Financial Fridays: Financial Cleansing and Updating

Financial cleansing has a lot of similarities to health cleanses

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Welcome to Financial Fridays #5! Over the next 2 weeks – every Friday from now until the end of 2017 – I’m going to share posts that will help you paint a picture of your financial life today and set you up for a prosperous 2018. We’ll touch on topics ranging from income and expenses to net worth, debt, career advice, and setting goals.

These are some of the steps Kristin and I have taken to help set ourselves up to be able to afford our dream wedding, dream house, and plan for early retirement. Of course, a healthy dose of privilege helps and I’d be remiss to not mention how fortunate we’ve been in that regard.

If you’re looking to make 2018 a better year financially than 2017, tune in every Friday for the rest of the year!

Why Fridays? Each post will have a set of actionable items that could be achieved easily over the course of a weekend!

Did you miss last week’s post? If so, give it a read.

Financial Fridays 5: Financial Cleansing and Updating

Welcome back to the next installment of Financial Fridays. This week is all about making sure that your financial life is updated.

What do I mean by that? Simple: clean up old, out of date stuff. It’s not the pretty stuff, but like cleaning, once it’s done you’ll feel better.

Why do we bother to clean up something like this? It’s simple. As things change, it’s easy to overlook some of the administrative work that goes along with it. It’s boring, sometimes tedious, and doesn’t get you much closer to reaching your goals most of the time.

But it can help you simplify your life, and like Michael Scott says: Keep It Simple, Stupid. Keeping things simple lets you focus on the things that really matter. I like to conduct a Financial Cleansing at least once or twice a year, or when I switch jobs.

Roll Over Old Accounts

If you’re like most people, chances are pretty good that you’ve held a number of different jobs in your life. While switching jobs can be a great way to earn more money, it also can make a bit of an administrative nightmare for your finances.

Rolling your old 401(k)’s into an IRA gives you complete control over what you invest in. Typically with an employer-sponsored plan, your investment choices are somewhat limited. In addition, old employers may pass additional administrative fees onto you.

There’s literally no reason to not roll over.

The rollover process is relatively straight-forward once you have accounts established. To start, figure out where you want to house your IRA(s). Vanguard, Fidelity, or Charles Schwab are all great options.

Open your account, and then talk to your 401(k) plan administrator to get them to roll it over. They’ll send the money straight into your new account, where it’ll likely sit as cash until you invest it.

If you’re unsure what to invest in, there are a few easy picks. My two favorite include Target Date funds (which rebalance themselves to become more conservative over time) or Index Funds, which are comprised of many holdings and track the index of a given market.

Surprisingly, only about a quarter of people who left their jobs rolled their 401(k) into an IRA. Doing so gives you a lot more flexibility and can potentially lower fees significantly. If you’ve got a few scattered accounts it can help simplify things.

My Progress

Admittedly I’ve half-failed at this one. I still have my old 401(k) from my first job out of school. Part of the reason I still have it is because it’s tedious. However, next week I’m committing to getting it rolled over once and for all!

It’s only half because I DID roll over an old 401(k) from my last job, but that was because it was already at the financial institution I wanted to stay with. That process was a lot easier and I could do it entirely online.

A few notes:

  • Unless you have a super compelling reason, don’t cash out your 401(k)! A coworker of mine did that and not only got dinged with taxes owed, but also with a 10% penalty. Ouch.
  • Converting to an IRA, in my opinion, makes more sense than transferring to a new 401(k). With an IRA you have much more flexibility over your investment options. While your employer may have decent options now, that may not always be the case.
  • If you have a Roth 401(k), make sure you get the portion of Roth money rolled into a Roth IRA and the rest into a traditional IRA. Any employer contributions will always be pre-tax, so chances are you’ve got a split.

Action: If you have old or scattered accounts such as a 401(k), HSA, or old IRA’s, combine them at your financial institution of choice. If you can’t do it online, call them.

Ensure you’re Protected

You know this is a boring administrative post when I’ve got to bust out the L word. I won’t say much on this because I’m not a life insurance guru, but a few words of wisdom nonetheless:

  • Your life circumstances change all the time. When was the last time you evaluated your life insurance?
  • Many people get some through their jobs. Do you need more than that?
  • Do you have dependents who rely on your income?

Admittedly life insurance isn’t a very sexy topic. If you need (more) life insurance, get yourself an inexpensive but adequate and quality term policy.

If you’ve had any major life changes in the past year – say like getting married or buying a house or having a kid – then it’s a good idea to review your insurance.

Action: Review your life insurance and ensure it still is meeting your needs.

Double Check Your Legacy

Nobody likes to talk about this but the fact of the matter is everyone on this earth is going to die. Morbid, perhaps, but true nonetheless. That means someone is going to have to take care of your shit when you’re gone.

Having a will will help whoever’s the executor of your estate deal with the administrative.

Additionally, making sure your beneficiaries on your accounts are accurate is important. A beneficiary is simply who gets that thing when you die. If we’re talking about life insurance, it’s that “death benefit” amount that’d go to the beneficiary.

After getting married, for example, it’s a good idea to review those.

Action: Update (or create) a will. It’s inexpensive, easy, and you can always change it later if you need to. Update your beneficiaries on your accounts as well if needed.

Update Your Money Map

With all of these changes, it might start to get a little confusing as to what you’ve got and where everything is. To guide this, I now use a Money Map.

A Money Map is a simple concept: it’s a map of how money flows in and out of your life. If you can print one out, excellent. Mark it up, draw on it, and ideally X a few things out.

Action: Update your Money Map.

Update Personal Capital

You’ve signed up on Personal Capital, right? If you haven’t, check out my review and then go sign up – I love using it to evaluate fees and track my net worth.

Personal Capital helps me keep everything organized, in addition to the Money Map. As I consolidate accounts, it’s sometimes necessary to add a new institution.

Earlier this year I got access to a 401(k) at a new institution. It’s easy to just skip over adding it to Personal Capital or my Money Map, but doing so at least on a periodic basis helps me make sure I’m making good progress toward retirement.

Thankfully Personal Capital makes it pretty easy to add accounts, so this one only takes a minute.

Action: If you rolled over any accounts to a new financial institution, update your Personal Capital account.

Quick and Easy

The process of financial cleansing doesn’t need to take a long time. If you set aside a few hours to tackle these, virtually all of them can be done quickly and painlessly. You might not even need to talk to anyone – an absolute dream for an introvert with a stutter.

Sometimes it can be a little tricky if you need to get on the phone with someone since you’ll have to deal with their hours. But just like cleaning a house, a financial cleansing will leave you on the other end feeling a lot better about things.

Tidying up your life is a good practice, and money isn’t exempt from that!

Question:

How often do you deal with the ‘administrative’ side of your financial life? Do you take care of it when setting a budget (or reviewing your spending)?

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2 Comments

  1. I think life insurance is applicable if your mortgage or loans or savings do not exceed your dependents ability to pay them off. For those without children, life insurance is even less applicable.

    I have life insurance through my employer but because my liquid assets can pay off my mortgage I don’t have additional term life insurance. I USED to have term life insurance when my mortgage was massive (in the 600K) with my ex boyfriend but now I don’t since it’s approaching $100K.

    1. Yeah our needs are definitely less than people with kids. Our big thing is I don’t want either of us to have to sell the house if we don’t want to, so at least coverage to pay it off is a good idea. Beyond that it’s probably not needed…we’re both very capable of working and earning for ourselves. The last thing I’d want though is for Kristin to struggle to live a good life and stay in the house, if that’s what she chose.

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