The picture you see is a picture of my jam-packed pen holder filled to the brim with all manner of pens, pencils, highlighters, scissors, Sharpies, and even a fake Mont Blanc pen we found on the flight back from Shanghai last year. Why is my pen holder a perfect analogy for my personal finances? The pen holder is an collection of all the pieces of junk I’ve collected over the years, from the free pens at trade shows to the ones I’ve taken home from the office. There is no rhyme or reason to it, no organization, just everything in one wire-frame pen holder.

Our personal finances, as I’ve learned when I put together our Personal Finance Users Guide, are very much the same way. I have a credit union account with my former employer, I have a bank account from back home in New York, I have a lingering 401(k) account, etc. etc., the list goes on. The fact of the matter, especially when you’re talking about simplifying your life, is that I don’t need all these pens much like I don’t need all those accounts. I have these pens because I’ve accumulated them over the years, which is a bad reason to ahve them.

So, how do I declutter the holder and declutter my personal finances? Easy, just remove the things I’ve accumulated over the past few years and reduce it to only that which I absolutely need. When it comes to pens, I honestly only need a few ball point pens, a highlighter, a Sharpie or two, and the scissors - everything else is going into a bag in the supply closet.

As for the personal finances, I’ve consolidated all my former 401(k)s into my Rollover IRA at Vanguard, closed all the unnecessary extraneous checking and savings accounts, consolidated credit cards, and cleaned up my paper records (shredding anything I didn’t need, it was two big bags worth). All that was after only five years of post-college working life! Now, every account that we’ve kept has had a reason for being there and that’s how it should be.

In the future, I think decluttering my personal finances will be an annual affair along with rebalancing investment portfolios. So, what does your pen holder look like?

The paradox of choice is that the more options we are given for a particular choice, the less likely we are able to make a choice. Penelope Trunk discussed it in her article about taking a job, any job and references Dan Ariely, an MIT behavioral economist, and his book Predictably Irrational. In the book, Ariely discusses a study about how people ended up buying more jam when given six potential samples versus twenty four. Twenty four potential samples was simply too much and people ended up not deciding, even though they had more information.

How does this apply to banks and credit cards? Too much information paralyzes us. It paralyzes me. In the case of jams, there’s no pain in not buying a particular flavor. In the case of credit card debt, there’s a significant pain in not paying down a card. With a bank, there’s a bit of pain in interest not earned and a bit more if you overdraft because you forgot which account held how much (or you forget how much you need to keep in an account to avoid fees because you have too many accounts). Too much information, like juggling many balls, hampers our ability to make good decisions and causes us unnecessary pain.

The solution is the simplify your finances.

If you have credit card debt, pay down the smallest amounts first. This may sound similar to Dave Ramsey’s Snowball technique and that’s because it is. However, rather than focusing on the psychological benefits (yay! another debt conquered! let’s get the next one!), I argue that removing one headache from your life, even if it’s not the most financially distracting one, is beneficial. Next, try to consolidate bigger debts into as few accounts as possible without sacrificing the interest rate. By not sacrificing the interest rate, I mean don’t consolidate lower interest cards to higher interest cards (which sounds obvious but sometimes we make mistakes). The number of credit cards offer zero fee 0% balance transfers are dwindling but they often have a fee transfer cap that could be to your benefit.

With banks, don’t keep accounts you no longer need. I kept an old employer’s credit union account open for a year and a half and it cost me $20. I had transferred money into that account from my Emigrant Direct account and written a check. The check didn’t get cashed for several weeks and before it could be cashed, I went into my account and saw some money sitting around. Not remembering why the funds were there earning a low interest rate, I transferred them back and got dinged with an NSF. While I was able to get the NSF removed, it was entirely my mistake but caused by keeping an account I didn’t need or use anymore. There are no negative credit impacts of closing bank accounts, so close the ones you don’t need anymore and drop juggling that ball.

Simplify your life and reduce the number of things your brain has to manage, you’ll be happier and richer for it.

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On a happier note, my post on the Top 5 Online Banks made it into this week’s Carnival of Personal Finance hosted by Canadian Dream.

The other day, as I was preparing my taxes, I saw a curious little $3 maintenance fee on my Bank of America Savings account. For the last five months, I’d been paying $3 a month in a maintenance fee that didn’t appear until November of last year (the account had been opened over a year ago). When I called, I was informed that the fee was because I had less than $300 in the account despite much more than that in the linked checking account. I had moved the funds over to the checking account because the difference in interest, much less than 1%, wasn’t worth me logging in to move funds as needed (vs. the risk of forgetting and taking a NSF fee). In my mind, I had figured that the account was one of those “minimum balance of $something, or combined account value above $something-else” and that I was safely in the $something-else category (usually it’s like $2,500 or $5,000 for something-else so I figured I was okay). Wrong, and they dinged me for $15 (of which I was able to recover $9 with a polite phone call, the other $6 were more than 90 days back and they couldn’t do it, which seems plausible).

