All of us have cleaned up our house on various occasions, sorting out essential items and throwing out unnecessary items. Decluttering is a method of identifying redundant things and letting them go.
When it comes to your finances, it helps to go minimalistic too. Over the years, we tend to collect several financial documents, numerous insurance policies, bank accounts, mutual funds and stocks. Once in a while, just like your house, you need to declutter your finances too.
This has several benefits. Sorting out finances makes life easier and helps you save more.
We will take a look at how you can declutter your finances. This is a process that will take some time and effort from your part, probably entail a weekend or two spent at home, but it is worth it.
First, we will look at how to sort out financial documents. Over days our cupboards and drawers become full of paper most of, which we will never need. Also, when there is a lot of extra stuff, it is all the more difficult to find what you need.
Says Manikaran Singal, Founder and Chief Financial Planner, Goodmoneying, “We need to first understand the whole purpose of doing this exercise. The purpose of sorting out the financial documents is to organise them in such a way that these should be easily accessible, as and when required.”
When the purpose is clear, you would be in a better position to answer if you maintain the documents physically or digitally. Ideally, one set of important documents should be maintained in physical form too and kept safe somewhere in the house. Store documents in separate labeled files, so that you know where to look for if you need something.
“When you have less on your plate, it would not be that difficult to manage. So consolidation is important and weeding out what does not fit your financial profile and personal requirements,” further adds Singal.
For example, there is no need to hold on to your old utility bills, credit card and bank statements. Nowadays, you have online access to most of these. Even documents like physical copies of insurance policies are not required to be kept for more than a few years. Sit through all your documents and use a shredder to cut the ones you do not need in pieces.
Coming to bank accounts, people tend to hold many bank accounts. Salaried people have a new salary account every time they change their jobs. They may also open new accounts when they shift cities. “Generally in the case of senior citizens, I have seen them operating a savings account, pension account, one locker account and post office account,” says Singhal.
If you have too many bank accounts, maintaining the minimum balance in each of them might be difficult. Further, by not maintaining minimum balance would mean paying a lot of money as penalty. When you do not use an account for a certain period of time, it becomes dormant and needs to be activated again, which would mean further hassles.
Sighal says that consolidation of bank accounts is required for the easy management of the funds. With less number of accounts, you would require less interest/TDS certificates from your bankers and it would be easy to file ITR.
With less number of accounts, you would not have to remember too many net banking or mobile app passwords, you would receive fewer phone calls/SMSes to maintain the balance or invest the surplus in some ‘good’ products.
It would be less tedious for the family to claim the money in the event of your demise. So, the ideal number is one or at the most two, if you are worried about a crisis like PMC bank. Once you are above 45 years of age, it is wise to convert every single account into joint account with your spouse and any other reliable member you trust.
Like bank accounts, many of us also tend to have several credit cards. Many of these cards may have annual fees. Also, if you are using all the cards, you need to pay the bills for each of them on different days, forgetting which would mean incurring high fees and interest. “So first-thing-first keep less number of cards, one or maximum two is fine. Cancel all other cards. Keep a check on the usage, I will not say not to use them at all, as using the cards wisely may bring some benefits too, but uncontrolled usage has its worst impacts,” warns Signhal. So it is important not to be carried away by zero fee credit card offers that you are likely to be bombarded with.
Similarly, having too many loans need to be avoided. Nowadays it is very easy to get a loan. An instant personal loan is available to buy gadgets, holiday and virtually everything. Even credit card EMIs and a zero per cent interest rate tempt us to spend more. Personal loans for expenses like holidays are not a wise thing to do because you have to pay for your holiday long after it is over. So before you get a high cost loan, do a careful cash flow analysis and take the loan only if absolutely necessary.
Do not take a loan if it is not absolutely necessary. Also, when you have extra cash, pay off high interest loans like personal loans and credit card loans at the earliest.
Managing too many loans is bothersome and costly.
Next, we will look at insurance policies. Many of us have money-back insurance policies. These offer returns of only four to five per cent. “Servicing a number of policies becomes difficult to manage. Due to the high costs associated and liquidity concerns with these products, they are not that rewarding too,” says Singhal.
He suggests that one does a detailed review of the products, considering the complete financial picture, actual requirements, cash flow situation, near and long term goals, and figure out where the policies are getting fitted in.
Many people have life insurance policies that have been taken a long time back, where the sum assured as well as the premium are small.
“One can keep this on as it does not affect one’s cashflow in any significant way. If one wants to declutter, one may surrender the policies. This will help in streamlining the overall portfolio. Some people find the surrender process tedious and may prefer to make the policy paid up. Even this is fine,” says Suresh Sadagopan, Founder and Principal Planner, Ladder7 Financial Advisories.
He explains that if one has policies with a high premium, one may choose to surrender them (if it has acquired a surrender value) so that the amount going to paying premium can now be deployed towards some good investments. If one prefers not to surrender, one can make the policies paid-up so that further premiums need not be paid and can be used for making appropriate investments. Ideally, if one does not have a term policy, one should free up the premiums, buy a term policy and invest the rest in mutual funds.
“Once again, one has to re-establish the reason for this decluttering exercise, so as to gain the courage of coming out of low paying policies even at the cost of booking losses. It is important to look at the bigger picture and understand what is more beneficial to you,’” says Singhal.
Finally, we come to investments where the decluttering method is equally important. Here, you may need the advice of a professional financial advisor, because if you are trimming down your investments, you need to do it smartly.
Diversification in one’s portfolio is important. Within stocks and MFs too, one needs to diversify. But one should have an optimum number of MFs and stocks so that they achieve diversification, but over-diversifying serves no purpose.
“Within MFs, one may have three to four equity funds and three to four debts funds from different categories to achieve the diversification,” says Sadagopan.
Singhal feels mutual funds itself are diversified products and having six to eight equity funds covering different market caps and strategies should be enough. Even on the debt side, having three to four funds with different strategies are good enough to have in the portfolio.
“Adding more than this may not result in any benefit from the diversification angle and will only complicate the portfolio,” he says. After the recategorisation of mutual funds, investors can understand the type of fund, its investing principles and achieve the right mix of investments. Funds within the same category and same investment type can be switched. It is advisable to sit with a financial planner and decide the mix of funds based on your goals and risk appetite.
In equities, the portfolio can be between 10-25 stocks depending on the amounts to be invested, sectors sought, risk-return expectations and so on says Sadagopan. “Many a times people get possesive with the investments made and do not want to prune their investments. A professional advisor will help in managing the portfolio and one should seek out their help,” he adds.
This decluttering exercise needs to be done once every year to keep your finances in shape. Also, it is important that you abstain from buying a new credit card or a bank account or end up investing in something just because someone is selling it to you.
The idea is to keep it simple!