Finance can be complicated—but it doesn’t have to be. How can you simplify your financial life? Below are 10 ideas.
1. Tracking donations: In the old days, it wasn’t too difficult to track charitable gifts. You would simply refer back to your checkbook. But today, most people have debit and credit cards plus apps like Venmo, making it more of a chore to track every transaction. Yes, there are digital solutions, such as Mint, but they all require some amount of maintenance. That’s why, primitive as it may sound, I’ve found that a simple solution turns out to be the most effective: a humble manila folder. Simply label it “Donations” then find a permanent home for it on your desk or elsewhere in your home. Each time you make a gift, print out a confirmation or receipt and stow it in your folder. At the end of the year, it’ll likely require only a modest amount of time to total everything up.
2. Tracking spending in retirement: If it’s hard enough to track charitable donations, what about tracking overall spending? Again, you could use a tool like Mint. But if this isn’t for you, the best approach for those in retirement is to put your finances on autopilot. Set up consistent, automated transfers from your brokerage account to your checking account. You can then use your checking account as a barometer to easily track your spending. Say you’re transferring $10,000 per month. If you find your checking account balance is rising over time, that tells you your expenses are running less than $10,000 per month. On the other hand, if you’re regularly making additional transfers from your brokerage account, you know your expenses are running somewhere north of $10,000. Then, depending on your situation, you could either trim your spending to bring it under $10,000, or if your plan permits, increase your monthly transfers until you’re running at break-even. Either way, it’s an effective way to monitor your spending without much effort at all.
3. Tracking spending in your working years: If you’re in your working years, it’s harder to use the above strategy because money tends to come in from multiple sources, so a different approach is needed. What I suggest is triangulating in on your spending using another relatively simple tool: traditional bank statements. Even if you receive statements electronically, you can print these out from your bank’s website. The summary at the top is the section that’s most useful. There you’ll find totals for dollars that came into and dollars that went out of your account each month. While subject to distortion from one-time items and funds transfers, these totals still offer a useful starting point. If you analyze perhaps six months of statements, that should provide a reasonable average. While sometimes a little imperfect, I find this approach far easier than trying to total up every little transaction.
4. Budgeting: In the past, bills arrived by mail, and it was the consumer’s choice when—or even if—to pay that bill. Today it’s the opposite. Seemingly everything has turned into a monthly subscription, and they’re billed to our accounts automatically. Compounding matters, if you then have your credit cards set to be paid automatically, you might find yourself in the situation a friend described recently: In reviewing his credit card statement—which he acknowledges he doesn’t do regularly—he was appalled to see not one but two Netflix subscriptions. It was for no good reason, and he’s not sure how long it had been going on. A practical solution I’ve found: Try to consolidate all your subscriptions onto a dedicated credit card. That way, these little charges can’t hide as easily.
5. Estate taxes: When it comes to estate planning, many are deterred by the cost and complexity involved. Consider irrevocable trusts. They are a popular tool for getting ahead of estate taxes. But if you want to set one up, you’ll first have to find a lawyer, then map out your wishes, decide which assets you’re willing to part with, choose a trustee, and, finally, make peace with the ongoing complexity, including an added tax return each year. It’s a lot. If you’re materially over the estate tax limit, it’s absolutely what I recommend, but what if you’re not comfortable with, or not yet ready to commit to, an irrevocable trust? In that case, there are still simpler steps you can take to chip away at your estate tax exposure.
You’re probably familiar, for example, with the annual gifting exclusion, which allows tax free gifts over and above the lifetime limit. This year that annual amount is $17,000 per donor and per recipient. But suppose you want to help a child with a home purchase, something that would require writing a much larger check—say, $100,000. There’s a way to handle that without exceeding the annual exclusion and without too much complexity.
After writing the check, here’s how you’d account for it: Assuming you are married and your son or daughter is also married, you’d classify the first $68,000 as a set of gifts under the annual exclusion ($17,000 times two donors and two recipients). You’d then structure the remaining $32,000 as a loan. In the following year, you could forgive that loan, including the accumulated interest—which the IRS requires you to charge on intrafamily loans—as gifts under the exclusion for that year. If this sounds complicated, my suggestion is to set up a Google spreadsheet to track your gifts, then share that spreadsheet with everyone involved.
6. Asset allocation: When it comes to building a portfolio, there are innumerable investment strategies and asset classes to choose from. But it doesn’t need to be complicated. When in doubt, you could employ the simple formula Warren Buffett recommends: an S&P 500 index fund combined with short-term Treasury bonds.
7. Withdrawal rate: Another topic on which there is interminable debate: how much retirees can safely withdraw from their portfolios. Many believe in the “4% rule” while others debate that figure. Some say it’s too high, while others believe it’s too low. My view is that there’s no one-size-fits-all. A useful alternative, for a more personalized answer, is to consult the Trinity University study on withdrawal rates. It includes a helpful matrix showing the probability of success for various combinations of asset allocation and life expectancy.
8. Insurance: No question, insurance can be expensive, but there are two types that are relatively cheap: term life and umbrella. They don’t cost too much because the risks they cover have low probabilities. At the same time, those risks can be very costly if they do materialize, so I recommend that most people load up on coverage.
9. Taxes: As you probably know, there are two sets of tax rates that apply to most personal income: There are the ordinary income brackets, and then there are the rates for capital gains. This information can be invaluable for planning. But look at your tax form, and it’s virtually impossible to see where you fall on each scale. How can you find out this information? Whether you work with an accountant or prepare your own returns, most tax software provides a summary sheet with your average and marginal tax rates for each category. And, of course, I am happy to help.
10. Just-in-case: With apologies for ending on a morbid note, it used to be that when someone died, it wasn’t too hard to piece together the deceased’s finances by simply opening their mail for a little while. But now, with most things electronic, it’s critical to put together a letter of last instruction. In doing so, here are a few suggestions: First, separate your list into two parts. The first can be shared with an attorney, accountant or financial advisor, while the second might include more personal information and would be shared only with family members. Again, I recommend using Google Docs or another electronic format, which will make it easy to share the document and to keep it up-to-date.