By Tony Isola
Learn more about Tony at NerdWallet’s Ask an Advisor
Many people lead lives of cluttered desperation.
A hoarder’s approach to finances can lead to real trouble down the road. Piles of financial statements, multiple investment accounts and too many mutual funds prospectuses can present an enormous obstacle to creating wealth.
To overcome this challenge, you need to learn how to “Kondo” your financial life.
Marie Kondo is the author of the best-selling “The Life-Changing Magic of Tidying Up.” According to the book’s website, Kondo is a “professional cleaning consultant with a three-month waiting list.” She pioneered the KonMari method of organization, which integrates a “revolutionary category-by-category” decluttering system, according to the site.
“Despite constant efforts to declutter your home, do papers still accumulate like snowdrifts and clothes pile up like a tangled mess of noodles?” the website asks.
The author’s last name has come to stand for the process of letting go of the stuff you don’t need. Although she refers to household clutter, the same principles can be applied to any financial mess.
It’s May—spring cleaning time and the perfect opportunity to Kondo your financial life.
How to begin
One way you can start is to discard old statements from your brokerage or mutual fund company. In many cases, these records are easily accessible online and can be stored digitally. Purchasing a quality shredder will do the trick for the reams of paper you may have stored up.
If you wish to keep some paper, the year-end statement will suffice for much of your record-keeping. Saving one statement instead of 12 will do wonders to declutter your finances. Kondo-ers have learned to ask themselves, “Does this spark joy?” If the answer is no, the item is discarded. Holding on to piles of statements from 10 years ago brings little happiness to your life.
But it’s important to retain up to seven years of bank and tax records, especially if you own a small business or work for yourself. Some financial institutions limit the amount of time they store digital records such as bank checks and deposits. If you’re ever facing an IRS audit, the government may ask you to produce physical documents. It’s a good idea to check with your bank or credit union to see how long they keep digital files and to plan accordingly. Otherwise, your efforts to track down the paperwork will probably be less than “joyful.”
Consolidate your investment accounts
Another way to clean up your finances is to consolidate your investment accounts. Investors frequently have a small IRA at one firm, a taxable account at another and their 401(k) at a third company.
This can happen when you change jobs and leave a 401(k) account with an old employer instead of rolling it over. Many times, people will forget about these accounts, which undercuts their potential to build wealth.
Though the paperwork can be painful, it is worth the time and effort to put your various accounts under one firm’s management. This will significantly reduce your paperwork and give you a big-picture view of your investments and how they fit together.
Consolidating your accounts will also help you track your goals more easily. This will enable you to have all your accounts working in harmony.
Reduce fees by limiting your mutual funds
You might own several mutual funds that hold the same stocks or bonds. If they are scattered all over the place, it will be more difficult for you to uncover this problem. Owning many investments doesn’t necessarily mean that you have a diversified portfolio.
Declutter your finances by limiting the number of funds you own. Often four or five low-cost index funds will do the trick. You’ll also end up paying less in account fees. According to NerdWallet, most Americans underestimate their hidden 401(k) fees.
Organizing your finances will lead to increased focus and better goal setting. In the words of Marie Kondo, “When you put your house in order … you can see what you need in life and what you don’t.”
Simplifying your investments can be like taking a deep, cleansing breath. For a few, though, it may cause alarm. If you are so obsessed by detail that you break out in hives at the thought of tossing your financial mega-binder, then the Kondo techniques are not for you.
But if you’re like most people, these tips will help you get a better grasp on your investments and eliminate stress. They may even motivate you to tackle the kitchen pantry or the garage someday.