The lesson for me here is two-fold and both are related to simplifying your finances. The first, is that as my life becomes more and more complicated, my ability to keep things “on the table” in my mind will diminish. When I was in college, concerned only with a handful of classes and almost nothing else, managing a dozen accounts was no big deal. Now, there are significantly more demands on my mindshare and thus my ability to keep track of everything lessens. One of the things that fell off the table was a monthly review of bank and credit card statements. By simplifying my finances, I can save money because I can more closely monitor my financial accounts. I can catch the $3 fee in the first month, not the fifth, and nip it in the bud.

The second lesson for me was that sometimes what appears to be a smart money move is really more hassle than its worth. More hassle means I’m less likely to do it, which can the smart money move into a stupid money move. The savings account, with its pathetic < 1.0% APY interest rate, exists only because I thought that we could maximize interest earnings. An external transfer would take several days but an internal one takes mere seconds. The savings account could be a holding tank and I would simply move funds as needed. A year later, the hassle of "mere seconds" became too great and I scrapped that strategy, thus costing me a cool $6 and 15 minutes of phone time. Simple is almost always better because I am inherently lazy.

In the future, I’ll be continuing to simplify our finances and operating under the belief that simple is almost always better (because I’m lazy), a valuable $6 lesson.

I had the fantastic opportunity to email interview Liz Pulliam Weston, a personal finance columnist for MSN Money as well as the author of several books including Easy Money: How to Simplify Your Finances and Get What You Want out of Life and Your Credit Score: How to Fix, Improve, and Protect the 3-Digit Number that Shapes Your Financial Future. I’m going to be getting a review copy from her publicist after we get back from our honeymoon but I wanted to ask Liz a few questions about simplifying our finances and she was happy to oblige!

1. I recently got married and discussed how we were going to try to simplify our finances, consolidating accounts and reducing the number of mailers we received each month, did you have any tips or advice for us on how to best do this?

First of all, congratulations!! Not only are you embarking on a wonderful journey, but it’s bound to provide lots of great fodder for your blog.

My best advice with trying to combine married finances is to ease into it and figure out what works for you. I’ve noticed people have VERY strong opinions about what you SHOULD do, but the only thing that matters is what works for you and your spouse.

Also, what works for you now might not work in a few years, and that’s okay, since people’s needs evolve.

What’s worked for my husband and I is to have one joint account where our paychecks/income streams are deposited and from which the bills are paid. But we also have “no questions asked” money—an “allowance” that we’re allowed to spend whatever way we please. Will keeps his in a separate bank account—the money is transferred there automatically each week. I take mine out of the joint account.

As I mentioned in the book, technology makes it pretty easy to move money around in accounts, so you don’t necessarily have to combine everything at one bank.

I’m NOT a fan, however, of hidden accounts—credit cards or bank accounts that are kept secret from the other person. I think the accounts themselves should be transparent and available for both parties to see.

If both of you have good credit, then getting a joint credit card or two for household expenses is a good idea (or you can add each other as authorized users to existing cards). Just don’t close old accounts since that can hurt your credit scores.

To reduce credit card offers, sign up for the credit bureaus’ opt out service, www.optoutprescreen.com or 888 5 OPT OUT.

2. There isn’t a single person out there who isn’t happy to simplify their lives, personal finance or otherwise, but there is always the fear that in “simplifying,” you accidentally cut something out that you never intended. Is there a proper way to approach this so that you make sure you don’t cut out something that was actually quite important?

The biggest fear is probably that you’ll toss something that you’ll need later. But remember that in the rare instance that you’re likely to need financial paperwork, it’s probably “living” somewhere that’s relatively easy to access. Your bank is required to keep your statements for at least six years; ditto your credit card company.

Just take a moment to ask yourself: “What’s the worst that could happen if I consolidate or eliminate this?” If you don’t know the answer, call a pro (like your tax preparer) or post it online in a forum where there are some financially savvy folks.

I’ll reiterate that your simplification generally shouldn’t extend to shutting down credit cards, unless your FICO scores are over 750 and you’re only closing recently-opened, low-limit accounts. Always keep your oldest and highest-limit accounts, regardless of your scores, and don’t close anything if you’re in score-improvement mode.

3. I’m hardly a Luddite but what would you recommend for people who are less trusting of the internet or less able to navigate it when it comes to simplifying finances? Bill pay works great if you trust the system and yourself to set it up properly, but people make errors.

People who monitor their accounts online tend to catch fraud faster and limit the damage compared to folks who wait for their statements to arrive in the mail. And remember that the U.S. mail is not encrypted and there’s no electronic trail showing when a payment left your account and landed in your biller’s account—in contrast to when you’re using online bill pay or other electronic payments.

