I have written earlier that when it comes to personal finance why simplicity is the ultimate personification. Most of the complexity in your personal finance usually creeps in very gradually. If you don’t make efforts to declutter and perform regular housekeeping, you will soon find yourself owning isolated islands of accounts. You might wake up one day and realize how in the world did you reach there. You don’t want to spend your day worrying about tracking multiple accounts or remembering the due dates of multiple credit cards you own.
Hence it is in your best interest to make sure you take steps to simplify your finances. After all, you didn’t sign up for this. You deserve to get your life back. You’ve obviously got better things to do with your life.
How To Simplify Your Financial Life
I have written earlier how 2018 was the year that changed our personal finances forever. It will be remembered as the year we got our financial ducks in a row. The transformation we went through that year is mind-boggling. It was not an easy process.
We had no clue what we were doing with our finances. We were ignorant about personal finance and had no clue about even the basics of it. We didn’t know how to budget, we didn’t know about the different investment accounts, we carried debt and had a lot of credit cards. We also didn’t have any emergency fund.
All of this was causing us a lot of stress and we felt out of control. We were living the classic paycheck to paycheck lifestyle. We knew it wasn’t how we wanted our life to be.
Hence we decided it was high time we take control of our finances and simply our financial life. The more we read about, the more we were convinced that it was the right thing for us to do. The unwanted complexity of our finances had reached a point of diminishing returns. we were sick and tired of it. We were finally ready for a change!
Let me walk you through the different steps we took to simplify our financial life. I hope this will inspire you to go out and simplify your finances as well. We have witnessed first hand the benefits of keeping things simple and I hope you’ll appreciate them too.
Without further adieu let’s check out how we simplified our financial life.
1. Consolidate Your Bank Accounts
When I started looking at all the bank accounts I had opened, I was shocked. I had literally opened not 1 or 2 but 6 different bank accounts. Three of them were checking accounts, which I used to split my paycheck every month. I didn’t realize at that time that I was running these many accounts since I hardly noticed how I spent my money. All I used to do was login when I got notified that payment on my credit card was due and I used to pay my cards in full and that’s pretty much it.
Apart from these checking accounts, I had also opened 3 other high yield online savings accounts, purely with the intent of leveraging the higher interest rate they were offering. They would be primarily used to save for irregular expenses and other savings goals. I had money from my checking account automatically transferred to these accounts every month.
I would occasionally spend more from my checking account and had to transfer money back to my checking account (it wasn’t in real time and usually happened between 2-3 days) which had resulted in some penalties and late fees since I could not make a payment on my credit card or some cheque didn’t go through.
I recall being on call with the customer care folks from these banks and had to request them multiple times to waive off the fees levied because of delays and it wasn’t a pleasant call for me at all. All of this made me think if this carefully crafted orchestration of money transfers between different bank accounts was worth it.
I finally took the courage to close 3 out of 6 accounts and I now operate with just 1 checking account and 2 online savings account, with the same online bank and mainly used for my emergency fund and short term savings goals. It has served me very well and I would never go back to having more accounts than this.
I personally love online banks for savings needs since they offer higher interest rates and a brick and mortar bank for my checking account and a larger network of ATMs.
2. Don’t Carry Multiple Credit Cards
In one of my earlier posts, I had written how I carried the entire rainbow of credit cards and it didn’t make my life easier. I was going after the reward points and trying to make the “most out of my spending”. It was as if I had made it my life’s mission to have the perfect credit score. I didn’t know that I was chasing a mirage! Having a high credit score was not an indicator of how wealthy I was going to be, it was only telling me that I was good at borrowing money and paying it back on time.
I carried 8 different credit cards to meet my wants. Just take a look at the list below and you’ll realize that it was not easy at all to track all of these cards. It wasn’t so much about paying them on time. It was primarily getting in my way of effectively managing my cash flow and I had literally planned my month around the due dates of these cards. I didn’t want to spend my waking hours knowing if my checking account had the money to cover payment for a credit card.
