internet connections, often cost much less than what you'd pay for the services à la carte. Cable giants such as Comcast and Baby Bells like SBC offer competitive bundles in most areas. "Dealing with one company is the biggest simplification you can make," notes Sam Simon, chairman of the Telecommunications Research and Action Center in Washington, D.C.
INVESTMENT: Three to five phone calls
THE PAYOFF: Save 30% or more on telecom
You have no idea how much you spend
Solution: Make all your purchases on one card
How many times have you heard that the best way to budget is to laboriously record every single expense in a notebook for an entire month. But c'mon, most of us simply can't stick with taking notes every time we pay a toll or stop at a newsstand for a pack of gum. "I try to do it once a year," says author and credit expert Gerri Detweiler, "but truthfully I find it boring."
Try this shortcut instead: For a month, pay for everything with a single card whenever possible. Use either your credit card (as long as you know you'll pay off your balance at the end of the month) or debit card. Use cash only for very small purchases (say, under $5). At month's end, your credit-card bill or bank statement will give you a fairly accurate picture of what you spend on food, entertainment, clothing and so on.
To create the Rolls-Royce of household budgets, you can instead use a personal-finance program like Microsoft Money or Quicken (see the box on page 87 for details). But be honest: This requires a considerable ongoing time commitment. Do it only if you've discovered your inner obsessive.
INVESTMENT: 15 minutes to add up your purchases
THE PAYOFF: Once you see where you overspend, you can cut back and save.
Your accountant is demanding combat pay every April
Solution: File tax records all year
Tortured by your taxes? You're not making matters any easier for yourself—or your accountant—if you have to scramble to find and assemble receipts and other tax records come filing time. Granted, organizing your tax paperwork might not feel as satisfying as, say, rearranging photographs from a trip to France. But it's likely to bring you far greater peace of mind—and perhaps even prove lucrative. "I've had clients find thousands of dollars in overlooked deductions," says professional organizer Robin Blank, who runs Chaos Consulting in Boston. For tax paperwork, Blank suggests setting up an accordion file that follows the 1040. Using that system, here's a rundown of what you need to save throughout the year:
INCOME: In addition to the W-2s and 1099s you get in January, you'll need records of any other sources of income, including gambling winnings (yes, that's income too).
BUSINESS EXPENSES: If you have a home office or you moonlight, keep the receipts for unreimbursed expenses— client entertainment, work travel and office equipment.
MEDICAL EXPENSES: The threshold for deducting health-care costs is high (they must exceed 7.5% of your gross income). Still, save receipts for co-payments, deductibles and out-of-pocket costs.
CHARITABLE DONATIONS: Don't forget records of old clothes, furniture and other stuff you give away.
TAXES: Hold on to property tax and quarterly tax payment stubs (or the canceled checks), plus any records of state and local taxes.
INVESTMENTS: Save confirmation statements every time you buy or sell an investment or make an IRA contribution.
EDUCATION: You may be able to write off some college tuition or fees for continuing education, so save receipts.
MISCELLANEOUS: Job hunting expenses may be deductible if they exceed 2% of your adjusted gross income.
INVESTMENT: 10 minutes a week
THE PAYOFF: Your accountant's goodwill—and perhaps a bigger refund
Your vital documents are in a sock drawer
Solution: A safe-deposit box and a home safe
You can lose important papers in a catastrophic event like a fire, flood or robbery—or just through simple carelessness (your passport is where?). To protect against both risks, create two secure storage places: one at home and one at a local bank.
You could spend more than a thousand dollars on an ultradeluxe, watertight safe, but you don't have to. Instead, go to your local hardware or office-supply store and buy a $100 model that's rated by Underwriters Laboratories to withstand intense heat for an hour, which is enough to survive a minor fire. Use this home safe for anything you might need quickly and can replace if your home burns to the ground or washes away in a flood, such as passports, insurance policies, emergency cash, a copy of your will and airline tickets. Put your papers in Ziploc bags.
Rent a safe-deposit box for items you rarely need, such as titles, deeds, birth and death certificates and stocks. Also, put in records that you'd want to have if your home were destroyed—a list of your bank and brokerage accounts, a copy of your will (or give one to your lawyer) and an inventory of your valuables. Keep in mind that the bank's insurance won't necessarily reimburse you in the unlikely event of theft or flooding, so if you want to keep precious jewelry in your safe-deposit box, insure the contents with a rider to your homeowners policy.
INVESTMENT: A trip to the store for the $100 safe; about $35 a year for the safe-deposit box
THE PAYOFF: Peace of mind—and room for more socks!
Your wallet is bursting with plastic
Solution: Cut them up—carefully
A big stack of plastic can damage more than your wallet seams. More cards mean more temptations to overspend, more chances to have your identity stolen, more headaches if your wallet is lost and more chances to look like a credit risk to lenders. Three or four cards is plenty. But closing credit-card accounts willy-nilly can damage your credit score, so cancel carefully.
Start by ordering a copy of your credit report from all three credit bureaus (available for $38.85 at myfico.com) so that you can find out exactly what you're holding and check for errors. Next, decide which cards to keep. You should have a low-rate one for purchases you can't immediately pay off. Another should be a rewards card that you pay in full every month, perhaps from a store or gas station where you shop frequently. If you have a business, you should have a separate card for that as well. Close the other accounts, starting with the newest ones—old cards help your credit because lenders like to see a long history of responsible bill paying.
