Friday, April 4, 2008

Financial Spring Cleaning

With spring approaching, many people engage in “Spring Cleaning”, where they clean out the clutter that has accumulated during the winter months. This is also a good time to ‘air out’ your finances as well. If you have had some major life events since the last time you examined your financial life, you might discover some dusty financial accounts that you have forgotten.

As people age, they accumulate checking and savings accounts. Often, one of the first tasks involved with moving to a new location is to setup accounts with local financial institutions; however, people often forget to close down the accounts at the place they moved away from. Similarly, married couples often start new joint checking and savings accounts, but often leave their old accounts from their single years open. Savers interested in the highest interest rates move their money around as they chase after the highest yielding accounts. Oftentimes, they leave their old accounts open either through neglect or on the chance that the account may again be an interest rate leader.

The accumulation of dusty accounts also happens with retirement accounts. Employees will change jobs and often leave their old 401(k) or 403(b) with their old employer. Employees that find themselves to be quickly climbing the corporate ladders between companies may find themselves with several retirement accounts, each having different rules and investment options. Keeping tabs on each of these accounts and maintaining an overall picture can be daunting.

What are some of the problems with leaving accounts open? First, it makes recordkeeping much more complicated. Receiving multiple statements in the mail at the end of each quarter or month can strain simple recordkeeping systems, especially if the accounts hold negligible amounts of money. Furthermore, multiple accounts can cause headaches at tax time. If you receive an interest statement showing that you earned $25 in interest after you’ve filed your tax return, you will have to amend your return with the complicated and costly 1040X. The $25 interest may cost you upwards of $150 in additional tax preparation fees. Second, you may be charged inactivity fees if your account shows no activity. These fees, ranging from $5 to $10 per month, may slowly eat away at your account balance, until your account turns negative. Thirdly, it may cause headaches for your heirs. If you have a hard time keeping track of your accounts, imagine what your heirs will feel as they try to untangle your financial situation.

So, what to do: As the earth renews itself this spring, take some time to shake out the dust and breathe new life into your financial plans. Step back and examine your entire financial situation. Are you meeting the goals you’ve set for yourself financially? If you haven’t set any goals, now might be a good time to set some after you’ve organized your financial life. If you have multiple old checking and saving accounts, decide if you really need them and close the unneeded accounts. Consolidate your accounts so that your financial situation becomes easier to manage and less stressful. If you have multiple retirement accounts, you might want to consider rolling them into your current employer’s retirement plan or into your own retirement account at an independent financial institution. Take some time to update your net-worth statement, as well as to review your will and other end of life documents. If situations have changed since the last time you updated the documents, draft and sign new documents reflecting your current situation.

Taking care of these details now will likely make the financial aspect of your life less stressful for you throughout the year.

NOTE: This is the first of our new MU Financial Tips of the Week and was written by Andrew Zumwalt of our University Extension staff and Director of our MOTax program. We appreciate hearing from you about ideas for future “Tips”. Importantly, feel free to forward our “Tips” to others and remind them that they can sign up to receive the tip by sending an email to LISTSERVE@LISTS.MISSOURI.EDU with No Subject Line and in the body: subscribe financialtip your first_name your last_name . Thanks. – Rob Weagley

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