Here’s the list of all the credit cards I carried before I decided to do the plastic surgery!
- Discovered IT Card – My grocery shopping card
- Bank Of America Cash Rewards Card – My bill pay card
- Bank Of America Better Balance Card – Build my credit score card
- Bank Of America Travel Rewards Card – My airline miles earner card
- American Express Card – Spend by category with the most points card
- Amazon Card – Make Amazon rich card
- Fidelity Rewards Card – Earn 2% flat cash back card
- Chase Freedom Card – Anything but freedom card
Given how badly I wanted to ditch my credit cards, it didn’t take me long to call the credit card companies and close 7 of them. I received numerous enticing counteroffers from their customer care teams to keep them but I stuck to my guns and got rid of them. It just didn’t make sense. Don’t fall for their smooth talk. They want you to keep ’em so that you continue to spend more money!
After having lived with just 1 credit card for nearly a year now, I am very happy that my credit score hasn’t dropped one bit. I do realize that effective and responsible credit usage is needed in today’s world and I am not so naive as to brush off its need completely. But I just don’t use my credit card as much as I used to before. I keep it reserved for planned usage only. I typically pay off the balance in full each month and I recommend the same to you as well.
I feel you don’t need so many different credit cards. Your life will be dramatically simpler if you just stick to 1 or 2 credit cards. Just don’t get sucked into the “build your perfect credit score” and “earn extra reward points” games and you’ll be just fine!
3. Have A Written Budget
Once I consolidated my bank accounts and got rid of my credit cards, I then moved to the next item in the list of simplifying my financial life. I started tracking my spending. Almost everyone who is new to budgeting will begin with simply tracking their spending. It’s like getting a hang of your spending habits. You’ve got to understand the problem before you devise a solution.
I clearly remember the emotions I went through when I was doing this exercise. I used personal capital for tracking my spending and I often discussed where we spent our money with my wife. I brought up with her, every single item and we used to be amazed how much was going out of our wallet each month on things that didn’t necessarily bring us joy. This period also made us recognize what we truly liked to spend our money on and how debt and other financial obligations were sucking our hard earned money.
Some of these obligations included 2 car payments and a small mortgage balance on a rental property we had bought a couple of years ago. My wife I decided that we didn’t want to carry that debt anymore. We hated the fact that we had to make those monthly payments and it was time to get rid of them completely.
Once we had a good handle on our spending, we decided it was time to graduate to a full-blown budgeting tool. We started with a simple spreadsheet only to realize we didn’t want to track my expenses manually. I wanted to simplify my life and it wasn’t helping me in that. So we decided to go ahead and buy EveryDollar plus subscription. We learned the basics of budgeting and after about 2-3 months, we got very good at it.
If you are new to this process, you shoot over the budget or under budget a certain category, don’t feel discouraged. It is perfectly normal. You’ll get better as time goes by. We got very good at it as time passed and we rarely overshot our budget and almost never paid the banks in late fees or missed any other payments.
In many ways, budgeting truly helped build discipline into your finances and it helped us recognize the need to be vigilant about how we spent our money. It gave us permission to spend on things we love and cut back on stuff we didn’t care about. It was truly a game changer for us.
After about 6 months of using EveryDollar plus, we decided to move to YNAB as our preferred budgeting tool and we absolutely love it. We are going to stick with this tool for the foreseeable future and it has more than paid for itself. I would highly recommend you to try it as well.
4. Become Debt Free
The next logical step in our simplification process was to become Debt Free. If there is one step I would highly recommend you to complete ASAP, it’ got to be this one. I can’t tell you how awesome we felt the day we made the last payment on our cars and our mortgage was paid off too. We were finally debt free. Wooohoooo!! It was as if someone had taken off a huge load off of our shoulders.
