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Some people try to avoid thinking about money at all costs, but that’s not a good idea. It may come as a surprise, but the opposite problem can also occur. Spending too much time managing your personal finances can have a negative impact on your life.
Maybe you have a complex web of bank accounts, credit cards, and investment accounts to manage. Or you’re always looking for ways to optimize your finances and squeeze an extra dollar of interest here and earn reward points from it. You feel like you’re doing the right thing, but your overly complex financial situation is actually holding you back.
For one thing, keeping track of so many accounts can be stressful. It also takes time. In fact, according to research from The Motley Fool Ascent, Americans who regularly engage in financial planning spend an average of 54 minutes a day doing so.
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Simplify your finances and you’ll only need one hour per month instead of per day. Here’s what you can do to better manage your money and get your time back.
1. Use fewer accounts
This is something I’ve been working on this year, so I know how easy it is to get bogged down with too many accounts. The reason you open a new credit card is because it offers a hefty sign-up bonus. Add new checking and savings accounts for bonus offers and high APYs.
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However, each time a new account is created, there will be a new statement that you will need to review each month. With credit cards, that also means having to pay another bill and managing more benefits.
Explore all your accounts and see which ones you use the most. Consider closing bank accounts and credit cards that you don’t use regularly. If you want to keep it as simple as possible, just truncate it like this:
For investment accounts, it depends on your situation and available options. If her employer offers her a 401(k), a 401(k) is a wise choice. You may want to save more money for retirement using an Individual Retirement Account (IRA) or Roth IRA. If you want to invest outside of a retirement account, you can do so using a brokerage account.
Again, keep it as simple as possible. If you have a 401(k), IRA, Roth IRA, or brokerage account, you’re good to go. However, you don’t need to have accounts at four separate brokerages.
2. Automate everything
Once you know which accounts to use, automate everything. This includes saving money, paying bills, and investing.
Start by deciding how much you want to save and invest each month. Be sure to choose a reasonable amount. Once that’s done, here’s how to automate your money management.
- Have your paycheck deposited directly into your checking account.
- It will be saved automatically. Create an automatic transfer of the amount you want to save from your checking account to your savings account.
- Set up automatic investments through your retirement/investment account.
- Set up automatic bill payments. Use a credit card as a payment method if it is accepted, otherwise use a checking account.
- Automatically pay your credit card using your checking account. Set your statement balance to be paid off in full each month to avoid interest charges.
That way, you don’t have to pay all your bills manually. You also don’t have to worry about forgetting to pay and being charged late fees.
Automating everything will significantly reduce the time you spend on finance. All you need to do is check in from time to time to make sure everything is going as planned.
3. Stick to passive investing
Some investors want complete control over their portfolio. They pick all sorts of stocks and sometimes even dabble in more advanced strategies like options trading. By managing any investment, you expect to receive above-average returns. Or, better yet, become very rich.
However, it is difficult to beat the market. The S&P 500, an index often used to measure market performance, returned 24.23% last year. After analyzing eight hedge funds, he found that only one outperformed the S&P 500. And most of those hedge funds are run by professionals who have dedicated their careers to investing, even though they don’t beat the market.
For most people, it’s not worth spending a lot of time on your investment portfolio. Instead, choose passive investing where you simply add money every month. There are some options below.
- index fund: These are intended to track the performance of a particular market index. You can also invest in an S&P 500 index fund or an overall stock market index fund. Your portfolio’s performance will match that of the overall U.S. stock market.
- target date funds: These are investment funds established for a specific retirement year. For example, if you want to retire in 2060, you can invest in a 2060 target date fund.
Spending a lot of time managing your money doesn’t necessarily yield good results. If everything is set up well, you can spend more time on other areas of your life without using your hands.
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