I’ve been helping a relative work through some financial challenges. I discovered early on that her finances were way too complicated — and by that, I don’t mean she had complex investments. Instead, she had an abundance of accounts that had to be paid each month, along with an unwieldy system for paying them.
I’ll give only a few of the details. First, she had nine credit cards. Added to that was a car note, a monthly auto-insurance payment, a couple of other insurance bills that were paid monthly, and, of course, several routine household bills (water, electricity, gas, etc.).
To pay a bill, she would go directly to a company’s website: She would log in to Company A’s site to pay the company A bill, then go to Company B’s site to pay the Company B bill, then to company C’s site to pay the Company C bill, and so on. She paid one account by phone (because she always had trouble logging in to that company’s website), and, to round it out, she paid one credit card bill in person because it was connected with a large banking firm (not her regular bank) that had a branch a few miles from her house.
Because there were so many things to pay, she kept a calendar that said: "Pay this bill on the 3rd, pay this on the 8th, pay this one on the 12th, etc." Surprisingly, this complicated system worked fairly well and she rarely paid anything late. But it was a lot to keep track of!
Taking steps toward simplicity
After learning about her system, I said (with great insight!), "I think we can simplify this." So we talked through a plan. The first order of business was to pay off her two lowest-balance store-branded cards (one of which had a balance of less than $150). Then, we began consolidating her remaining credit card debts (several of which carried interest rates of more than 20%) onto lower-interest cards.
The result, after three months of paying bills and moving money, was that her credit cards were reduced from nine cards to three. In addition, we were able to cut the average weighted interest rate on her cards by more than 13 percentage points — and we paid off more than $4K in debt to boot!
We also implemented a second part of the simplification process: automating as many of my relative’s payments as possible, using automatic drafts plus her bank’s free auto-bill-pay service. Bills with a standard amount due each month (such as a car payment) were set up to automatically draft month after month. Bills that had a variable amount due each month were set up with auto bill pay. They couldn’t be scheduled far in advance, of course, but typically they could be scheduled weeks or at least a few days in advance.
By using her bank’s online bill pay system, almost all her variable-amount payments could be scheduled via a single interface, thus eliminating the need to visit multiple websites on specific days to make payments. We also eliminated the need to make any payments by phone or in person.
This move from a complex system to a much simpler one required planning and follow-through but not much cost. In fact, the only cost was a one-time fee (less than $200) charged by a credit card company to transfer high-interest debt to a zero-interest-rate card.
Judicious pruning
Managing money is somewhat like tending a vegetable garden. In the spring, a newly planted garden is tidy and organized. By late summer, the same garden is likely to be a gnarled and overgrown mess!
I’m glad I was able to help my relative with a bit of "judicious pruning." Last year, my wife and I did the same with our own finances. We also consolidated a few too many investment accounts (with help from SMI Private Client).
Have you simplified your personal finances? If so, tell us how (in general terms) in the comments section below.
