Money Management

10 Ways to Simplify Your Personal Finances

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In a letter to shareholders, Berkshire Hathaway’s famed leadership duo Charlie Munger and Warren Buffett once wrote:

“Simplicity has a way of improving performance through enabling us to better understand what we are doing.”

What’s unique about this statement is that they credit simplicity with helping build a multi-industry conglomerate — a feat most people would agree is neither simple nor easy.

Munger — noted for his use of mental modeling as a method for simplifying complex ideas to facilitate better decision-making — has said:

“By tuning out folly and swatting away unimportant things so your mind isn’t cluttered with them […] you’re better able to pick up a few sensible things to do.”

In other words, when you make sensible decision after sensible decision, the results really start to add up.

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So today I want to dive into a few important concepts, strategies and tactics that can help you simplify your financial life.

First I’ll discuss four laws of financial simplicity, and then list six steps you can put into action today.

The Four Laws of Financial Simplicity

Simplifying your financial life brings balance, efficiency and results. But it can be hard to know where to start. After all, simplifying is often a matter of reduction; it means taking things out, taking a step back, and giving up control over certain aspects of your life.

And when it comes to finances, we’ve had it drilled into our heads that we need to pay attention to everything — to track every penny, to constantly be on the lookout for the best deals, to constantly rebalance and re-optimize our portfolios.

While it’s true that it’s important to stay on top of these types of things, it’s also true that everyone has limited bandwidth. And as I’ve discussed in other articles, decision fatigue is real. Our decision-making aptitude declines with the more decisions we’re asked to make.

So when thinking about how to begin the process of simplification, it makes sense to build a mindset that’s based on a handful of fundamental, unchanging laws. Adhering to these laws gives you a mental framework for thinking about your finances and helps you make consistent, rational decisions.

Here are the four laws of financial simplicity that I think are most important.

#1. The Law of Prioritization

What’s nice about personal finance is that it’s analytical. Often, knowing what you should focus on comes down to math.

For most of us, at any given time, there’s one key factor that has the largest impact on our immediate quality of life — whether that’s paying off high-interest debt, saving for a down payment on a home, or saving for retirement.

It can be tempting to try and focus on all three of those goals (or others) at the same time. But people who try that approach often make less progress than they’d like in each area, because they’re dividing their time, energy and resources across multiple fronts.

Take debt payoff as an example. If you have credit card balances, you’re paying a shocking amount of interest each year. That makes it harder to save for a down payment on a home, which means you may have to spend more time renting. That, in turn, equates to a lost opportunity to build equity. 

Of course, not everyone wants to buy a home (nor is it the best move in every situation). But this idea holds true across many different personal finance scenarios — a lack of focus can have a cascade of negative financial effects.

A better approach is to focus on only your highest leverage goal; the one thing that will have the most impact and best position you to confront the next goal.

#2. Occam’s Razor

Occam’s razor is a problem-solving principle attributed to the 13th-Century philosopher William of Ockham. It posits that the simplest explanation is usually the correct one.

Applying Occam’s razor to your finances means choosing the simplest, most efficient path to your goal. It’s about recognizing that complexity does not necessarily equate to better results.

One area that tends to be unnecessarily complicated is the selection of financial accounts. Many people think more is better; essentially, that they’ll be able to optimize through specialization. But often, this just leads to confusion and inefficiency (and sometimes, to unnecessary fees).

In general, you should strive for the lowest amount of accounts (checking, savings, investments, etc.) necessary to accomplish your goals.

#3. The Craftsman’s Approach

In the book Deep Work: The Rules for Focused Success in a Distracted World, author Cal Newport writes about how to determine whether a tool — such as a social media site, a particular technology, an app, etc. — should have a place in your life.

And he identifies a mistake that most of us make. We use what he calls the “any benefit” approach (which he describes as follows):

“You’re justified in using a network tool if you can identify any possible benefit to its use, or anything you might possibly miss out on if you don’t use it.”

Here’s an example. Let’s say you sign up for your investment provider’s app so you can check the value of your investments every day. Looking at the app through the prism of the any benefit approach, you’ll find that it provides the benefit of being able to monitor your portfolio on demand.

But Newport also describes an alternative to the any benefit approach, which he calls “the craftsman’s approach to tool selection”:

“Identify the core factors that determine success and happiness in your professional and personal life. Adopt a tool only if its positive impacts on these factors substantially outweigh its negative impacts.”

Through the lens of the craftsman’s approach, signing up for that app may not seem like such a great idea. Monitoring your portfolio every day doesn’t get you to your goals sooner. In fact, research shows that the more you monitor your portfolio, the more risky you perceive investing to be.

Leaning on the craftsman’s approach can help you avoid distractions and detours and stay focused on the handful of things that matter the most.

#4. Focus on the Principles

There are only a few core principles when it comes to personal finance. As the 20th Century management consultant Harrington Emerson wrote:

“The man who grasps principles can successfully handle his own methods. The man who tries methods, ignoring principles, is sure to have trouble.”

You want to focus on those core principles first. The methods will then take care of themselves.

In personal finance, some of the most important principles are:

  • Building a solid relationship with money.
  • Understanding the role and impacts of debt.
  • Automating and building systems to manage your finances.
  • Learning how to grow your money.

I’ve always found books to be a great way to build financial principles in your own life. For about $10 you can learn from people who have spent decades refining and mastering their financial ideas, strategies and philosophies.

A few books that have made a big impact on me include:

7 Ways to Simplify Your Finances

One you have a handle on the four laws above, it’s time to start taking steps to reduce the complexity of your finances. Here are six strategies you can begin implementing today.

#1. Consolidate Then Aggregate

The path to simplicity starts with consolidation. As we discussed above, you want to have the lowest number of accounts necessary to achieve your objectives.

