Many of us have heard the phrase “Inch by inch it’s a cinch, yard by yard, things are hard.” Sometimes thinking about your finances can be overwhelming. It’s easy to get trapped into the thought that you need to overhaul your life in order to succeed. Our first instinct is to assume that what we are doing now is all wrong, and that completely changing directions will be the most effective way to enhance our outcomes. There are certainly people out there that are doing everything wrong with their finances, but for most people, it’s much easier to tweak a few small things each year that will add up to big things later in life. Here are three simple ideas that you can implement in 2017 that will point you in a positive direction.
1. Spend as much (if not more) time thinking about “savings rates” as you do thinking about “rates of return” - So many people focus so many of their efforts worrying about how their money is “performing” instead of cutting out spending and increasing savings rates. The simple truth is that, especially in your younger years, the amount that you save every month is more important than the actual rate of return that you are earning on your investments. This year, you can put up to $18,000 into your 401K plan at work ($24,000 if you are over 50), so focus on putting as much away as possible. Don’t mistake this for me saying that your rate of return is not important, because it is, but your savings rates are much easier to control and will ultimately play a huge part of how much money you will have down the road. If you don’t have a workplace 401K, talk to your financial advisor about what type of plan will be the most beneficial for you, be it a ROTH IRA, Traditional IRA, SEP IRA, or one of the other plans that might make sense for you.
2. Consolidate all of those accounts– If you have three different IRA’s at three different institutions, eventually you have to ask yourself why you are making your life more complicated than it needs to be. Think of it as organization, the more clutter that you have in your life, the harder it is to be organized. You can clean up that clutter by consolidating your accounts into one IRA, ROTH IRA, Brokerage Account, and whatever other types of accounts that you may have. Remember, most investment accounts carry SIPC insurance, so your account in federally insured up to $500,000 in the event that the institution that holds your money becomes insolvent (which is very rare). So holding a bunch of different accounts typically does not make sense. It is easy to get plenty of diversification in one account. If you have a ROTH IRA, Traditional IRA, and Non-Qualified account, you may as well hold all of those accounts at the same institution. Diversification usually refers to spreading your money amongst different investments, not different investment accounts of the same tax qualification. Of course, before making a transfer/rollover decision, you should compare your current and prospective account’s features, including investment options and services, fees and expenses, withdrawal options and required distributions, legal protections, and tax treatment to be sure consolidation makes sense for you.
3. Hire an Advisor- I have clients from many different professions and stages of life, and they all agree on a common theme. They know that they will make more money focusing on trying to excel at their own profession than they will at trying to manage their own finances. If they are retired, they know that their retirement will be much more enjoyable letting someone else other than themselves worry about their finances. Not to mention, you might be taking up time that you could be spending with loved ones, or doing the things that you are passionate about. The relatively small fee that an advisor charges is usually worth the increased quality of life that you will experience by not having to worry about finding the right investment allocation.