Your finances do not have to be complicated for them to be successful. In fact, the simpler you do keep things, the better off you can be in the long run. That is why at KG Meyer, PC, we say, “Personal Finance Made Simple.”® And there are steps you can take now to make your financial life easier without the need to seek out a fee-only Registered Financial Consultant.
As people get older, they tend to have accumulated several different financial accounts, from multiple checking and savings accounts to multiple 401(k) accounts from previous employers. All of these extra accounts cause financial stress even among the most hardcore of us. But in these instances, simpler is indeed better for you and possibly your heirs in the event you pass away. And all of these multiple accounts could be costing you more in the way of fees.
Consolidate Accounts
The first thing that you need to do to make your financial life easier is to consolidate the accounts that are similar and can be consolidated. That means use a single checking and savings account at a normal brick and mortar bank, and on-line savings account for any excess money. When it comes to checking and savings accounts, most people tend to keep up with these and typically have only one or two of them in the first place. But some do indeed have multiple accounts that can and should be consolidated for convenience.
If you are like the majority of people, chances are you have had multiple jobs over your working career. In many instances, you may have also accumulated multiple 401(k) retirement accounts at various jobs. In these instances, it is usually the best option to rollover prior accounts into either your current employer’s plan of it is one that had an adequate selection of investments and does not have high fees associated with it. In most instances, you are eligible to roll previous 401(k) accounts into your current employer but is that always the best option is a question you must ask yourself.
In the event your current 401(k) plan does not have an adequate selection of investments or has higher fees than you think is justifiable the best option is to roll previous accounts over into an IRA that matches the 401(k) type, either Traditional or ROTH. When you do this make sure that you do not ask your prior employers to send you the check to roll it over into an IRA as they will withhold taxes and you will be required to make up that difference when you open the IRA. And if you are not able to pay the amount of the taxes you could also face a 10% penalty in addition to the taxes you had withheld.
And like IRA accounts you are not able to combine your account with your spouses. That means you have to have two accounts if you are married, one for you and one for your spouse.
Use Low-Cost Funds
Now that you have your accounts consolidated, it is time to select your investments. I highly recommend that you select and use low-cost indexed funds that are available in most 401(k) accounts and any IRA account. By using these, you keep your management fees to a bare minimum, which means more of your money will compound over time, leaving you with a larger nest egg. And here 0.5% can mean hundreds if not thousands of dollars that you will miss out on. If you do not believe a half a percent can make that big of a difference using Excel and the future value function and try 6.5% and 7.0% over a 20- or 30-year period. Yes, even a small amount can mean big money over decades.
Most large brokerage firms now have these low-cost indexed funds, and I would recommend looking at Fidelity, Vanguard, iShares, or Schwab for some of the lowest fees in the industry. And many of these firms allow for you to purchase shares directly from them in accounts that they maintain at no cost to you, which means no commissions and more money over time is working for you.
As far as what indexes to buy for your account, I would recommend three broad indexes at a minimum. These would be sufficient for most people and should provide sufficient diversity that a change in economic conditions will not destroy what you have worked hard to accomplish. The three funds are a total market index fund for the United States and one for the international markets and a total US bond fund. Of course, I do not know your situation and this recommendation while broad would and should provide you sufficient returns at minimal risk.
Cash
As we mentioned earlier in the post, cash is still vital to your financial needs. And also, the bank account that you maintain at the local bank will not pay you anything for your deposits. A brick and mortar banks pay about 0.1% for savings accounts and let us face it, that is nothing. Here is where the on-line bank comes in as they are paying 1.% or better for savings accounts. And do not overlook these on-line banks if you are shopping for CD’s as they pay a lot better for those deposits as well.
By doing these three simple tasks, you can streamline your financial life and make things much easier on yourself. But as always, if you run into trouble or need some additional assistance do not hesitate to reach out to a fee-only financial planner for assistance.
I hope that you have enjoyed this post from a year ago. Not much has changed in the form of advice. For more information from KG Meyer, PC and to join our newsletter, please fill out the form below.