There are few good reasons for having more than one checking or savings account, and you want to make sure you roll over any old 401(k)s to a single low-cost provider.

Once you consolidate, you then want to aggregate — which simply means to link your accounts in a single platform or dashboard so that you can easily monitor them from one place.

There are many free financial aggregators that provide this service.

  • Personal Capital is one of the most feature-rich free financial dashboards available, allowing you to link virtually all of your accounts in order to monitor your budget, track your investments and keep tabs on your net worth.
  • Mint is similar to Personal Capital, but whereas PC focuses more on helping you optimize your investments, Mint is better for budgeting and tracking the details of your income and expenses on the micro level.
  • Truebill is a budget tracker that can also negotiate lower prices on many of your bills. It has a clean, easy-to-navigate user interface; automatically syncs your transactions; and is totally free to use.
  • Trim allows you to set a budget for the month and get updated about your progress via text message. If you’ve tried budgeting apps before without much success, consider giving Trim a shot.

And if you have credit card debt, you should consider consolidating that as well. Doing so will make it easier to manage, but it may also save you thousands of dollars in interest.

More details about each of these services:
Personal Capital Review
Mint vs. Personal Capital
Truebill Review
Trim Review

#2. Keep Your Investments Simple

Many people hold back when it comes to investing. It seems complicated, and we tend to fear what we don’t understand.

But investing is one of the most powerful tools for building wealth, and avoiding the practice — or even approaching it timidly — can have a negative impact on both how long it takes you to achieve financial independence and how long your money will last during retirement.

Here’s some good news: it doesn’t have to be intimidating, because the simplest investing strategy is the most profitable investing strategy.

Plus, investment service providers are continuously making it easier to get started. For example, you can start investing with Betterment with an optimized portfolio for just $1.

Even if you know nothing about investing, you can become an above-average investor overnight just by following Betterment’s recommendations.

Related reading: Betterment vs. Vanguard.

#3. Automate Your Bills

These days, there’s no reason to waste time individually paying every bill every month. Yet, for some reason, that’s exactly what many people still do.

Setting up automatic bill payment for as many accounts as possible saves you time and helps protect your credit score (as you’ll never forget your due date).

#4. Set Up Alerts (aka, a Tickler File)

There are many recurring tasks in personal finance, and remembering to do them all can be overwhelming. That’s why it’s important to set up some type of reminder system.

Here are a few of my methods:

  • I add important tasks to Google Calendar and set up email alerts to remind me about them.
  • Once per month, I log into Personal Capital to review my net worth and cash flow.
  • Twice per month, I update the books for my business.

The less you have to remember, the better off you’ll be. You’re less likely to forget important tasks, and you can rest easy knowing that you’ll automatically be reminded when the time comes to take action.

Related reading: Annual Financial Checklist — 24 Simple Ways to Optimize Your Finances.

#5. Set Constraints

It’s easy to think of constraints in a negative light. After all, when we have all the options in the world, why limit ourselves?

But when applied in the right way, constraints can simplify many aspects of your life.

For example, say one of your constraints is this: aside from your rent or mortgage, you pay for everything in cash (as opposed to taking out a loan).

When it comes time to buy a car, redo your kitchen or go back to school, this constraint is a decision simplifier. If you don’t have the cash on hand, you can’t do that particular thing.

This is a little bit of an extreme example, of course, because it’s not always possible in practice. But it illustrates how constraints can be used to help make better decisions.

Other positive constraints could be:

  • Only work during certain hours of the day, which is especially important if you work from home or have a side hustle that allows you to work as much as you want.
  • Only buy groceries or run errands on two days of the week. This can help you save money by reducing the opportunities for impulse purchases, and it frees up time to focus on other things — whether that’s spending time with your family or making extra money.
  • Wait 30 days before you buy anything over a set amount. I call this a “to buy” list, and it’s one of my favorite ways to control spending. Set a threshold, and then when you want something over that threshold, write it down and set a reminder to circle back in 30 days. If you still want it (and can afford it), buy it! But in my experience, deferring the purchase tends to reduce your demand for the item.

#6. Sell As Much As Possible

There’s a helpful question to ask yourself when it comes to whether you should sell something:

Would I buy this again at the price I can sell it for?

If your answer is “no,” then in 99% of cases, you should sell whatever you’re considering getting rid of. You can apply this formula to anything from a home to a car to a piece of clothing.

The premise behind this question is simple: almost everything declines in value over time. If you have items that you don’t use or don’t need, they’re likely worth more today than they will be a year from now.

That means that if you sell something and regret it, there’s not much lost because you can buy it back for the same amount (or less), or let some time pass and get an upgraded version of the item.

Related: The best sites for selling different kinds of items.

Some Final Thoughts About Financial Simplicity

It’s ironic, but trying to figure out how to simplify your finances can seem prohibitively complicated. It’s difficult to know which parts of your financial life you can automate or step away from, and which ones you need to stay laser-focused on.

Using the laws and strategies outlined in this article gives you a framework for decision-making. By utilizing them, you’re building an entire system for thinking about your finances, as opposed to making individual decisions about every little thing that comes up on a case-by-case basis. And this, in turn, will help you make more consistent, rational decisions that lead to better results over time.

Additionally, using mental modeling can be a helpful part of this process. In the intro, I mentioned that Berkshire Hathaway’s Charlie Munger is a proponent of this approach, and I wrote an article explaining why. It’s a great next read if you’re interested in continuing to improve your financial decision-making skills.

R.J. Weiss
R.J. Weiss is the founder and editor of The Ways To Wealth, a Certified Financial Planner™, husband and father of three. He's spent the last 10+ years writing about personal finance and has been featured in Forbes, Bloomberg, MSN Money, and other publications.

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