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Five essential steps to put your financial house in order

Nov 24, 2020 | Linda Sama, CFP®


Organizing my home is similar to helping clients organize their investment portfolio and financial paperwork. Is your financial house in order?

Couple with iPad

How many black blazers do you really need?  

That is a question I have been asking myself recently.  2020 may have changed your thinking about what is really essential these days - it definitely has for me.  In March, I believed we were taking a short pause for 3 months to flatten the curve, until things turned around and returned to normal, but since that time, I have experienced a different life altogether.  Along with many of my peers and colleagues, I have been working remotely at home and will continue well into 2021.  This crisis has afforded me time to reflect upon and decide what is truly important to me and what I hope to experience in my life. Although at times I have felt a little bored, the upside of being less busy with friends and family and staying close to home is that I have more time for projects like reorganizing my home.  

Organization leads to less stress

Organizing involves both skill and creativity so I started by getting educated.  I began by watching some shows on Netflix like The Home Edit and read magazines which also helped with inspiration.  In the past, I often felt stressed out when I opened a closet or drawer and saw what had been building up for years.  I was always too busy to deal with it.  The worst feeling was when I would look for something that I knew I had, but couldn’t find it anywhere in my house.  This was especially stressful when I had to leave to go somewhere and had only a few minutes to find it.  

Having more time at home has allowed an opportunity to examine what gives me stress and what gives me contentment.  I decided that I no longer wanted to feel uncomfortable every time I opened a closet, so I started the task of taking my cabinets and closets apart to only put them all back together in an organized way.  It was a huge job, but in the end, it was worth it.   I’m happy to share that this activity has brought some control back in my life especially when we have so little of it these days. 

It may seem like an unlikely comparison, but going through this process to organize my home is very similar to how I help clients to organize their investment portfolio and financial paperwork.  Many people have shared that they don’t open their statements; often they just throw them in a drawer because they are overwhelmed at the process of organizing their financial paperwork.  My job is to help them put some order back in their financial lives by determining what is essential and what isn’t.  This article is not a recommendation to buy a bigger filing cabinet but instead, to break down the components of your financial landscape and create the view that brings you comfort and joy.  

Greg McKeown, author of the book, Essentialism, broke the steps down very neatly when he described the process of creating a life of only what is essential. The benefits are greater than you may think when you take the time to weed out and edit all the excess that you accumulate, creating buffers or space to be ready for the uncertain events that may pop up, and most importantly, being clear about your intent and what is important now.

Getting your “financial house” in order

Listed below are the 5 steps to follow to organize your financial life:

  1. Prepare an overview of all financial accounts 
  2. Review individual holdings and funds to determine overlap of investments
  3. Subtract and edit out the securities that are either creating an overweighting or no longer serving the purpose intended
  4. Reconstruct your portfolio with your specific goals and expectations in mind
  5. Create some space and a buffer to be prepared for unexpected changes and new opportunities

Step one: create an overview of your portfolio. I request statements to begin understanding a client’s investments.  Many people have accounts at 2 or 3 brokerage firms and often have statements for a few annuities hidden away at multiple insurance companies.  It is not uncommon for pre-retirees to have more than one old 401k or 403b retirement plan from firms where they no longer work, along with IRA accounts held at multiple financial institutions and banks.   When I begin adding up the number of accounts at all the financial institutions, it usually comes in between 12 – 15 which makes it easy to lose track of what you own.  

You may find the act of gathering the statements a chore but it is the first step to get organized. Old stock certificates and US Savings bonds (often no longer earning interest) are sometimes hanging around in safe deposit boxes or file cabinets too. At tax time, it’s easy to overlook a 1099 and to stay on top of required minimum distributions from the retirement accounts.  Year-end tax planning is especially difficult to harvest gains and losses when assets are in so many locations and as a general rule, all of these different accounts do not necessarily mean you have a properly diversified portfolio. I recommend doing some consolidation of these accounts to make your life easier overall.   Possible ways to help you consolidate accounts are:

  • IRA transfers 
  • 401k, 403b, or 457 plan rollovers to another retirement account
  • 1035 exchanges for annuities  
  • In kind transfers of securities between brokerage accounts
  • Transfer dividend reinvestment plan stocks and deposit stock certificates to brokerage accounts

I suggest my clients maintain an organized binder of their accounts and paperwork.  Compile the monthly statements and label the dividers to give them a place to go each month. The process of replacing the old with the new statements helps you to eliminate and shred the unwanted paperwork monthly and prevents piles from building up over time.  Most clients are turning to paperless delivery through online sources and having numerous websites with different usernames and passwords to remember is another reason it makes good sense to consolidate assets.

