So you’ve done your taxes (or at least filed your extension) and completed t annual spring cleaning. What’s left? It’s time to dust off the calculator, wipe the cobwebs off your filing cabinet, and clean out your financial house. With your taxes organized, it’s the perfect opportunity to get your finances in order for the rest of the year.
How do you clean your financial house, you ask? Other than taking the cash out of your purse and putting it through the washer, here are a few ideas:
1. Clean Out Your Filing Cabinet.
You don’t need to keep every document. Here’s a list of common statements you should clean out.
- Tax Returns – The IRS statute of limitations on audits are 3 years from the date you filed the return, or 2 years from when you paid the tax, whichever is later. In some cases, if you filed a fraudulent return or no return, it is recommended you keep the records for 7 years. My advice: just keep your tax records forever. You never know when you need to look up some information, especially if you own investments. If the IRS ever comes-a-knocking, you want to be able to show documentation. It’s a pain to deal with the IRS when you don’t have documentation.
- Investment Accounts / Retirement Accounts– Just keep the annual statements, forever. You can throw out everything else (except for the tax statement), because the annual statements should outline all the investments and transactions. Just make sure that your statements document the amount paid for the investment, plus any capital gains, dividends, and interest (aka Cost Basis). You’ll need this info for tax time, and it’s a pain when you don’t have it. Plus, you don’t want to pay taxes on principal, and essentially get double taxed.
- Bank Statements – I would keep these forever as well. If you have an annual statement, that will suffice. I know it’s just a bank statement, but if someone sues you, or you need to prove something to the IRS, you want to have these handy.
- Payroll Documents – At least 7 years. Even longer if you are a business owner. They can prove useful if you are in a dispute with an employee.
- Credit Card Statements – These aren’t that important to keep around unless the statement has tax-related purchases. Keep them around for 3 years, and up to 7 years for taxes.
- Mortgage Statements – Keep them 7 years after the property is sold or when the mortgage is paid off.
- Life Insurance – Keep these statements for the life of the policy, plus 3 years.
- Medical records – Keep them for 7 years, especially if they are claimed on your taxes.
It is always better to be safe than sorry. Don’t just throw statements away because you don’t want them or seem like clutter. If anything, just throw them in a box. You never know when you need them. Also, just because you can access your statements online doesn’t mean you shouldn’t have your own paper or electronic copy. Many institutions only hold your statements for a few years, so if you don’t download them in time, you may not be able to get them later. And remember to shred what you throw out – you can’t be too safe in an age of identity theft.
2. Clean Out Your Budget.
This is a great time to cut out some of the fat from your budget. Below are a list of budget items that typically worth taking a look at and see if you can lower. Certainly, you’ll have to do some research, but it wouldn’t surprise me if you can save anywhere between $150 to $300 a month from a few easy adjustments. Many of these can be expenses can be shaved with 2 hours of work. Imagine saving $200 from 2 hours of work. That’s a “pay rate” of $100/hr, and you only have to do it once, but the savings occurs every month!
- Phone Bill / Cell Phone – How many phones do you need, and do you need long distance on all of them? Downgrade your plan and save a few bucks. (saves $15/mo)
- Internet – Do you really need the fastest package? Try downgrading speeds or changing providers. Or share wireless with a neighbor. (saves $15/mo)
- Cable TV – How much TV do you watch, and do you really need all those premium channels? You can catch a lot of shows online and you can get HD for free on basic channels using rabbit ears. Plus you probably already have a DVD-subscription service, so how many movies do you really need to watch? (saves $30/mo)
- Credit Cards – Credit cards with high rates (15%+) means more of your payment goes to interest and less to paying off your balance. Try negotiating a lower rate, or transferring the balance to a lower rate card. (saves $50/mo)
- Insurance – Do some comparison shopping with your home, auto, health, and life insurance. Rate changes in combination with a change in policy terms can save you some scratch. (saves $50/mo)
- Eating Out – Honestly look at how often you eat out. Could you bring lunch to work? When making dinner, make a little extra and freeze the leftovers. It’s cheaper and healthier than grabbing fast food on the way home. And what about those morning lattes? (saves $100/mo)
- Miscellaneous – Whether it is clothing, gifts, or car repairs, people always underestimate how much they actually spend on miscellaneous items. Just being conscientious of these expenses will naturally save you some money. (saves $75/mo)
If you are able to save a mere $250/mo, it’s like giving yourself a pay raise of $3,000 a year. If you make $60,000, you just gave yourself a 5% pay raise. Stash that extra money away, and it’ll make a huge difference towards your retirement or your kids’ college fund.
3. Clean Out Your Investments.
With investments, it is so easy to set it and forget it. However, investments are something that should be monitored on a regular basis. It doesn’t have to be every day (depending on what investments you have), but it should be at least annually. Here are a few ideas that will keep your investments in order.
- Consolidate Accounts – There’s typically no need to have several accounts at several different institutions. For example, if you have 3 Roth IRAs at 3 different companies, you can consolidate them into one. It’ll even save on annual fees, and you may even receive some discounts. Or you can open up a brokerage account, where you can have many different investments from many different institutions in one account. Less paper, less fees…it’s a win win!
- Rebalance Your Portfolio – Make sure that your investments still meet your risk tolerance and investment objectives. As one investment (say stocks) grows more than another (bonds) over the course of the year, it will change the proportions of those investments relative to your portfolio. You may have more stocks than you want/need, and you may need to sell those stocks to bring your stock-to-bond ratio back on track.
- Sell The Losers – While you are rebalancing, take a look at the performance history of each investment. Performance does not simply entail rates of return, but also the amount of risk needed to achieve the return. You may be able to find better performers with less risk. Keep in mind to not compare apples to oranges. Stocks should be compared to stocks, and bonds should be compared to bonds, and so on.
If cleaning up your investments is too complex, and it is for many, it’s a perfect time to look into getting some professional advice. They’ll keep you organized so you don’t have to do it every year.
Doing an annual cleaning of your financial house will help you have a pulse on your money. For the most part, we tend to not know what to do with our money, choose not to deal with our money, or are too overwhelmed with life to be able to manage it. Keep things simple, spend only 2 hours, and focus on one of these 3 ideas. Your money will thank you.
Dustin S. Ma is an independent financial advisor and president of LampPost Planning. He based out of the Bay Area, CA, and can be contacted at (510) 488-3634, firstname.lastname@example.org, or 2010 Crow Canyon Place, Suite 100, #404, San Ramon, CA 94583.
These are the opinions of Dustin S. Ma and are for informational purposes only. This article should not be construed or acted upon as individual investment advice. Please contact your financial professional to discuss these topics. Registered Representative, Securities offered through Cambridge Investment Research, Inc., a Broker/Dealer, Member FINRA/SIPC. Investment Advisor Representative, Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Cambridge Investment Research, Inc, LampPost Planning, and shesgotgrove.com are not affiliated entities.
- 3 Ways To Spring Clean Your Financial House
- Be Great. Don’t Procrastinate.
- Failing to Plan is Planning to Fail
- Butter Up Your Budget
- Go For Your Goals & Verbalize Your Vision