Benefits of Consolidating Financial Accounts

In the world of finances, more is usually more. But when it comes to administration and bookkeeping, less is more.

One of the most powerful resolutions you can make is to simplify your personal finances. Paring down your accounts, files, bills, systems, and so on can make it easier for you to stay on top of your money.

A Zen-like awareness comes from being organized and in touch with every aspect of your money. If managing your money takes too long or is difficult, you’re likely to put it off or spend your time doing something that you enjoy more.

With this in mind, you may find it easier to consolidate your financial accounts. Let’s take a look at some of the benefits of account consolidation.

These tips can help you automate and streamline your finances, giving you more time to do the important things.

Our Financial Lives Have Become More Complicated

Keeping track of your personal finances can be tough. The average cardholding American household has just over 19 bank cards: 8 bank credit cards, 8 retail cards, and 3 debit cards. Two-thirds of American households own homes today, up from 44% in 1940, and the vast majority of those homes are bought using mortgage debt.

In 1980, 80% of workers were employed in a workplace with a pension plan; today, fewer than 30% are, and many are instead offered retirement plans such as 401(k)s, 403(b)s, and Thrift Savings Plans (TSPs). Since 1982, the percentage of Americans owning equities has risen by 3,500%.

While you can argue the pros and cons of self-directed retirement accounts, easy access to mortgage money, or plentiful and convenient consumer credit, an undeniable fact is that most citizens have far more information to track, analyze and act upon than ever before. The change offers some possibilities for benefits but also many risks of costs, both financial and mental.

Imagine your financial life a generation or two ago. You might have had one significant debt, a mortgage, but except in a few rare cases, it was probably a fixed-rate 30-year mortgage. Home equity loans were hard to come by for the average homeowner. Credit was rare. If you wanted a loan to start a business, you had to go hat in hand to the bank. No one was sending you free credit cards in the mail.

Contrast personal finances from a generation ago to today. I will use my wife and myself as an example. We have a mortgage but no other consumer debt or other loans. We have multiple personal and business credit cards. We have several bank accounts, including our primary checking and savings account, a high interest savings account, and another I use as an interface for linking to other accounts (call it my financial buffer zone). We have multiple retirement accounts and brokerage accounts. We have 529 college savings plans for our daughters. And we have 8 separate insurance companies for life, health, dental, home, and auto insurance (yes, we tried bundling, but sometimes it’s less expensive or more convenient to obtain separate policies).

Benefits of Consolidating Financial Accounts

Simplicity

As the old saying goes, sometimes less is more. This is true with your finances as well. Instead of dealing with half a dozen statements in the mail each month, you can deal with one or two. Fewer accounts also means fewer payments, deadlines, and tax forms. Something to think about this time of year!

Easier to Track

Account consolidation is helpful even if you use an account aggregator such as Mint.com, Personal Capital, or some of the other online money management apps. Instead of looking at line after line of numbers and mentally adding everything up, you can look at two or three lines. It gives you a much clearer picture of where everything is and where it is going. This is especially important as your accounts grow larger or more complex.

Reduces your risk

Identity theft is a beast. So is fraud. Having multiple accounts doesn’t necessarily make it easier for you to become a victim of identity theft, but it does reduce your ability to catch it quickly unless you take the time to actively monitor each account on a regular basis.

Yes, there are other steps you can take, such as putting a credit freeze on your name, shredding all your documents, switching to paperless, using a double authentication login for your email, etc.

But reducing your total number of accounts can also be an important step toward reducing your risk profile. That said, one of the reasons I have multiple accounts is in case we have a problem with one. I’ve had my credit card number stolen and was without a credit card for about a week while a new one was sent. It was a small inconvenience, but I’d rather not deal with it.

Fewer fees

I’m a big believer in not paying fees to financial companies. The only exceptions I make are for investment management fees (which are unavoidable but can be mitigated by using low-cost index funds), and for certain credit cards that have an annual fee. I used to be a staunch believer that there was no need to pay an annual credit card fee until I ran into a deal I couldn’t pass up (6% cash back on groceries, 3% on gas).

