Our financial lives are complicated. Credit cards, bank, retirement and investment accounts seem to multiply as we move through life. You change jobs and start a new 401K or move and open a new local bank account. We often have so many accounts, we forget they exist. I have had clients discover old 401Ks that they opened years ago. This is the reason there are thousands of people on lost property lists that many states now provide. The website unclaimed.org is a good place to start searching. In the United States the average person has 2.8 bank accounts, 4.5 credit cards, and 1.8 retirement accounts. And that’s the average with many of us having even more. So it is easy to see how accounts are abandoned.
Diversification
Complexity doesn’t add anything positive to your financial situation and can make it difficult to track your money. It’s a common misconception that having money spread around in multiple places means you are diversified. That is not accurate. Diversification refers to having a wide range of asset classes not to having multiple accounts. Now it is true that FDIC insurance with banks only covers $250,000 per person per type of account so holding too much cash in one bank may not be the best idea. Investment accounts at a brokerage, however, are different. In those accounts you own the securities. Stocks and bonds are held in your name. The brokerage is only a vehicle for holding securities in one place and facilitates a way to trade securities. Having numerous brokerage accounts will not make you diversified and makes managing finances difficult. So what should you do to simplify and organize?
Credit Cards
There’s a wide variety of Credit Cards.
Let’s look at credit cards. Two credit cards are enough. You need one for your expenses and one as a back up if you lose your primary card. Multiple cards only add to confusion and I am sure that at one time or another you might have forgotten to pay one in the past. It’s easy to keep track of your monthly expenses if you only have one card and easy to see if you have gone over your budget. Don’t be lured into getting cards because of the travel bonuses. Remember, those cards have a yearly fee and most airline miles go unused. Also, don’t succumb to pressure to open a card at a store for the additional 10-20% one time discount. Those cards usually charge interest rates in excess of 20% and having multiple store cards creates even more havoc when managing your monthly budget. Keep the number of cards to one or two although it is best if the 2 cards are from different companies.
Retirement Accounts
Retirement accounts also tend to multiply as they are often left at a former employer. I’ve had clients come to me with numerous 401Ks. One couple had 17 different accounts scattered everywhere. This is not only difficult to track but makes it almost impossible to manage the investments across the accounts. When IRA and Roth accounts were first created, many people went to their local bank and opened these accounts. Every year they opened a different IRA because the account was tied to a CD. This led to the misconception that a different account needed to be opened every year. By opening an IRA or Roth at a brokerage, you can deposit your contribution to the same account and diversify by buying investments in various asset classes. You can also rollover a 401K, 403B or other types of retirement accounts into one IRA. So all of the old accounts from previous employment can be consolidated in one place. Again, having multiple accounts with different custodians is not diversification. It’s chaos! Most couples need a total of five accounts: a joint or trust account, two IRAs, and two Roths. Retirement accounts must be held in only one person’s name and cannot be combined.
Taxable Investment Accounts
How much do you place in each investment account?
You only need one account and reducing the number of investments in the account can make it easier to maintain the proper risk level needed for your financial situation. I have seen accounts with 20-30 different mutual funds and when analyzed, many of the funds are invested in the same stocks and bonds. One account I reviewed recently had a 10% holding in Microsoft because it was part of many of the mutual funds the client held. That is a high concentration in one stock! Consolidate accounts and have a professional review them to make sure your investments are aligned with your goals for the money.
Bank Accounts
Bank accounts are also easy to collect and abandon. I recommend two accounts: one for everyday checking and expenses and one for savings that pays a higher interest rate than traditional banks. Look for a bank that offers free checking and no monthly fee. With online banking, there is no reason to pay for basic services. Brokerages also offer banking services including bill pay and debit cards associated with these accounts which will simplify your finances even more. There is more to be gained by consolidating than there is to lose. Keeping your finances simplified will enable you to have better control of your money and investments. So go forth and simplify!
