Money Strategies for the Fiscally Confused

Simple Strategies You Can Use to Jack Up Your Net Worth

Thursday, March 02, 2006

Does It Really Make Sense to Simplify?

Experts are always telling us to "keep it simple", especially with our money. They say that if you make things too complex, if there are too many accounts to mind, and if you invest in too many different things, you'll never be able to keep track of it -- and you'll die a lonely death in a studio apartment on the wrong side of town, crushed by the weight of your voluminous financial statements.

Not so, sayeth Dollar Bill. Keeping your money matters simple can lead you down an even worse path!

The biggest money challenge most of us have is saving. We try to save, but it sometimes doesn't happen. We even set up budgets to keep our spending in check, but they never work. When all else fails, we try to simplify everything by consolidating all of our accounts and debts. What effect does this have? It makes things confusing. Since our goal is to eliminate confusion, maybe we should stop all of this simplification.

My wife and I used to have one checking account and one savings account. We paid the bills from the checking account (online if possible), and we paid ourselves first by depositing money into the savings account. Sounds good, right? Well, no. What happened was that it became impossible for us to plan our savings. If you lump all of your money into one account, how can you figure out how to parcel out what you're saving for? In other words, if you're trying to save for a car, a television, landscaping, and Christmas gifts, you'll inevitably rob Peter to pay Paul when all of the cash is in one place. It becomes confusing very fast, and you end up fighting with your spouse when you want to withdraw money to pay for one of your pet projects.

Solution: Set up savings accounts for each of the things you're saving for.

At first blush, this might sound like I'm advocating further confusion by adding to the paperwork. Instead, what happens is that you're able to better organize your money, and subsequently your goals are achieved with less grief. I would then take it one step further and do the same thing with your investments. Have an account for speculative investment (no more than 5% of you total investment capital), have one for long-term growth, and have one that acts as a savings vehicle for mid-term purchases like saving for renovations or a new home (if you only try to save for big purchases using savings accounts, it'll take forever).

So the lesson is to segment your money into accounts that have specific, achievable goals in mind. This will avoid confusion for you and allow your money to grow unimpaired. Otherwise, you'll die a slow, painful "death by simplification".


At 12:34 PM, Blogger 2million said...

Not a bad idea - ING direct has a neat feature where they let you create subaccounts for your savings account so it was very easy to create an account for each thing your saving for.

Another way could be to maybe keep it all in the same account, but paritition the account in your pf software (Money, Quicken etc) into seperate accounts so you can see how much of the account is for each thing you are saving for.

I don't do either but you got me thinking about it now....


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