SO MUCH OF PERSONAL finance is focused on our future self—and that’s a challenge. Think about the standard prescriptions: Open an IRA. Maximize your 401(k). Save for college. Save for retirement. Build an estate plan.
These are all about the future—often the very distant future. An enormous amount of time and energy is spent planning for “someday.” But it’s equally important to focus on things that can be done to benefit you today. As we head into year-end, it’s a good time to conduct some financial housekeeping along those lines. Here are eight recommendations:
1. Organization. Over the course of a career, it’s not uncommon to wind up with a collection of financial accounts, including multiple IRAs and 401(k)s from old jobs. Often these can be combined, making your finances simpler to monitor and manage. But this doesn’t always happen—and not just because folks are deterred by the paperwork involved. Another reason: Many people don’t even realize it’s possible. Fortunately, the IRS provides this handy chart showing exactly which accounts can and can’t be merged together.
2. Spending (part I). In his 1758 book, The Way to Wealth, Ben Franklin wrote, “Beware of little expenses. A small leak will sink a great ship.” He was ahead of his time. In recent years, more and more companies have refashioned their business models around small, recurring charges. Think Netflix and Spotify. Many of these services are great, but it’s easy to lose track of the little charges and to continue paying for services you no longer use. Fortunately, there’s a growing number of solutions. Credit cards like Discover offer a “recurring payments dashboard.” A number of apps can help you identify and cancel old accounts.
3. Charitable giving. A few years back, a longstanding pillar of the tax code changed. As of 2018, deductions for state and local taxes were curtailed, while the standard deduction was substantially increased. Result? Many people who used to itemize deductions, and therefore receive a deduction for every dollar given to charity, are now covered by the standard deduction. This means they no longer receive an incremental tax benefit from charitable donations. This has led many people to adopt an every-other-year strategy for donations.
This year is an exception, however. A provision in the coronavirus-related CARES Act offers a special onetime “above the line” deduction for a cash donation of up to $300. “Above the line” means that everyone can benefit. The upshot: Even if you no longer itemize your deductions on your tax return, be sure to let your accountant know if you’ve made charitable contributions.
4. Interest on debt. As I’m sure you know, interest rates are at historic lows. This has prompted a flood of mortgage refinancings. That’s a good thing. But don’t overlook other, smaller debts. If they carry high interest rates, you may want to pay them off or replace them with lower-cost debt. Very few personal finance decisions carry such easily measurable results.
5. Interest on savings. If you have cash savings, you’ve probably also noticed the impact of lower rates. Some banks are now paying an insultingly low 0.01%. But you can do much better. There are lots of online banks that offer 0.5% or more. Some banks have banded together into a network called IntraFi that provides both higher rates and virtually unlimited FDIC coverage.
6. Asset allocation. The greatest catch-22 of personal finance has to do with risk tolerance. When they construct a portfolio, most people don’t have a sense of their risk tolerance. That’s because you have to live through a downturn to truly know how you’d react. But when that downturn comes, it may be too late.
A silver lining of this less-than-wonderful year: It has offered a test lab for assessing risk tolerance. Now that the market has recovered, this is a good opportunity to think back to how you felt in February and March, when the market dropped more than 30%. If you lost a lot of sleep, you may want to dial back your portfolio’s risk level.
7. Information security. The internet is both a blessing and a curse. Financial fraud is an ongoing concern. That’s why I urge you to set up two-factor authentication on as many of your accounts as possible. I also recommend the use of a password manager.
8. Spending (part II). Week in and week out, I write articles with recommendations on saving and investing. That’s important, of course, but this is also a good time of year to take a step back. In recent weeks, I’ve been asking folks about the items they would recommend as holiday gifts. The list ranges from ever-popular Apple and Bose products to items such as the Solo Stove that have taken on new importance in this era of social distancing. None of these items is terribly expensive.
It’s a good reminder that another key pillar of personal finance is spending. Sure, we all enjoy the story of Ronald Read. But I know few people who would actually want to follow that model. At the end of the day, the route to maximizing happiness isn’t all about accumulating the greatest number of dollars. Instead, it requires a healthy balance between saving and spending.
Adam M. Grossman’s previous articles include Split the Difference, Game Theory and Trends That End. Adam is the founder of Mayport, a fixed-fee wealth management firm. In his series of free e-books, Adam advocates an evidence-based approach to personal finance. Follow Adam on Twitter @AdamMGrossman.