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Is It Time to Declutter Your Finances?

Key Points
  • If you find yourself with too many financial accounts, it's wise to step back and review what you have—and decide what's no longer useful.

  • There's no real downside to closing unnecessary bank accounts or consolidating brokerage accounts with a single financial institution, and it can streamline financial management.

  • However, canceling a credit card can affect your credit score if you're not careful.

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 the 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 and 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 savings accounts for personal use.
  • For a special goal, for instance a big trip or a down payment on a home, it can 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 (EDIE ) 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 IRA 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 child.

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 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 and 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 because 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 percent. If you were to eliminate a card or two, bringing your available credit down to $25,000, your ratio jumps to 40 percent. And while there's no precise cutoff, in general it’s a good idea to keep your ratio below 30 percent. 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 is simply 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 because 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.  

 

Have a personal finance question? Email us at askcarrie@schwab.com. Carrie cannot respond to questions directly, but your topic may be considered for a future article. For Schwab account questions and general inquiries, contact Schwab. 

 

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