How to Simplify Your Personal Finances

In another life, I wrote process management software for large organizations in the government. These organizations had processes that “evolved” out of years of personal relationships and massive three-ring binders. (It wasn’t until that job that I learned Excel spreadsheets had limits to the rows and columns in a sheet!)

The processes had become extremely difficult to manage, with frequent mistakes, because it was too complicated. It relied on memory and relationships. The leaders of the organizations realized this and tasked us with solving this problem.

Whenever we worked with a new organization, our first task was to document their processes. Then we simplified it. Then we built a process management package that helped them get greater visibility into their process.

When I looked at my own personal finances, I realized I had a similar challenge.

I opened accounts whenever I needed them. I haphazard connected them. I signed up for bank promotions at every turn. I got credit cards and threw old ones in a drawer so they wouldn’t hurt my credit score. It was a mess.

Today, my financial foundation looks well-designed. But it didn’t start out that way.

Like Michaelangelo famously said about the statue of David, you simply chip away everything that isn’t the statue of David. Duh.

So that’s what I did!

Here’s how you can do the same.

Draw Your Financial Map

Before you can improve anything, you need to understand it.

(this map is from years ago – Tradeking was acquired by Ally in 2016 – thus helping me simplify without me having to do anything!)

The first step is to draw your financial map. A financial map is a drawing of all your financial accounts and their relationships with one another. It shows you which accounts are connected, through online links that allow you to initiate transfers, the roles of each, and helps get that model out of your head.

It also identifies areas where you have accounts you don’t need and could even help you remember accounts you’ve forgotten. So many instances of Missing Money are bank accounts people forget after they’ve moved.

Reshape Your Financial Map

Your map may look like a mess of arrows and circles. That’s OK.

Before you simplify, you want to set up your system within the existing mess. It sounds counterintuitive but you’ll be cutting away accounts. You don’t want to cut and reconnect accounts at the same time.

You want to shape your map into what you want it to end up being. You do this so that when you start closing accounts, you don’t run into any issues with people paying you or you paying other people, etc.

You want to select a checking account as your hub and start getting into the habit of using it as a hub. Our paychecks go into this hub and all of our bill payments are paid out of this account. I like designating a single account as the hub so I can see everything in one place. You can opt for whatever you’d like, but the result is that these accounts are keepers.

Start Closing & Consolidating Accounts

Once your hub is set, and you can wait a few months or even a year just to be sure, you can start closing accounts. There is no cost or penalty to close a bank account.

With brokerage accounts, there may be a cost for an account transfer. The system is called ACATS, which stands for Automated Customer Account Transfer Service, and some brokers charge a small fee to transfer accounts. This allows you to transfer assets as assets, rather than liquidating them and transferring cash. This may be better since a transfer has no tax implications while liquidation does. (many brokers will offer a new account bonus to help offset this cost)

If you have 401(k) plans at previous employers, you may wish to roll them over into a Rollover IRA. They’re just like a 401(k) from a tax perspective, you just get a lot of options if your previous 401(k) was limited. Here are what you should consider when rolling over a 401(k). And if you are intimidated by the process, a service like Capitalize can help you.

You don’t have to cancel or transfer everything at once. You can opt to do the easy stuff first, like bank accounts, and push off the more involved ones, like brokerages, until later. Or you can get lucky like me and have Ally Bank acquire TradeKing and never deal with it at all. 🙂

As for credit cards, you have a few options if you’re concerned about your credit score. If you intend to need your score (buy a house, car, etc.), don’t do anything with it just yet. If you own a car and own a house, with no near term loan needs, you can take a small hit by closing a credit card. Opt for the newer ones first, so you keep the average history as high as possible, or the smaller credit limits, so you keep your utilization down.

I recommend using only one or two credit cards. Keep your life simple. The added benefit of a third, fourth, or fifth card is rarely worth it. You can stick the rest in a desk drawer if you’re concerned about a lower score from canceling.

Lastly, if you do cancel cards, make sure you increase the credit limits of the others to limit the minor damage.

Redraw & Improve Your Financial Map

Once you’ve pared away some of the fat, redraw your map and think about how you might improve it.

I don’t like trying to improve a process while I’m simplifying it because you can get stuck in the weeds. It may be tempting to try to tweak things here and there but all that time you spend researching may slow down the simplifying process.

The only exception to this is if you decide to select a new checking account hub. If you’ve been using a brick-and-mortar bank with a ridiculously low-interest rate (they all do), it makes sense to switch to an online bank that might offer you more. Since you’ll be updating your other accounts, this is an improvement I can get behind.

Keep Simplifying

From time to time, go back to your map, update it, and simplify in areas where you don’t see a benefit for that complexity.

When you draw your financial map – send it to us! We’d love to see it!

Automate As Much As You Can

After your financial map has been decluttered, you need to automate as much as you can. A simple system is great. A simple system where you’ve automated as much as you can is even better.

I automate my saving, by setting up automatic transfers wherever they need to go, and I automate my bill pay. I do this for monthly bills, like my utilities, as well as my credit card payments. We don’t carry a balance and our monthly balance is roughly the same (I monitor transactions so I don’t get surprised by the statement), so this is fairly routine for us. There’s no reason for me to have to log into my bank account and pay a utility bill or a credit card. That’s just another thing to potentially forget.

The only bills I pay manually are those that I only see annually, like a heating oil delivery or propane delivery. Everything else is automatic.

Digitize Your Records (Especially Paper)

My post on how to organize your financial documents gives a step by step guide to how to organize the mass of paper you may be getting from your financial institutions, but the key rules are simple.

1. Digitize everything.
2. Keep the original if it government issued, notarized, personal property, tax or loan related. Shred the rest.

99.9% of the paper you get is useless. And that’s after you sign up for paperless/electronic statements.

I scan it if I can’t download it and I keep the original if the original is really hard to get.

Cut Services You Don’t Need

As you drew your financial map or automated your bill pay, you probably saw some services you were paying for. Consider simplifying your life by cutting those away.

By reducing those expenses, you reduce one other thing to worry about, you save a little extra money, and your finances are just a little more streamlined to what you want.

It can seem like a never-ending process, that’s OK, just keep at it and your life will get easier and easier.

And one day you’ll look back and see a statue. 🙂

What will you do next to simplify your finances?