We all have bank accounts, investments, insurance and some other products and services that we no longer use and which have no place in our financial plan. Yet, we are reluctant to take the action needed to shed the unnecessary flab. Spring cleaning your financial life allows you to focus the limited time and energy that you have, on important money matters rather than avoidable clutter. A one-time exercise to consolidate finances can bring benefits of efficiency, lower costs and alignment to your needs, without compromising on the advantages of diversification.
Unused bank accounts add to the list of things that you have to keep track of. There may be money lying unused in the account, or you may be receiving income from some forgotten investment and you may even be paying fees and charges for it. None of these may be adding to your financial situation. Close unused bank accounts and consolidate income, expenses and investment activities into a few designated bank accounts. One way to do this is for all earning members of the family to have individual bank accounts for receiving their salaries or other employment income. Apart from this, the household should have an expense account to route expenses, and an investment account to make investments and receive investment income. The expense and investment accounts will be funded from the individual income accounts. Consolidating bank accounts will help you track expenses, ensure that the saving and investment plan is working, monitor performance of the portfolio and ease operational issues of managing tax and other details.
If you look into your portfolio, you are likely to find investments that were touted as sure-fire winners, which have no place in your investment plan now. Weed out the investments that do not help you get to your goals and are maybe pulling down your portfolio’s returns.
The next step is to ensure that the asset allocation in the portfolio reflects your need for income, growth and liquidity. Common oversights include not considering the money held in provident fund account as debt allocation, ignoring the small asset class in a hybrid investment and making tax-linked investments independent of the asset allocation assigned to rest of the portfolio.
Consider all investments and then determine the asset allocation of the portfolio. At the next stage, identify duplication in your portfolio. Small holdings in multiple deposits, mutual fund schemes and individual securities may not add any real benefit of diversification. On the other hand, they may increase the cost of holding and monitoring the portfolio. Many schemes may hold similar securities and follow similar styles of managing funds. You may be replicating schemes. Analyse the portfolios to eliminate duplication and consolidate investments into consistent performers. Diversify across financial products and service providers to minimize risks. But don’t spread it so thin that the cost and effort outweighs the benefits.
The last-minute rush to take advantage of tax benefits, or the neighbour insurance agent who you could not say no to, means we have multiple insurance policies and pay high premiums but may still not be adequately insured. Assess the amount of insurance cover required under various categories such as life, health and personal accident. List the insurances that you already have, including covers provided by employer, policies that you hold and any others. Identify duplication if any. For example, consider an additional personal health cover if you think the cover provided by your employer is not sufficient. And most importantly, make sure that you have the insurance cover you need at the most economical cost. Surrender policies where the premiums are too high relative to the protection provided and use the cash outflow so saved to buy the cover you need. It is not important to have all your policies from the same insurance provider. Evaluate terms offered and settle for the one that suits you best.
A purse full of credit cards is not a vote of confidence in your ability to manage your finances. Evaluate the stash of cards you have on the basis of interest costs and fees charged, credit limits, acceptance, rewards and any other relevant features. Your primary credit card should have wide acceptance and efficient terms on costs and fees. An additional card as back-up is good to have in case the main card is lost or is inoperable. Holding multiple cards provides benefits of convenience and may even have a positive effect on your credit score if the cards are used responsibly. However, holding more than 3 to 4 cards is not advisable. Pay off outstanding dues and surrender cards that are unnecessary. Protect your credit history by holding on to cards on which you have built a credit history over a longer period and let go of the newer ones. Be diligent about tracking your credit card activities and always be disciplined about using them and meeting obligations.
It is a good idea to declutter goals too by prioritizing the more important ones so that your available savings are best utilized. Another step that will go a long way to streamlining your financial life is to organize the financial documents in a way that best allows you to act on them and access them as required.
Find a system that works for you. Automate bill payments, investments, mortgage payments and receipts to keep procrastination at bay. A one-time effort to get all these in place followed by periodic tune-ups will keep your financial vehicle purring along smoothly.
First Published: Wed, May 31 2017. 04 03 PM IST