Declutter Your Finances: 3 Steps to Save

We all need financial clarity in order to protect our families and our futures—but many of us feel unsure how to achieve it. Here, the three most common types of financial clutter that I’ve observed in my own life and in the lives of other women

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Clutter Clue #1: An overdiversified portfolio

We’ve been warned not to put all our eggs in one investment basket. But can you put your eggs in too many baskets? As a former portfolio manager, I’d say yes.

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Warren Buffett is famous for calling this di-worse-ification. It happens when you have so many different types of investments in so many different accounts that you cannot identify your overall mix (this is called your asset allocation, and it refers to the percentage of your portfolio that’s in stocks, bonds, cash and other investments) or even calculate the total fees you are paying.

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Since most of your long-term return depends on these two factors, losing track of them is downright dangerous to your financial health. How do you address this? Focus on what you absolutely need, laid out for you below. The rest is clutter; get rid of it:

 

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You need an asset-allocation plan


Buying stocks without a clear, overarching strategy is a recipe for clutter. Instead, start by determining what your asset allocation should be, says Eleanor Blayney, president of Directions for Women in McLean, Virginia, and CFP Board consumer advocate.

 

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Your plan will be determined largely by your age and risk tolerance: As you grow older, gradually move your money into safer investments, like bonds.

 

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To decide on your percentages, start with this long-standing rule of thumb, adjusted for women: 110 – your age = percentage of portfolio in stocks.

 

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You need to stick to “plain vanilla” asset classes


If your portfolio is worth $500,000 or less, limit your asset classes to five: cash, fixed income, U.S. large cap, U.S. small cap and international. (If your portfolio is bigger, you can add commodities, real estate and international emerging markets.)

 

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You need to keep costs low


The best way to do that: Invest in index funds. You can purchase them through most of the major brokerage houses. Compare the fees for different funds at Morningstar.com.

Clutter Clue #2: Poor protection against ID theft

The average Web user has 25 accounts (financial, news, social media) that require passwords, and she types in eight of them a day. I tried counting all of mine and gave up after 100. That’s a lot of passwords to remember and manage, but you need to do so in order to prevent identity theft. Below are your essential defenses; the rest is clutter.

 

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You need to change your passwords every six months


Do that for online banking, e-mail and social media, advises Cathy Curtis, CEO of Curtis Financial Planning in Oakland, California. A strong password should have at least 10 characters in a mix of numbers, letters and symbols. (Google “password checker” for sites that evaluate the strength of your passwords; Microsoft has a good one.)

Resources such as 1Password (found at agilebits.com) can help; it stores your passwords, integrates them with your browser so you don’t have to type them in and can automatically generate a strong, random password when you sign up at a new site.

You need credit-monitoring service


It will alert you to unusual activity on your bank accounts. Find one through your bank or one of the three major credit bureaus (Experian, Equifax and TransUnion); fees typically range from $12 to $17 a month.

You need to keep an eye on your statements


Besides taking the usual precautions, such as shredding your documents and buying on the Internet only if the site is secure (as indicated by httpsin the URL), you need to review your statements carefully each month and make sure you can account for every transaction. If anything appears amiss, quickly contact the company.

 

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You need passwords on your mobile electronics


That means smartphones, iPads, laptops.

 

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Clutter Clue #3: Lack of planning for disaster or even death

When I realized I was stumped by our fire-insurance policy, I immediately called our broker and peppered her with questions. The conversation made me realize there was something else I hadn’t done: figured out an emergency plan for rescuing essential documents in case of a fire or other disaster. So I got started. Here’s how you need to prepare—everything else is clutter.

 

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You need to have adequate insurance


You want to ensure that you have enough life insurance, personal insurance (auto, home, liability), medical insurance and earthquake or flood insurance (if necessary, based on where you live). Most important: Understand whether your policy covers the original cost of an item or the current replacement value. Those two figures can vary dramatically.

 

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You need an up-to-date visual record


Photograph or, better yet, videotape all the contents of your home. Keep documentation in a safe-deposit box or store it online using a cloud service such as Dropbox, Mozy or Backblaze. You can also stash a copy with a trusted friend or family member.

You need a plan for the worst-case scenario


Review the beneficiaries on your retirement and brokerage accounts whenever you have a life change, such as the birth of a child, a divorce or a death in the family. And prepare a will! Nearly 60 percent of Americans don’t have one.

 

MANISHA THAKOR has written two books about personal finance. She blogs at manishathakor.com/blog.

 

 

Related: Get Organized! Our Experts Show You How

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First Published January 31, 2012

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