A lot of people in the personal finance community will argue that it’s perfectly fine to carry debt if it’s offered at a very low-interest rate or it’s good debt. I am not one of them. After having seen the benefits of debt freedom, I would personally never want to go back into debt. This is especially true for consumer debt. I understand people can’t pay cash for big purchases like a house, so a mortgage would be a perfectly acceptable debt to carry. But I would highly discourage you to carry any consumer debt.
Most of the times a consumer debt is usually taken on to purchase a car or buy stuff that doesn’t appreciate in value and it doesn’t make sense to go into debt to own it. No amount of arguing will convince me that consumer debt is good. It is simply not worth it. This will give you a strong foundation to build wealth.
It’s not fun to plan your months around debt payments. So do yourself a favor, become debt free!
5. Consolidate Your Retirement Accounts
When you begin your career you’d typically have 1 or 2 retirement accounts. It could be a Traditional or Roth IRA and a 401(k) or a 403(b) offered through your employer. Life is fairly simple at this point and you’d not have trouble managing those accounts. However, as you move between jobs or transition careers to go from a W-2 job to self-employed or freelancing, you’ll be faced with this nagging question – What should I do my previous 401(k) or 403(b)?
For the most part, the advice you’d receive online about rolling over your 401(k) to an IRA is good enough. However, be mindful of the scenario where you might find yourself ineligible to contribute to a Roth IRA once you exceed certain income limits. I have written earlier about why you should not rollover your 401(k) to a traditional IRA. Have this at the back of your mind before you decide to make this move.
In short, I personally would keep my retirement accounts into 2 buckets – 1 brokerage firm to manage all my IRAs (Traditional and Roth IRA) and 1 brokerage firm to manage my 401(k) account. If they both happen to be a single firm, nothing like it. It is really helpful to have them consolidated in one place even helps you stay invested in a consistent portfolio across accounts. I personally prefer investing in Index funds and I recently had my employer offer low-cost index funds in their 401(k) offering. You bet where my money is going to be invested! I’m gonna index and chill.
If you have retirement account fragmented over multiple brokerage accounts, it might be the right time to defragment it and consolidate all of them.
6. Simplify Your Investments
Before I began learning about investing, the idea I had about investing was the one they portray in a typical Hollywood movie about Wall Street. I was intimidated by the amount of time one needs to spend on researching the hot stocks and the fear of losing big money in the stock market. For a long time, I kept myself out of the “investment game”. I didn’t want to risk my hard earned money. Boy! How silly of me to be thinking that way.
One of the first things I would advise people new to investing is to not rush into this. The higher the urge you feel to throw in your money into the stock market without understanding anything about investing, the greater the chance that you’ll lose it all. I remember the first time I felt I was ready to invest, my idea was to buy individual stocks like FAANG company stocks and follow conversations in StockTwits and simply buy those stocks! I can’t thank myself enough for not going ahead with that disastrous plan. I can’t even imagine how bad things could have gotten. I don’t like investing in individual stocks.
Although the whole stock market feels like a huge gamble from outside with lots of ups and downs, an experienced investor knows it’s all part of the game. A newbie who isn’t familiar with the ups and downs feels it’s a gamble. Over a long period of time, the market always goes up. If you stay put in the roller coaster, you won’t get hurt. Just don’t jump off of it.
The worst thing you could do with your investments is to put your money into something you don’t understand and hope that you’ll make some money. It’s not investing, it’s called Gambling! If you are in this boat, I would request you to stop right now and check out the following resources to get initiated on investing.
- Top Books On Investing
- JL Collins: “The Simple Path to Wealth” | Talks at Google
- JL Collins Stock Series
The links I have shared above has more than enough information to get a good grasp on investing. If you spend time going through those books and watching this video by JL Collins, you’d know more about investing than most people in America. Once you complete this exercise, I would encourage you to go back and look at all the investments you currently own in various investment accounts and look closely at the following things:
- What is the ticker symbol mutual fund or stock?
- What is your risk appetite? Is your money invest as per that?
- What is the asset allocation of your portfolio?
- What is the expense ratio of the funds in your portfolio?
- Is there an opportunity for you to invest my money in a more tax efficient manner?
