The first of the year can be overwhelming for many people. Even with the best of intentions, people overspend and are left with credit card bills to pay off. We go into the season confident we can stick to a budget but fall short when push comes to shove.
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According to research by Hersh Shefrin, author of “Born to Spend: How Nature and Nurture Influence Borrowing Habits,” about 98% of holiday budget-setters he surveyed felt confident that they would be able to stick to their budgets. Well, it turns out that many were mistaken: 36% admitted to overspending when he followed up. That’s quite a disparity.
Add to that the sheer amount of paperwork that hits our mailboxes in January.
So how do you avoid feeling overwhelmed? Simplify and plan ahead. Take the next three weeks—21 days—to clean up and clear out the old, and plan your 2014 so you don’t end up in the same situation next year.
Here are five ways to fearlessly simplify your finances:
1. Get rid of everything you don’t need.
Start with paperwork; keep important papers and shred everything else. Make two tax files: One for 2013 for all of the important tax documents you receive in January and another for 2014 (so you don’t have to sift through a sea of paper again a year from now).
Keep anything you’ll need to substantiate or prove to the I.R.S. (or anyone else for that matter) income you received or a deduction you took such as:
- Seven years’ worth of tax returns and supporting documentation (The I.R.S. can audit you for any reason for up to three years, but if they suspect you under-reported income, they have up to six years)
- Records of anything that is active, such as a contract
- Records for the sale of an investment, such as a home or stock until the relevant period of limitations expires or the year in which you sell them
- Home improvement records for at least three years after the asset is sold
- Disputed bills
Shred these documents:
- ATM receipts once the transaction appears in your account
- Any bank statement over a year old.
- Any quarterly investment statements after you receive the year-end statement (Better yet, sign up to receive your banking and investment statements online so you never get paper in the first place)
- Credit card offers (Or, even better, opt out! Go to www.optoutprescreen.com or call 1–888–567–8688 to opt out for five years or permanently)
- Convenience checks that come with your credit card statements (Or choose online statements, so you aren’t tempted to use them, or so there isn’t the danger they will get stolen and used)
- Pay stubs after you’ve double checked your W-2 and paid your taxes. (Better yet, have your employer store them electronically for you)
(note – this is not intended to be tax advice. Please consult your tax specialist for guidance specific to your situation. )
2. Pare down your accounts to what’s most important.
Though the average number of credit cards (for people with at least one credit card) in the U.S. rounds up to 4 per person, according to creditcards.com, I’ve seen couples with five or six credit cards between them. Add debit cards, savings accounts and investment accounts, and you can easily have 15-20 different accounts to deal with.
Multiple accounts add complexity to an already complicated financial life and can open the window to fraud. According to research from Experian, in 2012, people surveyed had an average of 26 different online accounts but only 5 different passwords. Who can remember more than 5 passwords? By ruthlessly closing accounts you don’t use or don’t need, you can greatly simplify your life and increase your fraud protection.
Keep in mind that the length of your credit history can have a positive effect on your FICO credit score. So if you do close accounts, close the most recently opened ones.
For the accounts you do keep, be sure to do a password audit! According to SplashData, the most common password is “password,” and “abc123” is in the top five. When it comes to your financial security, these just aren’t going to cut it. Create a really strong password instead – here is a resource from ConnectSafely.org.
3. Cancel all of your services (or at least pretend to).
Go through your bank and credit card statements to review all of your regular recurring expenses. Cancel any that you don’t use and pretend you’re going to cancel the others by calling up the vendor and bringing up the possibility. See how they entice you to stay.
My son did an audit of my cell phone bill a couple of years ago and asked me why I had an international calling plan for $5.95 a month. I thought we’d cancelled it after my husband returned from an overseas trip two years prior! Little things add up, and in my case, $6 turned into a wasted $150. Fearlessly cancel everything you don’t use and negotiate a reduced rate on what you do.
4. Plan your finances for the year.
Review upcoming expenses and set aside funds for them. Every December, the holidays roll around, every year you have birthday gifts to purchase, and you may want to take an annual vacation. You also have home and car repairs, and although you don’t know the exact dollar amount, you can count on them to crop up. Use one of your existing savings accounts or add a sub-account for these expenses so you are prepared for them.
5. Automate everything you can.
Choose an amount you know you can commit to putting away each month, and set up an automatic transfer from your checking to your savings account. Consider increasing your retirement contributions from your paycheck if you haven’t reached the maximum. If you invest in a Roth IRA, don’t wait until the end of the year—set up a manageable automatic investment from your checking account. Put your regularly recurring bills (at least the fixed ones) on auto-pay so you never miss a payment (review them regularly, however, to make sure they are correct). If you have recurring charges on a credit card, like a gym membership, set up an automatic payment so you never miss it by mistake.
The key to getting these things done is to do them quickly—focus on a short term, three-week “sprint.” Put the date on the calendar and celebrate when you reach it!
My husband and I set a deadline today to update our budget and our personal escrow accounts. This morning, while he was getting ready to go out, he remarked, “I’ve got a really busy day today.” I replied, “It’s going to get even busier since we made a commitment to update our budget by end of day today.” He saw the look of quiet calmness and determination on my face and smiled back at me. His (very wise) response was, “Sounds good.”
Nancy L. Anderson, CFP ™ is a fee-only financial planner with LearnVest Planning Services and a blogger for Deer Valley Ski Resort. Company website is LearnVest.com (use code Retire50 for a discount). Follow Nancy on Facebook – Twitter.
The opinions expressed are those of the author and may not be the views of LearnVest Planning Services LLC (“LVPS”), a registered investment adviser. The advice provided is not personalized investment or tax advice, may not be suitable for your individual situation, are not guarantees of future performance and may differ materially from actual events that occur. The author and LVPS are not endorsing, sponsoring or responsible for errors or inaccuracies by the unaffiliated third party sources and links identified herein on which the author reasonably relies.