Simplify Your Financial Life

One of the things we did early on the road to financial independence was to simplify our financial life. We did this as we were gathering up the list of accounts to calculate our net worth.   And, if you haven’t already, I recommend now is a great time to start simplifying your financial life while on the road to financial independence. Start by consolidating those old 401ks from previous companies, numerous IRAs, old 403bs, old pensions, and any other account you’ve been saying “you’ll get around to looking at” or rolling over “later”. If you are working on a financial independence plan which includes your significant other, work with them to simplify and consolidate any accounts wherever you can. 

Why Is This So Important? 

Well, you want to get to a place with your budget and financial independence plan that is manageable for tracking long term. And, the fewer accounts you have to keep track of, the less TIME you have to invest to know where you stand.

I am guilty of leaving an old 401k with my prior employer sponsored plan for far too long after switching jobs because I had no idea of how to invest it.  Meaning, I knew I needed to roll it over, but should I roll it over to my new employer’s plan, an IRA, or do something else? The money was invested, but I had no concept of if it was invested in something “good” or what to look for in the long term. Mr BA had the same issue but multiple accounts with multiple past employers. Pretty much everyone he worked at! We had double the clean up to do. 

Broad Based Index Funds Can Simplify Your Finances 

One of the things that hooked us on the concept of financial independence was that there could be a simple way to think about choosing investments. 

Nothing had to be complex, and in fact, the less complex the better. If I couldn’t explain it, I most likely shouldn’t be investing in it. And, so I started learning about index funds. With index funds, I just had to look for what broad based index funds with the lowest expense ratios were available in the plans I was looking to invest in. It didn’t matter if it’s an IRA, 401k, brokerage account, or HSA. I deployed this methodology for both myself and my husband. I recommend reading JL Collins stock series on his blog and his book, “The Simple Path to Wealth”.   My takeaways from this book and blog are: 

1. Look for broad based index funds with low fees (<=0.4%). And, you can have a portfolio with as little as one total stock market index fund and eventually (for us) one bond fund.
2. The wealth accumulation phase (when you are accumulating wealth for your financial independence plan) should be aggressive as you have time on your side to recover from market fluctuations. Whereas, during the wealth decumulation phase (when you are living off your portfolio) you should consider a less aggressive allocation of stocks and bond funds. More bonds means less volatility (ups and downs), but also lower returns. Plus, if you need it, you’ll have something to sell (bonds) which is more constant than stocks when the market dips – which it always does.  
3. Sequence of returns risk is something to understand and plan for. 

Review All Accounts for Simplification Opportunities

I recommend learning about index funds if they are not part of your portfolio already. But once you have a comfort level with index fund investing, leverage your list of accounts you created when calculating your net worth. Review every entry and ask yourself if consolidating would simplify your financial life. I did this for myself and Mr BA, and we rolled over old 401ks and 403bs and other accounts, as much as we could, into IRAs. We consolidated an old OPERS account that Mr BA forgot about until his parents provided him the postcard reminder which was mailed to his childhood home. It was from a summer job as a camp counselor! Clearly, our prior way of dealing with things (aka not dealing with things) was not helping us to understand our financial picture. So, we used that goal of actually understanding where we stood to motivate our consolidations and to simplify our financial life. 

Pensions

I had a tiny pension which was frozen by a former employer due to the company being bought out. I’d forgotten about it for many years so it was high on my list for simplifying. The only issue was that doing anything with that account was not something available to me to initiate. So, I learned about the rules of the account and waited. Low and behold, toward the end of last year, my former employer offered me the option to obtain a one time cash out payment or roll over. And, after quite a few calculations and some investigation of the pension fund, I determined the rollover was the option for me.

Are You Withholding Enough Taxes?

Another thing I recommend is looking to see if you have enough withholdings being taken out of your paychecks. This way you don’t end up with a large tax bill or refund in April. No sense giving the government an interest free loan, right? Obviously, it’s also nerve racking to have to pay the government for not enough taxes being withheld throughout the year.

Back in 2012 when we moved from the Midwest to where we currently live, we had a relocation package which helped with our move. However, we did not have a good understanding of the tax implications of that assistance. So, after having gone through that life lesson, we decided to check the IRS Tax Withholding Estimator and have additional funds taken out of our paychecks to ensure we got closer to zero owned or due to us in April. This had been working pretty well for us.

Financial Mistakes To Avoid When Trying to Simplify Your Financial Life

In 2018, Federal income tax calculations changed. I thought it would be prudent to check the withholding estimator and adjust the amount taken out of our paychecks. This started off as a well intentioned checkup. However, it ended up as an error causing our worst tax payment ever – 5 figures! Instead of entering Federal taxes withheld from our paychecks I entered in the federal taxes withheld, Medicare and social security! All in one lump sum instead of just entering n the federal taxes! OMG!

Labels are Key

It was a labeling nuance on Mr BA’s pay slip which led me down this erroneous path. So watch out for these easy to make mistakes when using the IRS Tax Withholding Estimator. When the IRS estimator asked for Federal Income tax withheld to date, it was just looking for the income tax. NOT the Medicare and social security which also fell under the Federal tax heading on the pay slip. I wonder how many people have issues with using the calculator each year? In September of 2019, I checked our withholdings again, and referenced the notes I left myself. My memory is not always reliable.   Fortunately, we had the cash on hand to pay the tax, but it was still scary.

What If You Make a Mistake on the Road to Simplifying Your Financial Life?  Figure Out the Root Cause

The other thing this debacle reminded me of, is how Mr BA is good at getting to the root cause of issues and learning from the mistake.  Once I had calmed down and found the error between looking at the pay stubs and the IRS estimator, we reviewed the error together to avoid the mistake in the future. We also made notes to look back on next year. This turned a painful error into a lesson learned for the future. 

Think You Are Done Simplifying Your Financial Life? 

Lastly, scour employee benefits for ones you or your partner may not be taking advantage of just yet.  These can make a huge difference while working to simplify your financial life on the road to financial independence.

• Is there an employee stock option purchase plan you can take advantage of? 
• Do you have access to an HSA with your healthcare plan and are you maxing that out each year? If not, see the Madfientist’s article on the triple tax advantaged benefits of an HSA. 
• Also, in the medical space, do you have access to a Limited use FSA? Limited use FSAs are a useful way to save pretax dollars associated with specific dental and vision needs. Plus they lower your tax burden.
• Are you maxing out your 401k or retirement accounts? 
• Do you understand how the matching works with your employer?  If you max our your 401k account in Q1, does your company pay out the match all year long? Or, do you need to spread out your deposits all year long to get the full match?  
• Do you have any long term incentive accounts that are not included in your net worth? Conservatively include them, if you can.

Take some time now to look for these perks. Through this effort I learned there were race fee reimbursements associated with a cycling team Mr BA is associated with.  That saved us a few hundred bucks annually. Nice!

The Bottom Line About Simplifying Your Financial Life on the Road to Financial Independence

If you are working to simplify your financial life on the road to financial independence, and free up mental bandwidth, now is a great time to take full advantage (or learn about) opportunities available to you.   Leverage that space you’ve created in your brain and life by reducing your financial clutter. See what new opportunities maybe awaiting you and your partner on the path to financial independence. Even if you can’t take full advantage of each new thing you find right away, it’s good to understand how they work for future reference.  You will not be sorry!

Did I miss anything important to look at when trying to simplify your financial life on the road to financial independence? Have you made any mistakes along the way? What are you looking to consolidate these days? Leave me a comment below. I’d love to hear about it.