Account fees were easy to avoid a few years ago. Unfortunately, banks and other financial institutions are having a more difficult time making a profit, so they have been increasing fees for their users.

If you aren’t careful, you might find that you get caught in the squeeze. Many of these fees are avoidable with a little work on your end, but it can be difficult to keep track of the requirements for each account in a fluid environment. Reducing your number of accounts makes it easy to worry less about inactivity fees, low balance fees, and the dreaded “charge you for being a customer fee.”

Benefits of Consolidating Bank Accounts

It is not uncommon to have multiple bank accounts. I have my primary checking account, but I also have online savings accounts with other banks that offer higher interest rates.

In addition, I have a business checking account at a local bank, and online business savings account for higher interest. Altogether, I have 3 personal savings accounts and 2 business accounts, which certainly isn’t simple but is much better than before!

Why have multiple bank accounts?

There are a few reasons to have multiple accounts – the convenience of the branch location, high interest rates, low fees, free ATMs, free checking, and other banking features.

Why more isn’t always better.

The problem with multiple accounts is that it spreads your money out, and if you aren’t careful, you can lose track of your savings, bounce checks, get overdraft fees, etc. The likelihood of making financial mistakes or even tracking errors increases with each new account you add. So while it may seem like adding new accounts can make you more money, it may end up costing you money – especially if you manage your money with a spouse or partner because multiple accounts create another barrier to communication.

Benefits of consolidating bank accounts.

Fewer bank accounts are easier to monitor and can often result in higher interest rates, lower fees, and other perks. It also makes it easier to communicate with someone who helps you manage your finances, reduces the number of statements and tax forms you receive each year, and makes it easier, in general, to manage your finances.

Benefits of Consolidating Investment Accounts

Investment accounts are similar to bank accounts – there are many great brokerage accounts that offer different benefits – low trading fees, no management fees, the ability to link directly to your bank account, etc. The problem, again, comes from being able to quickly and easily manage your money.

Here are some benefits of consolidating your brokerage and investment accounts:

• Ease of tracking investments. It is easier to track and manage your investments when they are in one location instead of several. This makes it easier to track investment performance and perform asset allocation.
• Track changes. Investment firms may change their fee and commission structures, add new account features, offer free training seminars, or make other changes. The fewer companies you have to remain up to date with, the easier.
• Special perks. The more money you have in your investment account, the more benefits you may receive from the investment firm. This can be in the form of lower fees or commissions, personalized investment advice or service, free trades, and other benefits.

Note about consolidating 401k plans and the Thrift Savings Plan: You may not be able to consolidate your 401k plan or Thrift Savings Plan if it is active, but you may be able to do so once you are no longer actively contributing to it. Here is some information about doing a 401k rollover into and IRA and options for your TSP when you leave the service.

How to Consolidate Your Financial Accounts

1. Create an Organizational System

Organization starts with you. The sooner you take matters into your own hands, the easier managing your finances will be. How you organize your finances is up to you. My personal system is a combination of physical and digital folders.

The physical folders keep official documents that need to be maintained. This includes both financial and non-financial documents, such as birth certificates, marriage certificates, passports, car titles, and similar documents.

I only keep physical copies of financial documents when needed. The rest of my financial documents are digital and are maintained with a filing system such as Account_YYYY_MM_DD. This helps me keep digital items better organized.

Creating your own organization system keeps everything in good order and helps prevent things from falling through the cracks.

2. Close redundant bank accounts

It’s not uncommon for people to have several bank accounts, but most people can get by with a local bank and an online bank for better interest rates. This is my preferred method of banking. I use an online account for higher interest rates and a local bank or credit union when I need access to a physical branch.

However, a low balance may trigger fees and certainly leads to the possibility of overdrafts. Keep all of your money in one or two accounts. We are aiming for one “operating” checking account and one emergency account in separate banks.

3. Consolidate your 401(k)s from old jobs

If you have 401(k)s at old jobs, you will certainly be better off rolling it into your current job or an IRA. You must roll them directly into IRAs or another 401(k) to avoid taxes and penalties, but any decent brokerage will help you with this process.

