Dear Carrie: I am trying to simplify my finances and have way too many accounts (savings, checking, brokerage, credit cards). What happens when you close an account? Is that bad to do? — A Reader
Dear Reader: Decluttering is certainly a popular concept these days. So why not apply it to our finances? While we all start out thinking we'll keep things simple, as time goes on, it's not unusual to find ourselves with accounts we no longer need — whether it's a checking or savings account that lured us in with initial higher interest rates or that credit card with irresistible perks. So you're wise to step back, review what you have and decide what's no longer useful.
However, while there's no real downside to closing a bank account, a credit card is another story. Here's what I'd suggest.
Review Your Checking and Savings Accounts
How many bank accounts do you need? There's no cut and dried recommendation. It really depends on your own situation.
— If you're single, having one checking account should be sufficient, especially if it has low fees and earns interest. Add to that a high-interest savings account and you should be set to go. I'd also set up an automatic transfer between the two to make saving that much easier.
— Couples may want to add an account or two to take what I call a "yours, mine and ours" approach. In this case, you might have a household checking and savings account for mutual expenses and goals and separate checking and saving accounts for personal use.
— For a special goal, such as a big trip or a down payment on a home, it may make sense to have a savings account specifically for that purpose. Seeing the balance grow in that dedicated account can be a real motivator.
— The FDIC insures up to $250,000 per depositor per bank. Therefore, if you have accounts with large balances, you might consider spreading your money across two or more banks. The FDIC's Electronic Deposit Insurance Estimator can help users get details about their specific situation.
Other than that, there's no reason to have multiple checking and savings accounts. So when you review your accounts, compare fees, interest rates and any other benefits and decide which ones work best for you. Then simply transfer your balances to the accounts you want to keep and close the accounts you no longer need.
Handle Business Banking Separately
If you own a small business or are a sole proprietor, you should have a separate checking account to keep track of business expenses and make accounting easier come tax time. To simplify things, consider having your personal checking, savings and business checking accounts at the same bank. Many banks offer a free business checking account in conjunction with a personal account.
Consider Consolidating Your Investment Accounts With One Company
Brokerage accounts can be a little more complicated because you're potentially talking about different types of accounts — taxable brokerage accounts, tax-advantaged retirement accounts or special accounts for things like college savings.
— Taxable Brokerage Accounts — Here again, it depends on your particular situation. If you're single, having one brokerage account is the best way to keep on top of all your investments. If you're part of a couple, you might again opt for three accounts: one brokerage account for each of you and one for joint investments.
— Tax-Advantaged Retirement Accounts — All retirement accounts are individual. Whether you're single or married, an individual retirement account or 401(k) is in your name only. Ideally, you'll have one of each. There's also the possibility that you could have both traditional and Roth retirement accounts, so that could potentially double the number.
— College Savings Accounts — When saving for a child's education, you might consider a 529 account or custodial account. If you have multiple children, best to have an account for each of them.
Having multiple brokerage accounts doesn't have to be overly complicated. You can simplify by holding all your brokerage accounts at one financial institution. Not only will you have access to all the accounts in one place, you'll also be able to see how they all work together, which will help you stay on top of your overall asset allocation and investments. If you currently have brokerage accounts at different companies and want to consolidate, contact the brokerage firm you want to work with; they can help you transfer your assets.
An exception would be your current 401(k), which is held by your employer. However, should you leave your job, you could roll that account into a rollover IRA at the brokerage firm where you have your other accounts, or possibly to your new 401(k). You'll want to make sure you understand all the options available so you can make the best decision for your circumstances.
Close Credit Cards With Caution
Here's where you have to be careful. Closing credit cards could affect your credit score. That's because of what the credit industry calls your credit utilization ratio. You get this ratio by dividing your total credit balance by your total available credit.
For instance, say you have $50,000 in available credit. If your credit balance were $10,000, your credit utilization ratio would be 20%. If you were to eliminate a card or two, bringing your available credit down to $25,000, your ratio would jump to 40%. And while there's no precise cutoff, in general, it's a good idea to keep your ratio below 30%. A higher ratio can result in a lower credit score.
So first, look at all your cards. Which ones do you really use? What is each card costing you in terms of annual fees and interest rates? Try to narrow them down to the most useful and the least costly. Then decide how to manage them. The easiest way is to put unused cards aside and carry only the ones that suit your current needs.
However, you may want to judiciously close accounts with annual fees or high interest rates. If that will increase your utilization ratio, one solution is to raise the limit on the cards you keep before you close the ones you don't need so your available credit remains consistent. Also, it's best to hang on to the cards you've had the longest; a long credit history is considered a positive. Your credit history is about 15% of your credit score.
Think of It as 'Kondo-izing' Your Accounts
Decluttering your accounts may not exactly spark the same sense of joy Marie Kondo describes when you clean out your closet, but in the long run, it can make your financial life easier to manage and give you a greater sense of security. And that's certainly a good feeling.
Carrie Schwab-Pomerantz, Certified Financial Planner, is president of the Charles Schwab Foundation and author of "The Charles Schwab Guide to Finances After Fifty." Read more at http://schwab.com/book. You can email Carrie at [email protected] The information provided here is for general informational purposes only and is not intended to be a substitute for specific individualized tax, legal or investment planning advice. To find out more about Carrie Schwab-Pomerantz and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at www.creators.com.
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