As with everything else, if you’re new to this, start slowly. Pay a few bills electronically to get the hang of it. Monitor your bank account so you see what’s getting paid. Don’t put everything on automatic all at once.

4. If I only had the time to do three things to simplify my finances, what would you recommend and why?

Use online bill pay. Safer, faster and more efficient than using checks.

Aggregate your accounts. It’s easier to track your money if you can see all your accounts in one place. If you use one bank for everything, you can use its Web site; some bank sites, including Bank of America, have an account aggregation feature that lets you add accounts from other institutions. Yodlee is another account aggregation option that’s been around for awhile and that has lots of features. If you’re wary of having a Web site store your financial info, then use Money or Quicken.

Consolidate to one or two credit cards. The fewer due dates, rates and terms you have to keep track of, the better. Pay off your credit card balances as soon as possible and get in the habit of paying your cards in full every month. Then consolidate to using one or at most two cards for your spending. Try not to use more than 30% of your credit limits at any point during the month to keep your credit scores healthy.

One of the benefits of creating my Personal Finance Users Guide was that I learned that we an overabundance of unused bank accounts and credit cards. In years past, each one had their purpose but have since been made obsolete. For example, one is a credit union near my home town that linked my finances with my parents and was important while I was in college. Having graduated many years ago, this link has become less and less important. Another example is a credit card I had in college that never kept up with the times in offering competitive cash back (Discover). Yet another is a credit union account at my former employer, one I kept just to have a local credit union account available (they have extremely good loan rates). However, for each, their time has passed and they need to be shut down.

Simplify!

That’s the mantra for the next few months of my life when it comes to personal finances. One of the things that comes with marriage is the inevitable doubling up of the essentials. A great non-personal finance example would be beds. Every person needs a bed. This inevitably means that when two people get married, you have two beds when you only need one. The same applies for bank accounts and credit cards. She has accounts at a bunch of banks, I have accounts at a bunch of banks, we certainly don’t need them all! (read this discussion about coupled finances and combining accounts, it’s a hot button issue!)

So, we’re getting married this weekend and then going on a much needed vacation honeymoon. When we get back, we’re going to start paring down all of these accounts and getting down to the basics.

Final Thoughts

Some would argue that you shouldn’t cancel your credit cards because it will affect your credit score (read this Devil’s Advocate post arguing otherwise), I say that simplicity is more important than a few points. If you can swing it, try consolidating your cards rather than canceling them. Closing bank accounts doesn’t appear to have a publicly recognized negative effect on your credit, so cut those away at will!

(Photo by eflon)

Today’s ten minute tip comes straight out of Seinfeld and the Costanza wallet, which is basically what most guy’s wallets look like after a few days or a few weeks of life. If you’re like me, you stick all your receipts in your wallet, despite the fact that they’re pretty much useless unless you’re getting reimbursed; and eventually these useless slips of paper seem to take over your wallet. If you have more receipts than you have actually bills of US currency… you have to clean out your wallet or your purse.

All kidding aside, in addition to just general cleaning, you should revisit which cards you have in your wallet or purse and think about whether you really need to be carrying them all the time. This is most important for credit cards or other cards that you use very infrequently and would be a pain in the butt to replace. I’ve lost my wallet before so, speaking from experience, I know that recovering everything is a huge pain. While credit cards are easy to cancel and replace, why have to go through the exercise if you hardly use the card at all? Why force yourself to remember which cards you have in your wallet when you can shelve it from your daily pack? I believe the same goes for anything else that might be important.

So, clean out and reorganize your wallet or purse Costanza!

(Photo by narisa)

In some aspects of my life, I’m pretty organized. In other aspects of my life, I’m pretty unorganized. And, in still other aspects of my life, I’m pretty unorganized for a little while until I get my act together and put my unorganized mess into a pretty organized system. When it comes to financial documents, I’m in that third category because I don’t have a very good filing system. Right now I take anything I can’t easily get to online, as in within a minute or two, into a handled plastic box full of hanging file folders and I didn’t put much thought into how I named the tabs. In fact, here are some of the names: Work 401k, Celica, Website 2005 Receipts, Website 2006 Receipts, and Utilities.

But wait, there’s more! In addition to that box, I have a few three-hole binders and a couple file folders that contain some other financial documents. The three-hold binders are filled with things that are logically connected. One binder contains all the documents related to my home purchase two years ago, another contains statements for my Roth IRA, and yet a third contains the statements to my SEP-IRA and Rollover IRA.

But wait, there’s more! I put all the papers in a huge pile on top of the plastic box until it gets to be about an inch high. That’s about the time I start feeling uncomfortable all those papers are sitting around and not organized into their little cubbyholes. So I start sorting through the documents and putting them where they should be, shredding the ones I want to get rid of (and hadn’t shredded already).

