How to balance diversification and simplicity in your financial life
If you have 1 credit card, you probably have 5. You may have multiple bank, retirement and investment accounts, as well.
Too many accounts can be hard to monitor, which in turn can make you more vulnerable to fraud. That’s not all: Research by Himanshu Mishra, professor of marketing at the University of Utah, found that people who manage multiple bank accounts spend 10% more on average compared with those with just 1 account.
But radically paring down your accounts may not be the answer. You don’t want to be beholden to just 1 financial services company or ignore insurance limits on your bank and brokerage accounts.
Here are some smart ways to balance diversity and simplicity.
Curb your credit
Having several credit cards typically helps your credit scores, while closing accounts can hurt. But keeping track of multiple due dates and paying multiple annual fees is a pain. If your scores are high (over 750 or so with FICO) and you aren’t planning to apply for a loan soon, consider closing some of your less-used accounts. Even if you decide to prune heavily, keep at least 2 cards from different issuers in case 1 is compromised by fraud. To protect your credit scores, don’t let the balance on any card creep above 30% of its limit.
Want to consolidate credit card debt onto a low-rate card? Try the search tool for balance transfer cards.
Roll over responsibly
If your current 401(k) or other workplace retirement plan accepts transfers from other employers’ plans, that may be your best option — especially if it’s a good plan. Workplace plans often offer cheaper investment options than you could find on your own as a retail customer. Also, balances in 401(k)s and similar plans have unlimited protection against creditors, which could be invaluable if you’re sued or have to file for bankruptcy. Workplace retirement plan assets also are protected from your employer’s financial troubles, since the accounts are typically held in trust.
Consolidate with care
If transferring your old retirement accounts to a new plan isn’t a good option, you can leave them where they are or roll them into an individual retirement account. Up to $1 million in IRA money can be protected from creditors in bankruptcy. If the firm that houses your IRA is a member of the Securities Investor Protection Corp., up to $500,000 per eligible account, including up to $250,000 in cash, is protected by SIPC insurance. SIPC isn’t backed by the government and doesn’t protect against fluctuations in the market, but is instead designed to make you whole if a brokerage fails. Many brokerages purchase additional insurance — check with yours.
Bundle for better banking
The more money you keep at a single bank, the less likely you are to pay account fees and other annoying charges. But there are limits to how much of your money is protected by the Federal Deposit Insurance Corp. The basic limit is $250,000 per account holder per bank. If you have a joint account, each of you gets $250,000 in protection for a total of $500,000.
Design your dashboard
Being able to see all your accounts in 1 place can help you spot fraud and better manage your money. Your bank, brokerage or financial adviser may offer such an account-aggregation service, or you could use software such as Quicken or sites such as Mint.com, Personal Capital, LearnVest or SigFig. Setting up account aggregation means turning over your user IDs and passwords for various accounts, so make sure you check out a provider’s privacy and security policies first.