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Spring Clean Your Financial House
Friday, March 21, 2008provided by
Spring has sprung, an old children's poem goes, which means many people are knee-deep in spring cleaning -- scrubbing floors, clearing out the garage and tossing all the clutter that's gathered over the winter months.
It's also an ideal time to consider sprucing up your financial life.
It's not just about tossing out old paperwork; it's about doing the regular maintenance to ensure that you're getting the most out of every dollar. A regular checkup can help you get -- and stay -- on track with your finances.
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Spring is an ideal time to schedule in a few hours for your financial review. Clearing out the financial clutter won't just make your life simpler; it could save you some serious cash. Here are five good areas to get started.
- What to do: Consolidate accounts, streamline with online statements and bill pay, toss old statements and checks.
- Time involved: A solid hour will get the ball rolling, but you may need to follow up during the next few weeks to make sure the changes you've made have taken effect.
- Cost: Some banks have small fees to close accounts -- usually less than $30 -- if you've had them for less than six months.
- Details: If you've moved a few times, you may find that you have several bank accounts -- and an overwhelming number of monthly statements. "It's easy to keep a bank account open," says Galia Gichon, author of the "My Money Matters Kit." "But the downside is that you may be incurring fees every month, and those can be avoided."
While some financial whizzes use different accounts for different reasons, piling up benefits and perks, most will benefit by streamlining accounts with a single financial institution.
After you've determined which bank best suits your needs, be sure to switch any automatic payment plans to that bank, such as gym memberships, car payments and Internet service -- or risk hefty fees when payments don't go through.
Once you've consolidated the accounts, you may find you've got more cash in your account, so you should check in with your bank to see if you qualify for better deals. You may find that you have better options for online bill payment services, monthly fees or interest rates.
Move your banking life online to cut clutter. You can generally get monthly statements online, and many banks also offer a service that allows you to see your canceled checks online as well. Toss old checks and old statements, because you can get copies of them from your bank.
You'll benefit by paying as many bills as possible electronically. Not only will you save the price of a stamp, but you also can have payments deducted automatically to ensure you never incur a late charge again.
- What to do: Check your credit report, shop around for lower interest rates, and come up with a payment strategy.
- Time involved: 30 minutes and up.
- Cost: None.
- Details: A 50- or 100-point change in your credit score can mean the difference between great loan terms and terrible ones, and inaccuracies in your credit report can drag that score down at least that much. Do yourself a favor and double-check it, says Liz Weston, author of "Easy Money." "You should pull your credit reports from the three credit bureaus, which you can do at www.annualcreditreport.com," she says. See a problem? Dispute it, in writing, and you should have a resolution in about a month.
Once you have an accurate credit report, check the interest rates you pay on balances and compare the rates with other cards. You may be able to use that as leverage to improve your credit card terms. Credit card companies are happy to use any opportunity to hike your rates, but that doesn't mean you should just accept it. If you have a history of making your payments on time, give your credit card companies a call and ask if they can do better with their rates. Many will drop them if you're just willing to take the time to ask.
Finally, develop a plan to pay off any debt. Tackle high interest credit-card debt first to guarantee the best bang for your buck, says Kim Lankford, a contributing editor at Kiplinger's Personal Finance magazine. Any tax return you've got coming can help you make a big dent in your debt, so consider paying it off before blowing it on the latest gadget or a luxury vacation.
- What to do: Create or update a will or trust; consider a living will and financial power of attorney; toss old documents.
- Time involved: If you're starting from scratch, plan for at least an hour.
- Cost: Do-it-yourself programs, such as WillMaker or Will Creator, can help you create a simple will for as little as $20. If you have a more complex situation, a will drawn up by an attorney starts at about $300.
- Details: First things first, says Mary Randolph, author of "The Executor's Guide." If you don't yet have a will, it's time to buckle down and draw one up. "It drops to the bottom of people's to-do list for obvious reasons," she says. "But the good news is not that hard to do." Step-by-step software and online programs can guide you through the process fairly easily and inexpensively.
If you've got any property at all -- a home, a car, a flat-screen TV, or jewelry with real or sentimental value -- a will can help make sure it gets to the right person upon your passing, and it can help prevent a lengthy probate process.
