TODAY MARKS MY 300th weekly contribution to HumbleDollar. Over time, one key theme has emerged: While personal finance can be complicated, it doesn’t have to be. How can you simplify your financial life? Below are 10 ideas.
1. Tracking donations. In the old days, it wasn’t too difficult to track charitable gifts. You would simply refer back to your checkbook. But today, most people use debit and credit cards, plus apps like Venmo, making it more of a chore to keep tabs on every transaction. Yes, there are digital solutions, such as Mint, but they all require some amount of maintenance.
That’s why, primitive as it may sound, I’ve found that a simple solution turns out to be the most effective: a humble manila folder. Simply label it “donations,” and then give it a permanent home on your desk or elsewhere in your home. Each time you make a gift, print out a confirmation or receipt and stow it in your folder. At the end of the year, it’ll likely require only a modest amount of time to total everything up.
2. Tracking spending in retirement. If it’s hard to track charitable donations, what about tracking overall spending? Again, you could use a tool like Mint. But if that isn’t for you, the best approach for retirees is to put their finances on autopilot. Set up consistent, automated transfers from your brokerage account to your checking account. You can then use your checking account as a barometer to easily track your spending.
Say you’re transferring $7,000 per month. If you find your checking account balance is rising over time, that tells you your monthly expenses are running at less than $7,000. On the other hand, if you’re regularly making additional transfers from your brokerage account, you know your expenses are running somewhere north of $7,000. Depending on your situation, you could either trim your spending to bring it under $7,000 or, if your plan permits, increase your monthly transfers until you’re running at breakeven. Either way, it’s an effective way to monitor your spending without much effort.
3. Tracking spending during your working years. If you’re in your working years, it’s harder to use the above strategy because money tends to come in from multiple sources, so a different approach is needed. I suggest using another relatively simple tool: traditional bank statements. Even if you receive statements electronically, you can print these out from your bank’s website.
Check out the summary at the top of the statement. There, you’ll find totals for dollars that came into and dollars that went out of your account each month. While subject to distortion from one-time items and funds transfers, these totals still offer a useful starting point. If you analyze perhaps six months of statements, that should provide a reasonable average. While sometimes a little imperfect, I find this approach far easier than trying to total up every little transaction.
4. Budgeting. In the past, bills arrived by mail, and it was the consumer’s choice when—or even if—to pay that bill. Today, it’s the opposite. Seemingly everything has turned into a monthly subscription, and they’re billed to our accounts automatically.
To make matters worse, if you also have your credit cards set to be paid automatically, you might find yourself in the situation a friend described recently: In reviewing his credit card statement—which he acknowledges he doesn’t do regularly—he was appalled to see not one but two Netflix subscriptions. It was for no good reason, and he’s not sure how long it had been going on. A practical solution I’ve found: Try to consolidate all your subscriptions onto a dedicated credit card. That way, these little charges can’t hide so easily.
5. Estate taxes. When it comes to estate planning, many are deterred by the cost and complexity involved. Consider irrevocable trusts. They’re a popular tool for getting ahead of estate taxes. But if you want to set one up, you’ll first have to find a lawyer, map out your wishes, decide which assets you’re willing to part with, choose a trustee and, finally, make peace with the ongoing complexity, including an added tax return each year. It’s a lot. If you’re materially over the estate tax limit, it’s absolutely what I recommend. But what if you’re not comfortable with, or not yet ready to commit to, an irrevocable trust? In that case, there are simpler steps you can take to chip away at your estate tax exposure.
For example, you’re probably familiar with the annual gifting exclusion, which allows tax-free gifts over and above the lifetime limit. This year, that amount is $17,000—the sum you can give to as many folks as you wish. Now, suppose you want to help your daughter with a home purchase, something that would require writing a much larger check of, say, $100,000. There’s a way to handle that without exceeding the annual exclusion and without too much complexity.
After writing the check, here’s how you’d account for it: Assuming you’re married, and your daughter is also married, you’d classify the first $68,000 as a set of four gifts under the annual exclusion ($17,000 each from you and your spouse to your daughter, plus another $17,000 each from you and your spouse to your daughter’s husband). You’d then structure the remaining $32,000 as a loan. In the following year, you could forgive that loan, including the accumulated interest—which the IRS requires you to charge on intrafamily loans—as gifts under the exclusion for that year. If this sounds complicated, my suggestion is to set up a Google spreadsheet to track your gifts, then share the spreadsheet with everyone involved.
6. Asset allocation. When building a portfolio, there are innumerable investment strategies and asset classes to choose from. But it doesn’t need to be complicated. When in doubt, you could employ the simple formula Warren Buffett recommends: an S&P 500-index fund combined with short-term Treasury bonds.
7. Withdrawal rate. Another topic on which there’s interminable debate: how much retirees can safely withdraw from their portfolios. Many believe in the 4% rule, while others debate that figure. Some say it’s too high. Others believe it’s too low. My view is that there’s no one-size-fits-all. A useful alternative, for a more personalized answer, is to consult the Trinity University study on withdrawal rates. It includes a helpful matrix showing the probability of success for various combinations of asset allocation and life expectancy.
8. Insurance. No question about it, insurance can be expensive, but there are two types that are relatively cheap: term life and umbrella. They don’t cost too much because the risks they cover have low probabilities. At the same time, those risks can be very costly if they do materialize, so I recommend that most people load up on coverage.
9. Taxes. As you probably know, there are two sets of tax rates that apply to most personal income: There are the ordinary income brackets, and then there are the rates for capital gains. This information can be invaluable for planning.
But look at your tax form, and it’s virtually impossible to see where you fall on each scale. How can you find out this information? Whether you work with an accountant or prepare your own returns, most tax software provides a summary sheet with your average and marginal tax rates for each category.
10. Just in case. With apologies for ending on a morbid note, it used to be that when someone died, it wasn’t too hard to piece together the deceased’s finances by simply opening his or her mail for a little while. But now, with most things electronic, it’s critical to put together a letter of last instruction.
In doing so, here’s a suggestion: Separate your letter into two parts. The first can be shared with an attorney, accountant or financial advisor, while the second might include more personal information and would be shared only with family members. Again, I recommend using Google Docs or another electronic format, which will make it easy to share the document and keep it up-to-date.