Hello everyone, I am currently away on vacation. This is a guest post from Brip Blap, “a little blog about life, family, career, personal finance, productivity, health, and the environment… for starters.” Brip Brap has lead an interesting life, and if you like this post, consider subscribing to his feed. He writes great articles on a regular basis. 
Keeping track of your personal finances can be tough. The average cardholding American household has just over 19 bankcards: 8 bank credit cards, 8 retail cards and 3 debit cards. In 2005, the average household was approaching $10,000 in credit card debt. Two-thirds of American households own homes today, up from 44% in 1940, and the vast majority of those homes are bought using mortgage debt. In 1980, 80% of workers were employed in a workplace with a pension plan; today fewer than 30% are, and many are instead offered retirement plans such as 401(k)s, 403(b)s and Thrift Savings Plans (TSPs). Since 1982, the percentage of Americans owning equities has risen 3,500%. While you can argue the pros and cons of self-directed retirement accounts or easy access to mortgage money or plentiful and convenient consumer credit, an undeniable fact is that most citizens have far more information to track, analyze and act upon than ever before. The change offers some possibilities for benefits but also many risks of costs, both financial and mental.
Imagine your financial life a generation or two ago. You might have had one significant debt, a mortgage, but except in a few rare cases, it was probably a fixed-rate 30-year mortgage. Home equity loans were hard to come by for the average homeowner. Credit was rare. If you wanted a loan to start a business, you had to go hat in hand to the bank. No one was sending you free credit cards in the mail. You probably had a defined benefit pension – maybe after 30 years working for Massive Corporation, you would retire on 80% pay without having worried about index funds or Roth vs. Traditional IRAs. If you owned stocks, your stockbroker took care of the paperwork for you. Market news came out once a day. You received a single bank statement every month, because you couldn’t go online and open a new account in 15 minutes like you can today. Some merchants might take a check, but few would accept credit cards. There might be store layaways, but seldom store credit cards. Most of your financial life, other than your mortgage, was cash-based; no cash, no expenses.
Contrast personal finances a generation ago to today. I will use my wife and myself as an example. We have a mortgage, but in order to avoid a jumbo rate we took out a variable-interest home equity line of credit (but paid it off within a year). We have 14 physical credit cards representing 9 separate accounts. We each have 2 debit cards, and 4 different bank accounts at 2 banks. We have 5 retirement accounts and 7 brokerage accounts held at 3 separate brokerages, including 4 custodial accounts for our son, nieces and nephew. We have 3 separate insurance companies for life, health and auto. We have 2 FSA accounts and 1 car lease (which will end soon).
That is AFTER I did a significant consolidation of accounts. Before that, we held countless store credit cards, separate checking accounts for both of us, and each of us individually held multiple brokerage accounts, DRIPs and retirement accounts. I alone had a half-dozen 401(k)s and IRAs scattered around with former employers and separate financial institutions. The overwhelming amount of information that was available on a monthly basis made it impossible to understand what was happening with our finances. Here are 7 steps we took (and are still working on) to get our finances under control:
1. Cancel credit cards. Start with the oldest cards first and ALL of your store credit cards. I don’t care if you shop at Bumblesnort Clothing every day, you don’t need their card. You should pick one major credit card (Visa, Amex, or MasterCard) that offers the best benefits and the lowest APR. Keep that one. If you feel uncomfortable with having just one card, keep one more; maybe you want a Visa just in case they don’t accept Amex. Fine. The rest are unnecessary.
2. Consolidate your 401(k)s from old jobs. If you have 401(k)s at old jobs, get them out immediately. You must roll them directly into IRAs or another 401(k) to avoid taxes and penalties, but any decent brokerage will help you with this process. Consolidate your IRAs into one financial institution, too.
3. Get rid of DRIPs and small brokerage accounts. There are many people who will praise DRIPs and small, low-cost brokerages but you don’t need them if you feel more comfortable with a more expensive brokerage. You should not be trading frequently unless you are smarter with investing than Warren Buffett, and I doubt you are. If you don’t trade frequently, a slightly higher commission won’t bother you. Buy and hold, buy and hold.
