We often talk about the important role that financial efficiency plays within your portfolio, helping to lower costs and enhance expected net returns. Similarly, there is something to be said for personal financial efficiency. When is the last time you’ve undertaken a spring cleaning of your financial affairs?
As our lives become increasingly complex, our money matters often follow suit. Over time, most families accumulate multiple banking relationships and money managers, orphaned retirement accounts, a stack of insurance policies, and a hodgepodge of credit cards.
To a point, a variety of financial resources is warranted. But the decisions on what to have, what to hold and what to eliminate should be driven by a quest for cost-effective efficiency and guided by a carefully crafted financial plan. Following are some key considerations.
We generally advise holding accounts at a single bank or credit union whenever possible. Consolidating your family banking accounts can contribute to lower aggregate fees, easier money transfer between accounts, simplified account monitoring (particularly with online and mobile banking apps) and enhanced relationships with your local branches.
As long as it otherwise serves your overall financial interests, there are efficiencies to be gained by rolling over company-sponsored retirement accounts from former employers into your current employer’s plan or a personal IRA:
· You’ll have fewer moving parts to track.
· Depending on the particular managers involved, a single, larger account may generate fewer operating expenses than multiple smaller accounts.
· You and your advisor can more easily manage your collective retirement assets within your consolidated investment strategy.
Two handy tips: It’s advisable to work with an informed advisor to ensure you avoid any taxes or penalties incurred through improper rollovers. Also, many defined benefit pension plans don’t offer lump-sum distributions for rollovers; in these cases, keep good records with calendar reminders, so you are prepared to collect your benefit when it becomes available.
There is an abundance of academic evidence supporting the vital role that diversification plays in managing investment risk – i.e., spreading your holdings around the globe and across a mix of factors that have displayed persistent levels of risk-adjusted returns over time.
Spreading your holdings across multiple investment managers is a different thing entirely, more likely to generate gaps and overlaps than efficient plans and investments. Instead, seek a wealth manager to oversee your highest financial interests and maximize your portfolio’s expected after-tax return consistent with your goals and risk tolerances. Efficiencies include the ability to:
· Maintain a single point of contact for your far-flung financial needs.
· Most effectively locate holdings within taxable and tax-favored accounts
· Create and follow a personalized investment plan – with existing and new assets
· Track and monitor your overall portfolio with consolidated reports and resources
Additional Decluttering Opportunities
Beyond your banking and investment accounts, credit cards and insurance policies are additional prime targets for a spring cleaning. With respect to the tempting credit card offers that never seem end, is the 1 percent cash back really worth it, when an overlooked unpaid balance generates a 22 percent late fee? Having a manageable number of low-interest, favorable-term lines of credit may be well worth forgoing the free toaster.
Similarly, it’s easy to accumulate a variety of insurance policies over the years. As with your investment portfolio, seek a relationship with a single agent or wealth manager who can help you avoid gaps or overlaps in your coverage, keep your policies current with your family’s needs, and generally ensure you’re not overpaying for coverage you don’t need.
The Benefits of Personal Financial Efficiency
Decluttering can reduce unnecessary costs, sparing your time and energy for more important interests in your life. It also can help you better monitor threats of identity theft and fraud.
Perhaps most importantly, clarity begets confidence. You’ll feel better when you can approach your financial affairs from a cleaner slate. Who knows, it may even put a new spring in your step.