In a letter to shareholders, 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 to helping build a multi-industry conglomerate . Not exactly an easy thing to do.
Munger 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.”
When you make sensible decision after sensible decision, the results really start to add up.
While Buffett and Munger are discussing investing, the same principle applies to our personal finances. When we keep things simple, we not only free up our time and thoughts, we get better results.
Today I want to dive into the the strategies, tactics, and ways to simplify your finances.
There are 7 of them.
7 Ways To Simplify Your Finances
# 1 – Consolidate Then Aggregate
The path to simplicity starts with consolidation. You want the least amount of accounts to achieve your objectives.
There’s little reason for having over one checking or savings account. You want to make sure you rollover your 401(k)s into one low cost provider.
Once you do consolidate, you want to aggregate.
Use one of the many free financial aggregators which gives you a dashboard for viewing all your accounts in one place.
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.
# 2 – Simple Investing
What holds back many people from investing is it seems complicated. But, investing is one of the most powerful tools for building wealth.
The better news…
…the simplest investing strategy is the most profitable investing strategy.
Furthermore, investment service providers are making things easier to get started.
For example, you can start investing with Betterment with an optimized portfolio for just $1. Even if you knew nothing about investing, by following Betterment’s directions you would become an above average investor overnight.
# 3 – Automate Bills
Set up automatic bill pay with as many accounts as possible.
This saves you time, as well as improves your credit score as you’ll never miss a payment.
The important thing to remember is to avoid overdraft fees. So, make sure there’s always enough in your bank account. A good system here is to have billing alerts emailed to you.
# 4 – Go A La Carte
It’s easy to overspend on subscriptions.
A gym membership, food deliveries, cable TV, clothes boxes can be quite the luxury.
But when we’re paying for stuff via subscription, there’s little consciousness in our decisions. We keep on spending without much thought. While it’s a great model for the business, it makes it easy for us to overspend.
Try cancelling a subscription and see how much you miss it. If you do, try buying a la carte for a few months. If you’re spending more still, then go back to the subscription.
For example, cancel a gym membership, and use the freedom to try some new gyms, classes, DVDs, or workout from home.
# 5 – Set Up Alerts (aka Tickler File)
There are many routines and rituals in personal finance.
Remembering to do them all can be quite overwhelming. That’s why it’s important to setup some type of reminder system.
I use Google Cal to email me reminders of important tasks.
Once a month I pop into Personal Capital (Click here to sign up for Personal Capital and get a free $20 Amazon gift card), review my net worth, cash flow, and go through some of their helpful calculators.
Twice a month I update the books for my business. Quarterly, I’ll pay taxes. Once a week I’ll jump into Mint and review my spending.
I’ve also done this with many household chores. Cleaning the gutters, replacing the furnace filter, etc…
The less I have to remember, the better.
# 6 – Set Constraints
At first it’s easy to think of constraints as something that’s negative. When we have all the options in the world, why limit ourselves?
But when applied in the right way, constraints simplify many aspects of your life.
For example, say one of your constraints is, “Besides a home, I pay for everything in cash.”
When it comes time to to buy a car, redo your kitchen, go back to school, etc…this constraint is a decision simplifier.
Other positive constraints could be:
- Only working during certain hours of the day
- Only buying groceries or running errands on two days of the week
- Waiting 30 days before you buy anything over a set amount amount
# 7 – Sell As Much As Possible
There’s a helpful question when it comes whether you should sell something:
Would I buy this again at the price I can sell it for?
If you answer is no, in 99% of cases, sell what you’re considering selling. You can apply this from anything from a home or car to a piece of clothing.