These are some of the basic questions that will help you determine your investment strategy going forward. It’s a highly fruitful exercise and will result in a deeper understanding of your own behavior and also guide you to make the right investment choices that suit your needs.
Once you figure out a lot about investing, you can look at consolidating your investment accounts and also the kind of investments you hold in them. Till then avoid the temptation to invest your money into something you don’t understand or seek professional help.
7. Automate Your Bill Payments
Now that we largely simplified your financial life, let’s bring in some automation into it. You can look at areas of your personal finance that currently require manual intervention and automate them.
Bill payments are one of the most common starting points in this journey. Most of the banks provide this feature today and I highly encourage you to either use their Bill Pay feature or go and register directly with the service provider and link your credit card or debit card to make the payment automatically. This way you never have to miss a payment and pay late fees. The same applies to your credit card too. Set up auto pay on the due date and you will avoid late fees.
I personally have set up all my service providers to be paid using my debit card and it has worked seamlessly so far. I don’t have the overhead of paying my credit card if I chose to pay them using my credit card instead. It’s just an extra step and I have chosen to avoid the hassle.
8. Automate Your Savings
I had mentioned earlier about having too many bank accounts opened at one point in time. One of the reasons why I did this was I had taken this concept of “one account per savings goal” literally and really too far. I had literally opened about 14 different accounts (between 2 online banks) and they were all mapped to some savings goals like birthday fund, car registration fund, vacation fund, etc.
I felt so stupid when I realized I could still do all of this if I just stuck to 1 or 2 accounts and used my budgeting tool to virtually manage how this whole money was divided amongst different savings goal. E.g. I could simply keep 1 savings account with let’s say a $5000 and it could be split up as follows:
- 250 – Car Registration
- 250 – Thanks Giving Shopping
- 500 – Vacation
- 3000 – Property taxes
- 1000 – Emergency Fund
A budgeting tool like YNAB helps you achieve this very easily with its savings goals feature. I personally am a big fan of it and I highly recommend you to try it. This approach has kept me from running amok with my savings accounts.
It has finally restored some sanity into my life and I have ditched 12 out of the 14 online savings accounts I once had. I now have 2 savings accounts:
- Emergency Fund
- Other Savings Goals.
9. Consolidate Your Insurance Policies
How often do we ignore this useful tip? I have been guilty of doing this myself. The benefits of consolidating all of your insurance needs like Auto Insurance, Home Owners Insurance, Umbrella Insurance into one single provider are that you get you a much better deal than purchasing them from 3 different vendors. Don’t leave the money on the table. Get that discount!
If you are still sitting on the fence on this one, go ahead and make the switch. But make sure you shop around for a good deal before you settle down.
I would also use this opportunity to make sure you have your Life Insurance and Disability Insurance are also in place. These are 2 very important insurance policies you’d need to carry to ensure your financial life doesn’t fall apart if something were to happen to you. I would urge you to complete this ASAP if it’s not already done.
10. Ditch Subscriptions You Don’t Use Anymore
The last item in the simplification process involves looking at all the subscriptions you may have and evaluating if they make sense anymore. For e.g. when we went through this process, we realized we didn’t need Amazon Prime. So we ditched it earlier this year (now we just share the account with my wife’s cousin) and that has saved us a ton of money. We don’t jump to Amazon now for every single purchase. We are more mindful of the spending we do on Amazon.
Another place we downsized includes our Costco membership. We went from executive membership to gold star which literally cut the membership fees by half. It seemed appropriate since our spending wasn’t high to justify the membership.
We also chucked a lot of music app subscriptions and switched to YouTube and other ways of listening to music. I personally moved to podcasts and all of my free time is now utilized in listening to some thought-provoking podcasts. I am in love with all of them. There is so much to learn from each one of them that I would never run out of content. It’s free!
I hope these 10 tips will help you simplify your financial life and make is simpler. The goal here is to get your precious time back so that you can spend it doing things you love instead of juggling them in your mind.