I’m a bit of a personal finance junkie. I have a habit of opening too many new financial accounts. The reasons are usually justified at the time I opened the account – a great teaser rate on a new savings account, a signup bonus for a bank account or brokerage account, or a credit card with a cash bonus or rewards points, etc. If you play your cards right, you can easily bring in several hundred dollars per year or more in these bonuses. Depending on the nature of the sign up bonus, you could bring in well over a thousand dollars in cash and other perks. But all of that comes with a price: disorganized finances.
The older and busier I become, the more I value simplicity. I want fewer accounts, and fewer hassles. Slowly but surely, I’ve been chipping away at the ledger, and consolidating my financial accounts. There are actually quite a few benefits to consolidating financial accounts, and I recommend that everyone consider reducing some of their accounts if possible. (For those of you who are curious, here is a list of accounts we currently use).
Our Financial Lives Have Become More Complicated
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 401k plans, or Roth or 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 no other consumer debt or other loans. We have multiple personal and business credit cards. We have several bank accounts, including our primary checking and savings account, a high interest savings account, and another I use as an interface for linking to other accounts (call it my financial buffer zone). We have multiple retirement accounts and brokerage accounts. We have 529 college savings plans for our daughters. And we have 8 separate insurance companies for life, health, dental, home, and auto insurance (yes, we tried bundling, but sometimes it’s less expensive or more convenient to obtain separate policies).
Benefits of Consolidating Financial Accounts
Simplicity. As the old saying goes, sometimes less is more. This is true with your finances as well. Instead of dealing with half a dozen statements in the mail each month, you can deal with one or two. Few accounts also means fewer payments, deadlines, and tax forms. Something to think about this time of year!
Easier to Track. Account consolidation is helpful even if you use an account aggregator such as Mint.com, Personal Capital, or some of the other online money management apps. Instead of looking at line after line of numbers, and mentally adding everything up, you can look at two or three lines. It gives you a much clearer picture of where everything is, and where it is going. This is especially important as your accounts grow larger or more complex.
Reduces your risk. Identity theft is a beast. So is fraud. Having multiple accounts doesn’t necessarily make it easier for you to become a victim of identity theft, but it does reduce your ability to catch it quickly unless you take the time to actively monitor each account on a regular basis. Yes, there are other steps you can take, such as putting a credit freeze on your name, shredding all your documents, switching to paperless and using a double authentication login for your email, etc. But reducing your total number of accounts can also be an important step toward reducing your risk profile. That said, one of the reasons I have multiple accounts is in case we have a problem with one. I’ve had my credit card number stolen and was without a credit card for about a week while a new one was sent. It was a small inconvenience, but one I’d rather not deal with.
Fewer fees. I’m a big believer in not paying fees to financial companies. The only exceptions I make are for investment management fees (which are unavoidable, but can be mitigated by using low cost index funds), and for certain credit cards that have an annual fee. I used to be a staunch believer that there was no need to pay an annual credit card fee until I ran into a deal I couldn’t pass up (6% cash back on groceries, 3% on gas).
Account fees were easy to avoid a few years ago. Unfortunately, banks and other financial institutions are having a more difficult time making a profit, so they have been increasing fees for their users. If you aren’t careful, you might find that you get caught in the squeeze. Many of these fees are avoidable with a little work on your end, but it can be difficult to keep track of the requirements for each account in a fluid environment. Reducing your number of accounts makes it easy to worry less about inactivity fees, low balance fees, and the dreaded “charge you for being a customer fee.”
How to Start Consolidating Your Financial Accounts
I can’t tell you there is a firm number to how many accounts you should have. Each situation is unique. But in many cases, fewer is better. My recommendation is to sit down, grab a pen and paper, and map out your finances. Once you have a list of accounts and how you are using them, you can determine which of your accounts are necessary, and which are redundant. You may find that you can shutter a few accounts and simplify your life.
Here are some steps you can take to get your finances under control:
1. Close redundant 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 business checking account. 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, or use a bank that features sub accounts, such as Capital One 360, or Ally Bank.
2. Set up automatic payments. I try to use my credit cards for as many purchases as I can. This gives me cash back on my card, and gives me a neat statement so I can review my purchases each month. I then have the credit card payment automatically paid from my checking account each month. I review the statement, but I don’t have to write a physical check. You can often do this with a variety of bills, including insurance, loans, credit cards, utilities, and more. Automate your payments from a single checking account. Then try to group them into the early part of the month, so that the money comes out before you spend it on other things.
3. Consolidate your 401(k)s from old jobs. If you have 401(k)s at old jobs, you will almost certainly be better off rolling it into your current job or into an IRA. 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. Consolidating these accounts can help you reduce management or custodial fees and it makes it much easier to balance your retirement portfolio. Consolidating retirement accounts will also simplify Required Minimum Distributions when you reach retirement age.
4. Get rid of DRIPs and small brokerage accounts. There are many people who will praise DRIPs and small, low-cost brokerages. But you should not be trading frequently unless you are smarter with investing than Warren Buffett, and I doubt you are. Most investors are better off investing in index funds versus individual stocks. If you don’t trade frequently, you will most likely be better off consolidating everything under one roof, even if you have to pay a slightly higher commission.
5. Stop opening new accounts. I’ve been tempted by large sign up bonuses numerous times. While the free money is nice, it usually comes with golden handcuffs. If you open a new bank account to get a sign up bonus, you usually have to make a sizable deposit, keep the account open a minimum amount of time, and sometimes add automatic deposit, or use the account for automatic payments. This can add up to a lot of work. Most credit card sign up bonuses require spending a minimum amount over the first few payment cycles you have the card. Some of these bonuses are very large, and can be worth the added hassles. Just make sure you understand what your time is worth and set a threshold the bonus must exceed to make it worthwhile. Otherwise, you are adding complexity to your life for a small financial reward.
6. Consolidate credit card debt or other bills (advanced). You may find it helpful to transfer your credit card balances to a single credit card at a lower interest rate. You can often do this by opening a new balance transfer credit card. I know we just discussed not opening new accounts, but this can be the rare exception that helps you consolidate your debt so you can pay it off more quickly. Only use this strategy if you can commit to not using your other credit cards and not taking on any new debt.
Don’t Close all Your Accounts!
I don’t mean to suggest that you should only have one financial account for each basic activity (banking, investing, credit card, etc.). In fact, I think there are great reasons to have more than one account. The most important reason is to have a backup in case your account is locked out or compromised.
It wasn’t until my credit card number was stolen that I realized I didn’t have a backup credit card. That could have been disastrous if this had happened while I was traveling, or needed quick access to my funds and didn’t have enough in my checking account. So by all means, keep an extra credit card handy, or just store it in your sock drawer for emergencies. (Also note that closing credit cards can also decrease your credit score; keep this in mind before closing any credit card accounts).
Speaking of emergencies, it’s also a good idea to have an emergency fund that is separate from your main checking or savings accounts so you don’t get tempted to use the money for regular expenses, and so you can have a backup, just in case. So I have a backup savings accounts as well.
Consolidating Your Financial Life is a Process
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. Work on consolidating your accounts and you will see the benefits almost immediately.
Here are some additional tips to get declutter and simplify your financial life, such as stopping junk mail, getting on the Do No Call List, and other helpful tips to reduce clutter and stress.