In Part I, we talked about organizing a cash flow system to track your income and spending according to your values and goals, while minimizing time spent doing so.
In Part II, I shared my own system for organizing financial paperwork and documents. I highly recommend using a digital system and shared some of my favorite tools.
This third part will cover optimizing your financial accounts. In recent months, I’ve been working on restructuring my accounts as part of my plan to simplify my finances.
It fits right into my journey toward minimalism. Of course, minimalism is about so much more than just reducing your physical possessions. It’s about reducing anything in your life that doesn’t provide value. Extra accounts can be just like clutter in your house!
Let’s walk through the steps to get your financial accounts organized.
Step 1: Write Down All Your Accounts
In order to figure out exactly what changes need to be made, you first need to know what accounts you have right now. Really, you probably have a lot more than you may initially think.
On a piece of paper (or a spreadsheet), write down all of your accounts with the following headings and details:
- The company/bank where the account is held
- The type of account (such as checking, savings, CD, retirement, loan, etc.)
- Whether it’s possible to change the account (for example, money in an employer-sponsored retirement account most often can’t be moved or transferred while you’re still working there, mortgage loans could be changed, but would require refinancing so it may be unreasonable)
- The current interest rate for bank and loan accounts
- Current fees being paid for the account (in annual terms)
I suggest adding in a column to compare current interest rates as well. This will help you to determine whether a change in accounts might help you reach your financial goals more quickly.
Here’s an example of this exercise (click to enlarge):If you’re not sure whether you’ve captured all of your accounts, just look through your bank transactions for the last couple months and it will help remind you.
Step 2: Make an Account Map
An account map is a visual chart showing your financial accounts and how they all fit together. An unnecessarily complicated financial account map can add a lot of time and confusion to your finances.
Here’s the gist: you want to know exactly how much money you have, how much debt you have and manage it all in the most efficient way possible. Well-structured accounts help you do all of this (and more!).
Using your nifty list of accounts, now you can create an account map that allows you to visualize the flow of your money.
I’ve shared my own financial map before and have had requests to update it based on my goal to simplify my finances. A couple of accounts are still a work in progress, but this is where I plan to be by the end of the year:
This account map is color-coded by the institution where the accounts are held. As you can see, most of my accounts are held at the same bank and most of my investments are held at the same brokerage company (or will be by the end of the year). My plan is to keep my cash savings in my brokerage account (in money market funds and CD’s), which eliminates several of my previous accounts.
Step 3: Open, Close or Transfer Accounts
My original plan was to reduce the number of accounts I have, as much as possible. However, I’ve found that it’s been just as beneficial to lower the number of financial institutions I use. Because honestly, if you manage your money well, you simply need quite a few accounts to do so.
Checking & Savings
It’s not difficult to open new personal checking and saving accounts. Transferring funds is a fairly straightforward and easy process as well. If you’re using a bank that charges fees, doesn’t have online bill pay (!), or is otherwise inconvenient there’s probably a better option out there.
If you have a big chunk of money sitting in a savings account earning .02% interest, it’s probably worth it to open an online savings account where you can earn over 2% (literally 100 times more). Ally, Synchrony Bank and Capital One all get good reviews. Or, you can check the interest rates being paid on money market funds in your brokerage account (be sure to check the fee ratio also!).
I know there are a lot of people in the personal finance blogging world that have a dozen or more credit cards and optimize their use to get the maximum reward possible. I simply don’t find it worth my time or energy. Right now, we have 3 credit cards we use. And, two of them are only open because they are our oldest credit accounts and we want to maintain high credit scores.
If you’re not even sure how many credit cards you even have right now, you can go to www.annualcreditreport.com and obtain your credit report from one of the major credit bureaus (you can get one from each bureau for free each year). Your credit report lists every loan account and the current balances.
You may not want to close certain credit cards if you’ve had them for a long time, especially if you’ll need a loan in the near future. But, otherwise, there’s a lot more transparency in your finances if you stick with only one or two cards and close the rest.
Taxes really complicate our lives and our finances. As a CPA, I know this well (ha!). But really, the reason I have so many accounts is simply due to requirements in order to reduce my taxes. For example, we have the following separate accounts:
- Brokerage account (joint)
- Traditional IRA (husband)
- Traditional IRA (me)
- Roth IRA (husband)
- Roth IRA (me)
- Traditional 401K (husband)
- Health Savings Account (husband)
None of these accounts can be combined together. There are no joint IRA accounts. The tax treatment of Roth IRA’s is different from Traditional IRA’s, so they are required to be kept in separate accounts. And, we can’t combine the 401K into the IRA, even though the tax treatment is nearly the same because he’s still with the employer.
Although you can’t combine these tax-advantaged accounts to simplify, it does make a big difference if you can keep as many of them as possible at the same financial institution. Not only can you log in to one central place to check on them, but it saves you time because you don’t have to figure out how several different bank websites and policies.
As for other investments, see if you can transfer any individual stocks you hold into your brokerage account and consolidate everything as much as possible. It can be a hassle to transfer investments, but it’s totally worth it in the long run!
Plain and simple, changing any of your loan accounts is probably not nearly as easy as other types of accounts. There are also a lot of factors for choosing loan accounts that usually supersede the need for simplicity, at least to some extent.
You should compare the interest rate you’re paying to the current going rate at least annually, though, to see if refinancing is a good option. Just be careful, as there are many other considerations that go into this decision, especially with student loans.
If you’re about to take out a new loan, though, it’s a good start to see if the financial institutions you already use can provide what you need.
Simplifying your accounts is a good way to tidy up your financial life. While you’re konmari-ing the rest of your life while watching Marie Kondo’s new Netflix special, go ahead and spend some time konmari-ing your financial life as well.
It may take some time, but it’s an essential part of optimizing your money.