Don't get carried away with card-cutting zeal, though. A third of your credit score is based on your credit-utilization ratio (your total current charges vs. your total credit limits). Ideally, you should regularly charge no more than 20% of the credit you have available. An American Express charge card, by the way, does not figure into this ratio.
INVESTMENT: It's not enough to cut up credit cards. You must take the time to close each by phone.
THE PAYOFF: A better credit score, which will qualify you for lower interest rates on loans
When you last checked your portfolio, Enron was a large-cap
Solution: Automatic investing
The price of neglecting your portfolio is high: If you don't pay attention to your investment mix, you can end up with too much risk. If you don't save regularly in the first place, you'll certainly fall short of your goals. To combat investing amnesia, make it automatic.
First, have a system for saving regularly. Funding your 401(k) or other workplace retirement plan is the simplest one because money is withdrawn from your paycheck before you even see it (and before taxes are taken out). You can also set up an automatic investment program with any bank, brokerage or fund company. Once you're putting money away, settle on an asset allocation. For the majority of working-age investors, leaving 60% in stocks and 40% in bonds will do. (To fine-tune a portfolio for your age, goals and risk tolerance, use the asset-allocation engine at money.com/tools.)
Review your portfolio once a year and rebalance if your allocations are off by 10% or more. By doing so, you'll automatically sell your winners and invest more in cheaper sectors—in other words, buy low and sell high. Many 401(k) plans and brokerages will rebalance for you automatically if you want. A way to do all of this in one step is to invest in a target-date retirement fund such as Fidelity's Freedom funds (800-343-3548) or T. Rowe Price's Retirement series (800-638-5660). These funds offer an allocation appropriate for your expected retirement date and adjust the mix annually. Just be aware that such funds are meant to be your only holding; other investments will skew the mix. (For more on these funds, see Ask the Expert on page 59.)
INVESTMENT: 30 minutes to sign up for automatic investing; an hour a year to rebalance
THE PAYOFF: Lower risk and better returns
You have 10 insurance policies—and little peace of mind
Solution: Insure against the big stuff only
The world's a scary place, but a file full of insurance policies won't necessarily make you and your family safer. Only five types of insurance are critical: health, disability (if you're working), life (if you have others who depend on your salary), homeowners and auto. Much of the rest you can skip. Don't buy insurance for something you could cover out of pocket. You can say no to credit life insurance—buy more life insurance to cover your debts instead. Your auto policy or your credit card will usually cover car rentals. Your children don't need life insurance unless they help support you. Travel insurance may be a good idea if you're headed to a country with inadequate medical facilities, but flight insurance is simply overpriced life insurance. And most people should not even think of long-term-care insurance until age 60.
Once you're down to the five key policies, consider consolidating some of your business. You may be able to save 5% to 15% by using the same provider for home and auto.
INVESTMENT: An hour to ensure you have essential coverage; one minute to turn down other pitches
THE PAYOFF: Less paperwork, plenty of protection
Your brokerage statements are as thick as the White Pages
Solution: Fewer accounts and fewer funds
You may be drowning in prospectuses, annual reports and quarterly statements because you have too many mutual funds or because you have too many brokers. Here's the fix for each.
OWN FEWER FUNDS. You can have a well-diversified portfolio with a total U.S. stock market index fund and a total U.S. bond market index fund. For more diversity, throw in a small-cap and an international fund and perhaps a real estate investment trust. Too many funds can leave you with duplicate holdings and a hard-to-track allocation, because similar funds often own the same stocks. To check for overlap, use the portfolio X-ray tool at Morningstar.com.
INVEST WITH FEWER COMPANIES. Spreading your investment dollars among four funds could increase your chances of meeting your goals; spreading them among four brokerages will get you nothing but extra paper and more account fees. Worse, if you lose track of what you own, you could accidentally overweight in certain stocks or industries, which will increase your overall portfolio risk.
INVESTMENT: A phone call to close each account, which may cost you $50 to $100 at a brokerage
THE PAYOFF: A more efficient portfolio
You're buried in paper
Solution: Learn what you really need to save
While slogging through masses of paper, it's hard to shake the nagging feeling that you'll need something again. Chances are you won't. "I'd say that 80% of the paper that comes into your home will never be looked at again," says organizing pro Blank. To identify which 20% to keep, and for how long, use this guide.
ONE MONTH: Credit-card and ATM receipts (or until you get your monthly statement); receipts for small-ticket items as long as they can be returned (likely 30 days)
ONE YEAR: Paid utility bills; monthly and quarterly bank, brokerage and credit-card statements (or until you get the year-end one); and paycheck stubs until you get your W-2
SEVEN YEARS: Tax returns, receipts for major purchases and year-end credit-card, bank and brokerage statements
INDEFINITELY: Medical records, receipts for home improvements, mortgage documents, current insurance policies and warranties until they expire
Once you have a clean slate, your last job is to minimize the paper inflow. Take your name off mailing lists by signing up at dmaconsumers.org. Shift to electronic statements for your frequent-flier, brokerage and fund accounts. You can often opt to receive bills by e-mail as well.
INVESTMENT: Hours to sort through years of paper
THE PAYOFF: You'll have tamed the paper dragon—and maybe even freed up a room in your house.