Spring Cleaning for Your Finances

Spring is just around the corner, so our minds turn to cleaning up and getting ready for new growth. Moreover, tax documents are arriving daily, bringing a fresh focus to simplifying our financial lives.

Here are a few ideas to make your financial life better this year, by cleaning up credit cards, bank, retirement, and investment accounts:

First, get your credit reports through the major credit reporting agencies, by visiting Annual Credit Report.com – Home Page.  Experts recommend doing this every year, so if you have not done it for a while, it is definitely time.

Your credit report will reveal a number of interesting things. As the site says, there is more to the game than the score. People want to have a higher credit score, because it can affect not only what you can borrow, and the rates you may have to pay. Your credit score can also affect whether you are approved to rent, insurance rates, and even whether you can get a job.

It is important to have the correct information in your credit file with these companies. People often are concerned about the “social credit score” used in some other countries, but the reality is that corporations run a similar operation here in the US. We cannot change this situation, so we may as well operate as well as we can, within its framework. For most people, it is not realistic to “opt out” of having credit altogether.

In the credit report, most people are surprised to see how many open credit cards and lines of credit they have. Did you once buy a bed on a 90-day-same-as-cash arrangement? You will probably find that this account is still open. Close all the accounts you are not using and will never use again.

For credit cards, the situation is more complicated. Your credit score is based partly on your amount of available unused credit.  If you have a credit card that you use from time to time, but your balance is never close to the card’s limit, this can help your credit score. Cancelling cards with unused credit can actually lower your credit score, so this should be done with care. On the other hand, an open account that you never lose is just an invitation for somebody to try to use that account.  You might not find out for a while if this happens.

With the above in mind, reduce your open and unused lines of credit where possible.

Next, review your bank accounts. How many banks do you use? Most people need only one or two. This may be another opportunity to prune. Raising your average balance at the bank often avoids fees. Consider using a credit union instead of a big bank, unless you truly need the services offered, such as ATMs on every corner, or if you can stomach some of their shenanigans. If you have a rental or your own business, keep a separate bank account for those transactions.

Finally, consolidate your investment accounts where possible. If you have moved from job to job, you may have multiple 401(k) plans from former employers.  Here you have some options. Your current employer plan may allow a “roll-in” from these old plans. If not, consider consolidating old retirement plans into your own IRA. If you are close to age 55 and might decide to take withdrawals before age 59 ½, you should probably hold off on this, but most people can benefit more by consolidating and simplifying accounts. There are rules concerning consolidating pre- and post-tax retirement accounts. Each spouse must keep their own retirement accounts. There is no such thing as a joint retirement account.  While you are checking, it is a good idea to review the beneficiary for each account. Custodians sometimes lose this information, or it becomes out of date.

Spouses may have kept old brokerage of mutual fund accounts before getting married. Consider consolidating here as well.

Fewer retirement and investment accounts can translate to more consistent investing: it is easier to create a single view of where all your money is, and easier to rebalance.  Having fewer accounts also results in fewer of those tax forms that keep showing up. You can finish your taxes faster and with less likelihood of forgetting to report something.

The above suggestions are aimed at helping you cut back the undergrowth that can creep into our financial lives. While you are cleaning up, you may find other problems, such as identity theft, or misinformation in your credit report. Correcting those problems can be more complicated, but like anything else, the sooner you find out about it, the less work it can be to resolve.