3 Smart Reasons Not to Oversimplify Your Finances
January seems to beg for fresh starts, organizing binges and articles about simplifying your life. In some ways, though, a little complexity is a good thing.
Of course, paring and consolidating your financial accounts, for example, can help you better track your money. You may find it easier to coordinate your investments, save on account fees and spot fraud.
But there are times when less is not more. Here are three reasons why you may not want to take simplification too far:
1. Insurance limits
When you are young and broke, bank and brokerage insurance limits seem like a luxury problem.
Back in the day, I could not imagine having more than $250,000 in a bank account, the depositor limit covered by the Federal Deposit Insurance Corp, or more than $500,000 in a brokerage account, the limit for Securities Investor Protection Corp coverage.
Now, in middle age, my husband and I are fortunate enough to have to worry. I have had to study the nuances of coverage and weigh the risks of exceeding the limits against the hassles of opening up more accounts.
With checking and savings accounts, it is pretty clear that we want to stay below the limit. Banks do fail, and people with excess money in their accounts tend not to get it all back.
With brokerage accounts, it is more complex. Individual, joint, IRAs, Roth IRAs, corporate, trust, estate and custodial accounts each get their own $500,000 coverage limit.
That seems like enough to reimburse customers for fraud or massive hacker attacks. Just in case, though, we are not keeping everything at one firm, at least not yet.
Credit cards can be truly rewarding if you are religious about not carrying a balance. But the thing about rewards cards is that your sign-up bonus brings the biggest payoff.
After you have spent a certain amount in the first two or three months, a big wad of points, typically 50,000 to 100,000, lands in your rewards account. That makes it worthwhile to keep looking for new cards to get more bonuses.
But the cards we have already opened also offer lovely ongoing perks: elite status and upgrades at hotels, free checked bags and companion passes on airlines, cash back at certain retailers, opportunities to boost our rewards accrual rate with special offers.
So the old cards are worth keeping, which means more accounts to monitor.
Having lots of accounts does not hurt our credit scores, which are typically over 800 on the 300-to-850 FICO scale.
Closing an account now and then does not hurt much, either, as we have so much available credit. Automated payments make sure we are never late, but the big disadvantage to all these cards is keeping track of them all.
There are aggregation sites such as Mint and Personal Capital that allow people to track multiple accounts and numerous daily transactions.
Email and text alerts apprise us of suspicious activity in our credit card and bank accounts. Two-factor authentication helps secure our investment and retirement accounts from intrusion. (This requires something you know, such as a password, as well as something you have, such as a code generated by an app or sent via text.)
These features help us to be as vigilant as we need to be to manage a multi-faceted financial life.
Still, technology should not be an excuse for needless complexity.
Why track a bunch of old 401(k) accounts if your new employer plan is a good one and allows you to roll the old into it?
Why pay annual fees on credit cards you do not use?
Why try to beat the market with your investments when a passive approach consistently offers better returns?
Yes, sometimes simpler is better. Just not always.