4. Close bank accounts. In today’s banking world, a low balance may trigger fees and certainly leads to the possibility of overdrafts. Keep all of your money in one or at most two accounts. We are aiming for one “operating” checking account and one emergency account in separate banks. If you own a business, you need a separate account for that, but otherwise you don’t need more than 2. If you want a “Christmas” account, set up a spreadsheet and pretend you have a separate account.
5. Don’t lease or buy cars on time. I wanted to lease a car thinking it would save money in terms of repairs, etc. I won’t be fooled again. Don’t buy a car until you can afford to pay cash for it, period. You will thank me for this rule, because nothing is more disheartening than realizing you’re paying double for your already-expensive car if you buy it on time, not to mention having one more finance account to keep track of.
6. Set up automatic payments. You should prepare for life with no checkbooks. Automate your payments from a single checking account. Group them into the early part of the month, so that the money comes out before you spend it on other things.
7. Stop checking your investment and retirement accounts. I have a terrible temptation to check my brokerage accounts, bank accounts and even my custodial investment accounts, IRAs and 401(k) accounts once a week. Once a week is crazy. Once a month is unnecessary. Once a year is reasonable. That money should be viewed as “stuck in there”, and if you have picked the best funds available in your plan and brokerage account (I prefer index funds), you have no need to check on that money. Don’t follow your ticker symbols daily, because you’re in this for the long haul.
Minimizing the amount of time you spend analyzing your finances helps free up time to spend on more important activities: identifying potential alternative income opportunities, learning how to be frugal, educating yourself and maybe even having a little bit of fun with friends and family. I do not miss the day when I used to drag out the checkbook to pay 23 (!) different credit card bills (I had three different gas cards)! Work on consolidating your accounts and you will see the benefits almost immediately.
(Ryan says: Canceling credit cards can affect your credit score. Be sure to keep this in mind before canceling all your cards. It may be better to transfer the balance to other cards issued by the same card provider.)
{ 7 comments… read them below or add one }
WOWIE! That’s a lot of cards, banks and accounts. I think this was an interesting post – realistic and smart, and good advice for the unprepared.
But I’d also like to hear about how one can be convinced into having a million separate cards, banks, accounts and all? Imagine the diversity of fees, rates and all that must be paid when that happens!! And I thought owning 3 mutual funds was already a little Management Expense crazy!
I’m not a fan of rule #5. I know you’re right, but I also know that it will be a long time until I can afford to purchase a new car
Wow, as you know I normally love your site… But there is a lot of advice here I take exception to.
1. Cancel credit cards: Why? If there are no annual fees, why not keep the cards open? It’s good for your credit rating. Closing accounts is not. Having only one major credit card is not a good idea at all. You should have two at the very least, probably three, four, or more. Just keep the balances low and you’ll keep on getting more credit. Pay the bills on time, don’t use them, and your credit score will go through the roof. Closing account is a horrible, destructive idea.
I also don’t agree that you have to be “smarter than Warren Buffett” in order to actively trade. Why? You don’t need to be the best in the history of the world. Zecco.com lets you trade for free. If you like doing it, why not?
Most of the rest of the advice was 100% solid, but #1 was 100% wrong.
Hi Jason,
This post is a guest post written by Brip Blap, and I think he did a very good job. I agree that keeping credit accounts open can help your score, but I think the point he was making was to close unnecessary accounts to simplify life. Due to their extremely high interest rates, I agree that store cards are pretty much worthless – unless you pay them off every month.
Saving Diva,
I think this is a general rule of thumb, but not hard and fast. The last car I bought, I used a large down payment, and included the trade in value of my car. For a 4 year loan, my payments were around $160/month, but I paid the car off in less than a year. I just wanted to make sure I didn’t overextend myself by paying it off all at once. I think the thing to remember is to be realistic in your purchase, and do your best to pay it off more quickly than the loan calls for.
Torbjorn,
I think many people just sign up for cards to get the initial savings and before they know it they have more cards than they need. The same for bank accounts – you move, or have a different need, find a better interest rates, etc. This post is all about simplification.
I don’t think 3 mutual funds is too much if they are in different sectors.
Great post overall but I have to agree with Jason about item #1.
Canceling your oldest credit cards (specially if they have no irregular payment histories) is seriously going to damage your credit score.
However, I guess for people who are still learning how to manage credit, it’s probably the lesser of two evils to remove the temptation and close the account.