Consolidate your IRAs into one financial institution, too. Consolidating these accounts can help you reduce management or custodial fees and make it much easier to balance your retirement portfolio. When you reach retirement age, consolidating retirement accounts will also simplify Required Minimum Distributions.

4. Set up automatic payments

I try to use my credit cards for as many purchases as I can. This gives me cash back on my card, and gives me a neat statement so I can review my purchases each month. I then have the credit card payment automatically paid from my checking account each month.

I review the statement but don’t have to write a physical check. You can often do this with a variety of bills, including insurance, loans, credit cards, utilities, and more. Automate your payments from a single checking account. Then try to group them into the early part of the month, so that the money comes out before you spend it on other things.

5. Consolidate small investment accounts

Many people have multiple investment accounts. This makes managing your investments much more cumbersome when you balance your investment portfolio and when you do your taxes.

Most investors are better off investing in index funds versus individual stocks. If you don’t trade frequently, you will most likely be better off consolidating everything under one roof, even if you have to pay a slightly higher commission for the rare times you make trades.

Consolidate your investment accounts whenever possible by using one brokerage or investment company. That move allows you to log into one online account, receive one statement, receive one tax form, and deal with one institution when you have questions.

You can move 401(k)s from previous employers by doing a tax-free rollover into an IRA or into a retirement plan at your new workplace. IRAs can also be transferred to one brokerage account for easier tracking.

Your investments will be much easier to monitor when they’re in one place.

6. Stop opening new accounts

I’ve been tempted by large signup bonuses numerous times. While free money is nice, it usually comes with golden handcuffs. If you open a new bank account to get a signup bonus, you usually have to make a sizable deposit, keep the account open for a minimum amount of time, and sometimes add an automatic deposit, or use the account for automatic payments. This can add up to a lot of work.

Most credit card sign-up bonuses require spending a minimum amount over the first few payment cycles you have the card. Some of these bonuses are very large, and can be worth the added hassles. Just make sure you understand what your time is worth and set a threshold the bonus must exceed to make it worthwhile. Otherwise, you are adding complexity to your life for a small financial reward.

7. Reduce the Number of Credit Cards You Carry

The average American carries between 4 and 6 credit cards.

Access to easy credit can be convenient, but it can cause problems for some people. Reducing the number of credit cards you keep can reduce the amount of mail you receive and make it easier to manage your money.

Just keep in mind canceling a credit card can affect your credit score. You should probably leave the oldest card open and make sure canceling any credit cards won’t make your credit utilization too high (amount of credit used vs. the amount of available credit).

Here are more tips about the effects of canceling a credit card.

8. Consolidate credit card debt or other bills (advanced)

You may find it helpful to transfer your credit card balances to a single credit card at a lower interest rate. You can often do this by opening a new balance transfer credit card. I know we just discussed not opening new accounts, but this can be the rare exception that helps you consolidate your debt so you can pay it off more quickly. Only use this strategy if you can commit to not using your other credit cards and not taking on any new debt.

Streamline Communications and Documents

Manage Your Mail More Efficiently.

To ensure you don’t let papers pile up, sort your incoming mail in a portable file box with hanging file folders.

Keep the file box in a handy location where you open your mail, like the kitchen or your home office and use different folders to sort receipts, bills, documents to shred, documents to file, and so on, until you can process them.

The average person receives 560 pieces of junk mail each year, or about 1.5 per day.

A great way to minimize the clutter is to stop junk mail and opt out of pre-screened credit offers, leaving you with the more important pieces of mail to deal with.

From there, set up a system that works for you.

Some people find it easier to do batch processing, where they go through a week’s worth of bills and correspondence at one time, and others prefer to deal with it immediately.

Experiment to find which method is best for you.

Sign up for a Do Not Call List.

You can also opt-out of annoying phone calls by signing up for the Do Not Call List.

This step won’t stop phone calls from companies you currently deal with or charities, but it should stop unsolicited phone calls from mortgage brokers and debt consolidation companies.