So you see what I mean? I’m organized… but not really. I don’t have a good system and I’d like your help. I find that most of you have your stuff together and I was hoping you’d share your approach with me. If you aren’t comfortable leaving it in comments, you can email me directly too.

What I plan on doing is highlighting a few of the responses and writing more about them because I really need a better filing system than what I have now. Even my explanation seemed ragged… Thanks!

Get your checkbook, find ten minutes, and setup online bill payment for your credit cards, mortgage, and any monthly recurring bills you may have. Even if you don’t like the idea of paying online because you don’t “trust” that the payment will make it on time, set up the online bill payment just in case. Murphy’s law states that if you forget to make a payment to an important bill, you’ll make that mistake after the post office has closed… so beat Murphy at his game by setting up online payment so you can log on late at night and push the payment you forgot.

If you need an additional incentive, think of all the trees you’ll save by not using envelopes and all the money you’ll save by not having to use stamps (which will only get more and more expensive). Plus, if you setup online bill pay with a credit card, you can even earn points for paying with your card!

I don’t know how JD comes up with the topics he does but practically every single one resonates with me and this one about pursuing paperless personal finance hit spot on. I only started truly dealing with personal finance issues such as bills, credit cards, and banking within the last four years and I’m pretty much as minimalist in terms of paper as you can probably. I’m so trusting of going paperless because many of the all-electronic processes had proven themselves in the last four years (in terms of earning user trust on their safety and reliability) so I just rolled into it. I think going paperless as much as possible is the way to go.

There are two reasons why you should go paperless: it’s good for the environment and it will save you money. Since most people are interested primarily with saving money and I like it when people try to save the environment, I’ll try to trick you into going paperless for your reasons even though I want you to do it for my reasons (shhh! this tactic is a scecret, don’t tell anyone!). If you want ideas on how to go as paperless as possible, read JD’s post for ideas.

Reason 1: Save On Envelopes & Stamps

Each bill you don’t have to send is one in which you don’t have to stick into an envelope, which usually is provided, and stick a 41 cent stamp on. If you mail off two credit card payments, a mortgage payment, a car payment, a cable payment, and a utility bill each month, that’s $29.52 saved each year in stamps alone. Don’t scoff at the thought that going paperless only saves you thirty bucks in stamps, would you pick up a thirty dollar bill if it were sitting on the ground? I would.

Reason 2: Avoid Fees Because Payment Systems Remember

One of the benefits of getting email notification of a statement is that when you get the email you’re generally at your computer, which means you can log on and schedule a payment. If you get a paper bill, you have to go get your checkbook, write out a check, put it in the envelope with the stub, put a stamp on it, and walk out to your mailbox. There are plenty of opportunities in that process chain to just put the bill down and take care of it later. If you’re online, just log into your account, schedule a payment, and have a nice day until the next notification.

Reason 3: Schedule To Pay At The Last Minute

Keep those hard earned dollars in your bank account until the last moment and have the bank remember when to pay for you. When you log on and schedule the payment, most places will let you pick the day you want to send it. Simply wait until the last day (I generally schedule it three or four days before the last day, just in case… though the just in case has never happened and I’m not really sure what could happen) so your dollars keep earning interest. While I can’t quantify how much money you’ll earn each year, it won’t be much but it’s better you than some company.

Reason 4: Electronic Payments Are Rarely Lost

The USPS processes gazillions of pieces of mail each year and a percentage of those are lost or mangled in processing and O’Doyle’s Law states that all bad stuff happens to you when it will hurt you the most (it doesn’t because I just made up that law but if there is a law for that I don’t know it), so put two and two together and realize that a physical payment is far inferior to an electronic one. With electronic payments, you get confirmation of a successful scheduling or payment almost immediately. If it’s “lost,” you generally know because the next page doesn’t load. When regular mail is lost, you generally know because you get a missed payment fee.

Reason 5: Electronic Theft Is Harder

It takes very little effort to steal your information when you mail a check payment. If you have a traditional mailbox, it just takes someone with enough stones to open up a stranger’s mailbox and snatch the envelope. Once they open it up, they have your name, address, bank name and your checking account number - all off your check. If someone wants to steal your information when you make an electronic payment, it’s impossible because you aren’t sending your bank information with your request every single time. You only register the bank once, it’s never displayed back to you for security reasons (in case you unwittingly give out your credentials to a thief), so they’ll have to somehow catch you when you enter that in and spend eons of time to crack the SSL 128-bit encryption (good luck, read this for more on SSL 128-bit encryption). The Law of Least Resistance says that a thief, given the skills to two both, would rather open your mailbox.

There are probably plenty of other ways that going paperless will save you money either right this moment or in the long run but those are probably the biggest. So even if saving the environment isn’t on the forefront of your mind (though it should be!), save yourself some of the other kind of green by going paperless and everyone wins.