Step two: do a deep dive analysis of the holdings to determine overlap.  Dividend distributions, risk factors, category of the asset class, and expense ratios are just some of the considerations to look at.  A common finding is that many people own different mutual funds but the funds hold many of the same underlying investments.  By duplicating your investment strategies, you may be paying more and think you are diversified.  You create a lot more paperwork to manage and possibly increase your risk of an over-concentration of a specific type of asset class.   This analysis is complex and the process to x-ray your mutual funds may be best left for a financial professional.  My suggestion is to turn to a CERTIFIED FINANCIAL PLANNERTM or CFP® who can create an in-depth portfolio analysis for you. 

Step three: edit and subtract some holdings in order to reconstruct a portfolio best suited for you and your specific needs. You must be clear about your intent and your goals for your money.  Goals are sometimes referenced in vague terms like growth or income, but it is best to have very specific goals and expectations for your money.  I have known people who were emotionally attached to a specific security even though the investment no longer served their needs.  An over-concentration of a particular holding can sometimes be the reason for an underperforming portfolio or even the risk of losing a lot of money.  Consulting with a financial advisor is key to working through your specific goals, expectations, and emotional ties especially if the asset is not producing the desired returns or income needed.  

Step four: reconstructing a portfolio that is designed specifically for you. Model portfolios offered by many financial firms have become quite popular, however, it is not always a good idea to liquidate everything and repurchase again through a model portfolio just to streamline your account. By doing this in taxable investment accounts you run the risk of overlooking significant tax consequences that may require you to pay taxes from the sale of the investments.  Before selling any investments, it requires an in-depth review of potential capital gains and losses. Tax-loss harvesting is a technique used often by financial professionals to take losses in a portfolio in order to offset the taxable gains.  The process of matching losses against gains will help you reduce your tax burden and may possibly give you losses to carry forward for future years.  Tax planning is an effective way to maximize your bottom line return on your investments.   In addition to setting up your proper asset allocation, minimizing your tax consequences while redesigning your portfolio is best when discussed with a CERTIFIED FINANCIAL PLANNERTM who will work together with your tax advisor to help you achieve the best possible outcome.

Step five: create a buffer to prepare for unexpected events that can impact your portfolio which helps to manage your risk and stress. Think of leaving some empty space in your closet for unexpected guests to hang their coats or to add the new coat, when you come across a good sale.  In your portfolio, this can be done by maintaining a liquid or short term cash position or adding an alternative asset class that can weather the storm differently than your traditional investments.  For example, I have had clients pursue real estate opportunities for supplemental income to offset the low interest rate environment which is considered an alternative investment.  The availability of a credit line attached to your investment account prepares you in the event that you need liquidity at a time that you do not want to sell your investments. Having assets at many financial institutions often limits your ability to borrow at the best rate because the rates are usually dependent on the size of your account.  This is another good reason to consolidate your accounts.  In today’s rate environment, the interest on this line of credit is often under 3% and the borrower only pays when they use the line.  Also, you would have the option to pay interest only if you wish, so the line affords you great flexibility for inexpensive short term financing.  

Strangely these steps were the same when I cleaned out my front hall closet!

Understandably a plan to reorganize your investment portfolio is a big project and one that takes more expertise than you may feel you have. Again, my recommendation is to work with a seasoned and reputable, financial advisor who has your best interests in mind to communicate and educate you all along the way.  If you are already working with one and still feel disorganized, it is a good idea to get a second opinion from a CERTIFIED FINANCIAL PLANNERTM, who is rigorously trained and educated to help you get your financial house in order.

Contact me if you would like to discuss your portfolio and I will be happy to provide a free consultation.  Organizing your financial house won’t be as overwhelming if you seek out help from a professional!


Wealth planning