Handle Email More Efficiently

My wife and I set up a dedicated email account through Gmail for our finances, insurance, and online shopping accounts. We don’t use it for anything else, including communication with family and friends.

Use your personal email account for personal items and a dedicated email account for finances and official household business.

Be sure to opt out of store emails and coupon offers as most of these are just clutter you won’t read anyway. The result is a clean inbox with actionable items.

Go Paperless

Whenever possible, opt to receive electronic statements, which have multiple benefits, including less mail to process and a lower environmental impact. Some companies, like Vanguard, will also waive fees if you go paperless.

Most financial institutions, credit card companies, utility companies, and service providers offer to deliver your mail electronically. They help protect you from identity theft, reduce the amount of paper you have to process or shred, and allow you to centralize all your incoming financial documents.

You can go online to view older documents or print them out if needed. If you prefer paper statements, get a document scanner so you can scan the document for your records.

Then shred it; reducing clutter at home.

Automate Your Finances as Much as Possible

Automation saves me an immense amount of time each month. But that doesn’t mean to set it and forget it, you still need to monitor your accounts. This section covers automation. See the next section for how I track my finances.

Use Automatic Bill Pay

Autopay is a fantastic way to save time and money and to make sure no bill ever falls through the cracks.

Most online savings accounts offer free bill pay as part of their service, and it has become very common through brick-and-mortar banks.

Set up as many bills on autopay as possible, reducing the amount of mail you send and receive and reducing the time you spend worrying about paying bills.

You can also link some payments to your credit card each month so you can take advantage of rewards points or cash back.

Only use this method if you are certain you can and will pay your bill in full each month.

The bill service either transfers your money electronically or mails a paper check to any individual or company in the country that you want to pay—whether it’s your next-door neighbor or your mortgage lender.

Automate Your Investments

Just like paying bills, investing is easier when you don’t have to sit down and write a check or initiate an electronic funds transfer each month.

Set your basic asset allocation and make automatic payments for your investments. This can often be done through work via 401k contributions or a payroll deduction.

You can also do automatic transfers through many brokerages, investment houses, or other financial institutions.

Some discount brokerages, such as Ally Invest, E*TRADE, and TD Ameritrade, make it easy to make scheduled trades.

Be sure to go over your asset allocation every so often to maintain a balance with your investments.

Regularly Monitor Your Finances

Managing money is much easier when you know how much is coming and going, and where it is coming from, and what you are spending it on.

I track my finances monthly. I use a net worth spreadsheet I built that tracks my account balances for each financial account I have. This includes bank accounts, retirement, health savings, college savings, and my house value and outstanding mortgage balance.

I also track actions I take each year, such as Roth IRA contributions, 401k contributions, estimated tax payments, and other big-picture financial actions I want to track.

Keeping track of my finances helps me ensure things are moving in the right direction and helps me to avoid making expensive mistakes.

Use Personal Finance Software

In addition to my custom spreadsheet, I also use online money management apps. (I use Personal Capital, but there are many other great tools).

Many great financial management tools include Mint.com, Personal Capital, Quicken, You Need a Budget, and a host of free online money management tools.

Our favorites are Mint.com and Personal Capital.

Research your financial options, then decide on the best all-around solution(s)

There is no one size fits all solution for banking customers or investors, though some companies offer a 90% solution. Examine your banking needs, and try to reduce the number of banks you have down to the best 2 or 3 solutions (I understand the convenience of a local bank or the lure of higher interest payments!). But you might rarely need more than 2 or 3 personal bank accounts (business accounts are in a different category).

The same thing goes for investing. Examine your investing needs and habits and try to determine if one of your accounts will offer the best solution, or if you need multiple accounts. Many people can easily reduce their non-retirement investment accounts down to 1 or 2 investment firms, often a discount broker for cheap individual stock trades and a mutual house firm where you can buy low cost mutual funds. Here is a comparison between the two types of firms for a better understanding: best companies for an IRA. (The article was written about IRAs, but it also applies to non-retirement accounts.

Take a few minutes to examine your options and find a solution. Managing your money is much easier once you consolidate your financial accounts!

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