As you're working on a will, also consider drawing up a financial power of attorney document, which specifies a trustworthy person to control your finances if you become too sick to handle them on your own. A living will, also commonly included in these types of documents, is helpful to specify your wishes if you're unable to communicate them because of illness.
Once you've finished drawing up these documents, don't just shelve them indefinitely. An annual review remains important, because when your life changes, the parameters of your will may need to change, too.
"If you had a major life event -- if you had a child, if you got married or divorced, or if a parent died and you inherited a lot of property -- you'll have different things to think about," says Randolph. "Most people need more than one will in their lifetime." Make sure you're still comfortable with the executor and beneficiaries of your estate.
If you've made any updates to these documents, get rid of the old ones, says Bob DiQuollo, president of Brinton Eaton Wealth Advisors. "People have a habit of keeping copies of estate planning documents, even when they have an updated one," he says. "There's no reason to keep a prior versions, because it just adds confusion."
Retirement accounts and investments
- What to do: Consolidate accounts, rebalance and update beneficiaries.
- Time involved: Plan to set aside a couple hours to get started, and another hour or two in coming weeks to ensure that changes have been made.
- Cost: As long as you simply roll over retirement accounts, you shouldn't incur major fees. Some companies charge a small fee to close accounts, usually less than $50.
- Details: Diligent saving and good investment decisions are keys to helping you build wealth and retire comfortably, but it's easy to get bogged down with too many details and accounts.
Consolidating accounts is one key to reducing your stress. "It's tough enough to figure out what's going on with your money, but if you've got several statements a month coming in, you may just let them pile up and not even open them," says Gichon. "It's a huge obstacle for people when they try to move forward financially."
Gichon suggests moving old 401(k) accounts into the one at your current job -- check with your human resources department about the logistics -- or moving them into a self-directed IRA through a major mutual fund company, such as Vanguard, Fidelity or T. Rowe Price.
"If there's an office for one of these companies nearby, you can bring the information about all of your accounts and they can help you make the transfers," says Gichon. "You can get one statement with all your information with IRA, Roth IRA and 401(k). It's much easier."
If you're happy with where your accounts are, an annual rebalancing is a smart idea. Even if you planned your initial investments wisely from the start, big gains or losses over time can skew your portfolio, says Weston. After a few years, your ratio of investments may have shifted significantly, resulting in a portfolio far more aggressive or conservative than you intended.
If you can't stand the thought of going through your retirement investments annually, consider putting your money in a target date fund, offered by most major mutual fund companies. The fund will rebalance automatically, giving you one less thing to worry about.
Also look at beneficiaries: If you put your parents as beneficiaries of a 401(k) plan you got from your first job, you may want to change that if you've married or had a child. Similarly, if you've gotten divorced, you'll probably want to remove your ex as a beneficiary.
Finally, consider increasing your 401(k) savings: At the minimum, be sure to save enough to earn the full match from your company. If you increase your savings at the same time as your annual raise, you probably won't even miss the extra cash.
- What to do: Get new quotes for car, home and life insurance policies; update beneficiaries.
- Cost: None, unless you upgrade your policies.
- Time involved: Plan to spend a couple hours doing research.
- Details: Term life, car and some homeowner insurance policies have gone down in price over the past few years, says Lankford. If you haven't shopped around for a new policy recently, you may find that a bit of research can save you hundreds of dollars.
As you're shopping around, be sure you're sufficiently covered. "After the recent California wildfires, a lot of people discovered they didn't have enough coverage," says Lankford. If you've done significant renovations or additions to your house and haven't revised the policy, be sure to take those upgrades into account. "It doesn't cost that much to add, but it could add hundreds of thousands of dollars in your payout," Lankford says. Web sites such as www.Accucoverage.com can help you determine the replacement cost of your home as you update your information.
Give your life insurance policies a second look if you've had a major life change. A new baby might warrant increased coverage, for example, while a divorce or death might require a beneficiary change.
If you renew or change any policies, shred your old documents, says DiQuollo. "Once you renew a policy, you can get rid of the old one," he says. "I"ve never heard of anyone needing an old one."
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