Our life is frittered away by detail. ... I say, let your affairs be as two or three, and not a hundred or a thousand; instead of a million, count half a dozen, and keep your accounts on your thumb-nail. ... Simplify, simplify.
-- Henry David Thoreau, from Walden
You may not agree with all of Thoreau's views (such as the uselessness of the post office), but on the value of simplifying our lives, he had a point. Most of us, by the time we're well into our adulthoods, have rather complicated lives and financial affairs. Simplifying them can improve our financial condition -- and perhaps provide peace of mind.
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Here are six ways you might do so.
1. Pay off debts
Let's start with debt. It's always well worth paying off any high-interest debt you have (such as that from credit cards), because it can save you a lot of money. If you owe, say, $40,000 on credit cards and you're being charged a not-uncommon interest rate of 25%, you're on the hook for annual payments of $10,000 for interest alone. Pay off that debt, and every year you'll be keeping $10,000 in your pocket -- or in your investment accounts.
One approach to paying off debts is to pay off your smallest ones first. This can declutter your debt life, leaving you with fewer and fewer debts. A different and arguably better approach is to pay off debts with the highest interest rates first.
2. Automate your finances
Next, you can trim your to-do lists by automating some routine financial tasks; this will save you time and trouble, and reduce the chance of missing payments or neglecting to contribute to investment accounts. Look into how much of your financial life can be automated. You might be able to route a specified portion of your paycheck into a bank or brokerage account, for example, and you can auto-pay many recurring bills.
3. Get organized
A great way to declutter your life is to better organize it -- and that also applies to financial matters. Consider setting up a batch of file folders to hold statements from each of your financial accounts (like banks, brokerages, credit cards, and retirement accounts). You can do this online, too, in folders on your computer desktop.
Organize tax-related documents as well, plunking them as they arrive into a folder for each tax year -- perhaps along with related receipts and information you'll need to refer to, come tax-prep season.
You can also declutter by tossing or shredding lots of financial papers when they're no longer needed. Some things, such as tax returns and important documents (like birth, marriage, and death certificates) are best kept forever; utility bills can be discarded once paid, along with old insurance policies. Keep records of each investment you've bought at least until you sell it, in order to document your cost basis and holding period.
4. Review your portfolio
Reviewing your investment portfolio regularly can also help you declutter and simplify your financial life. For example, if you spot investments you no longer want to hold, you can sell them, and focus your dollars on the stocks (or other securities) in which you have the most confidence. You might also note stock splits or spin-offs that have occurred, and update any records (such as online portfolios) accordingly.
5. Consolidate accounts
Another way to declutter your finances is to consolidate accounts. Perhaps you've moved from job to job, leaving a trail of 401(k) accounts in your wake. You might simplify that by consolidating them, and rolling them all into an IRA. Read up on it first, though, to consider the pros and cons. Consolidation would simplify your life, and you'll have a wider array of investment options in an IRA than in a 401(k), but IRAs don't permit loans while 401(k)s do.
6. Review your spending
It's a good idea to go through the budgeting process every year, or every few years, to see exactly how much money you have coming in and where that money is going. Take some time to determine what your financial goals are, such as saving for a big vacation and for retirement, and figure out how much you'd like to sock away regularly in order to meet them. Then go through your credit card and banking records and receipts, listing every expense; see where your money has been going, and whether you're able to both pay your bills and meet your goals. If not, look for places you can trim your spending.
The process may help you spot some ways to declutter your expenditures, such as by canceling subscriptions you don't use (for magazines, gyms, memberships, and so on).
Also, as you record your spending for various insurance policies, take an hour or two to call several other insurers, seeing if you can get a lower price for the same coverage. This strategy will often work, and can save you hundreds of dollars.
A little time spent simplifying and decluttering your financial life can pay off handsomely, saving you some money and helping you achieve your goals.
