The recent best-selling book, The Life-Changing Magic of Tidying Up, argues that life’s better when you eliminate your clutter. I believe the exact same principle applies to your financial life.
As you look at your pile of shoes, tools or warily peer into your messy closets, it’s no surprise your things get lost so easily. Too often, partially due to a distaste for all things related to money, people similarly neglect their finances.
If this describes you, your benign neglect may lead to costly and avoidable mistakes.
Over the years, I’ve noted two common habits that lead to financial disorder.
First, many people have too many investment accounts. It results in a cornucopia of accounts and the situation is overwhelming.
This type of shotgun approach – to just open accounts all over town and never look back – creates a situation that is often unmanageable for a normal person. And, as a general rule, what is unmanageable most often remains unmanaged. In the world of investments, I can assure you, that’s not a good thing.
People living in this disorganized state also have little idea about their overall investment allocation and the level of risk they are taking with their money. With their piles of unopened envelopes and email notices growing, they often don’t know their mix of stocks, bonds or cash. There are simply too many accounts and it literally stops them from moving forward with a strategic investment plan.
Second, failing to periodically clean out your financial closet can result in costly estate and tax planning mistakes.
For example, neglect can lead people to fail to update their beneficiary designations as their life situation changes, such as a divorce, death or having a new child. The benefits of good tax planning concerning your heirs can be large and to inadvertently throw them away is unfortunate, to say the least.
Another example is for those who have successfully completed basic estate planning moves – through the creation of trusts or other methods. Having to keep track of too many moving parts naturally lead to a failure to execute on the plan. When you don’t actually fund your trusts or properly designate your payable-on-death directives for your various accounts, all the planning in the world is wasted effort and can lead to avoidable expenses for your loved ones.
A good financial adviser will work to better organize your financial life. Helping you tidy up your affairs is one of their core functions to help you gain confidence with your overall financial strategy and plans. An uncluttered home – and an uncluttered financial life – invariably leads to an uncluttered mind. It might even feel, dare I say, life-changing.
