Building wealth doesn’t just happen. Quite the opposite, in fact.
To create the kind of lifestyle you dream of requires careful planning and disciplined work. Just as your house doesn’t clean itself, your money drifts into chaos and entropy if you ignore it for too long.
Just as you spring clean your home to give it a more thorough scrubbing, you should do the same with your finances.
Break out your financial dustpan and set aside a weekend morning to clean up your finances and plan how you’ll end this year in far better financial shape than when you started it.
How to Spring Clean Your Finances
1. Literally Clean Out Your Old Stuff
You can knock out several house cleaning and financial cleaning tasks simultaneously.
We all accumulate far too much stuff in the course of modern life. It slowly fills up our homes, leaving us constantly shuffling items around in a doomed attempt to tidy up.
Stop shuffling, and start decluttering. Go through every room, closet, and storage space with a fine-toothed comb. When in doubt, throw it out, sell it through Decluttr, or give it to someone who could use it.
Separate your outgoing items into three piles: sell, donate, and trash. You’d be surprised what people will buy. There’s a market for your old cell phones, computers and other electronics, clothes, furniture, and children’s belongings. Sell these on Craigslist, eBay, or Etsy to recover some of your initial cost.
What you can’t sell, donate to a charitable organization. You can donate your clothes, furniture, and old electronics. Nearly everything you can’t sell can be donated. Your trash pile should end up being the smallest of the three.
Make sure you keep your donation receipts in case you decide to claim a tax deduction for charitable giving. You’ll need to itemize each of these deductions come tax time.
2. Clean Up Your Paperwork
Like most Americans, I used to keep a big, bulky filing cabinet for important paperwork. Then I moved abroad about five years ago and had no choice but to get rid of it.
Today, I keep all of my important documents digitally. I back them up through two systems: an automated cloud backup service that constantly uploads my files for secure off-site storage, and an external hard drive I keep at my apartment. If my laptop stops working after I spill water on it — which I’ve done — I won’t lose my critical documents.
We live in a world of increasingly digitized wallets, documentation, and financial services. Nearly all of my “cash” holdings are in a bank account. Even investors with hard assets like gold and silver don’t generally hold them as physical goods — they buy them as commodities through their brokerage account.
Make your file storage digital to be more organized and cut down on clutter. Borrow or rent a scanner if you don’t have access to one already to make the transition painless. For any original documents you simply can’t bear to part with, put them in a portable, fireproof safe. If something isn’t valuable enough to justify space in your fireproof safe, then it isn’t valuable enough to keep as a hard copy.
Finally, make sure you shred all financial or personal documents when you discard them to avoid identity theft. Many banks and shipping businesses, like FedEx, offer shredding services. You can also purchase your own paper shredder for less than $50 on Amazon.com.
3. Set (or Check Progress on) Financial Goals for the Year
When you’re clear on your long-term financial goals, you can then work backward to set mid-term financial goals over the next two to five years and short-term financial goals for this year. For example, I want to reach financial independence within the next five years, so I set targets accordingly for net worth and passive income by the end of this year.
Your financial spring cleaning offers a perfect opportunity to check in on your progress. You can tweak and adjust your spending, savings, and investments as needed to put yourself on track for hitting your short-term targets for the end of this year.
Starting with long-term goals and then working backward is one way the wealthy think differently about money. The middle class budgets for today’s comfort, rather than their long-term plan for designing their perfect life.
By setting and reviewing your long-, mid-, and short-term goals, you can re-evaluate your immediate monthly budget to make sure it serves what you’re trying to accomplish.
4. Review Your Monthly Budget
Most people hate the “B” word: budgeting. It instantly conjures thoughts of sacrifice and giving up all the comforts they enjoy.
However, that’s only one way of looking at budgeting. After all, building wealth isn’t convenient. If it were, everyone would spend less and save more.
I look at budgeting through the lens of lifestyle design: I value international travel, passive income, and the ability to walk or bike everywhere. I don’t particularly care about living in an enormous house and filling it up with lots of things. So my wife and I designed our lives around spending most of the year overseas, where her employer gives us a free apartment, and we chose a city where we don’t need a car.
Reframe how you look at budgeting. Instead of thinking in terms of sacrifice, think in terms of prioritization and intentionally designing your perfect life based on what’s important to you. Instead of taking two years to save a down payment to buy a home, for example, you could probably do it in one if you cut $500 or $1,000 in monthly expenses.
Which comes back to prioritizing. Would you rather spend $100 per month on cable TV or save your down payment faster? The same goes for spending money on new clothes, gadgets, eating out, and any other discretionary expense. Put even “necessary” expenses under the microscope. Even paying for housing is optional; just ask anyone who house hacks.
Pro tip: If you don’t currently have a budget, now is a perfect time to make one. Start by setting up an account with either Tiller or Personal Capital, then connect each of your financial accounts. You’ll be able to track your spending each month to get a better idea of how you’re progressing financially.
5. Cancel Unused or Unnecessary Subscriptions
You could spend $100 per month on cable TV. Or, you could spend $10 on a video streaming service like Hulu or Netflix. However, the less obvious subscriptions are the ones that get most Americans into trouble. Try this two-minute exercise.
List every single subscription you pay for, whether monthly or annually — video and music streaming, gym memberships, box subscriptions, landlines, antivirus software, hard drive backup services. You probably pay far more than you think. You can list these out manually or use an automated tool like Truebill or Trim. These services sync with your bank and credit card securely to help you manage recurring charges.
After you have a list of your subscriptions, apply a simple litmus test: Do I use this subscription multiple times a week, and does it make my life noticeably better? For instance, if you’ve been to the gym 10 times in the last month, that likely justifies keeping your membership. But if you’ve been once or twice, cancel your membership and switch to home workout routines instead. There are several free, high-quality resources that offer free, streaming workouts.
6. Plan & Budget for Remaining Irregular Expenses This Year
Irregular expenses are the fly in the ointment of most people’s budgets.
No one forgets to budget for their rent or mortgage payment. But most people forget to budget for wedding, birthday, shower, and holiday gifts, for example.
But just because these expenses don’t pop up every month, that doesn’t mean they don’t cost you money and eat into your budget. So set aside money in a high yield savings account from CIT Bank. Then earmarked this account for irregular expenses.
You should also budget for travel expenses. You will probably go on at least one vacation this year.
Plan what you want to spend on these and other irregular expenses for the rest of the year, and set aside money accordingly.
7. Plan Your Retirement Contributions
Whether you want to max out your IRA or 401(k) or just take advantage of matching contributions, now is a good time to plan out how you’ll achieve your target retirement savings this year. Again, these contributions don’t just happen — you need to budget for them carefully.
In the case of your employer-sponsored retirement plan, you can simply tell your human resources department to start contributing more from each paycheck. You may need to fill out a form or follow a set process, so make sure you know what’s needed to officially increase your contributions. Even for your IRA, you may be able to split your direct deposit to go into both it and your checking account.
However much you want to contribute, make it the first expense to come out of each paycheck so you’ll never forget to contribute.
Pro tip: Make sure your IRA and 401(k) are on track according to your goals. Sign up for a free analysis from Blooom. Once you connect your accounts, they will make sure you’re properly diversified and have the optimal asset allocation. They’ll also make sure you’re not paying too much in fees.
8. Adjust Your Tax Withholding If Needed
If you got a tax refund last year or owed the IRS money, your tax withholding needs tweaking.
Withhold too much, and you give Uncle Sam an interest-free loan. Withhold too little, and you get hit with IRS penalties.
Aim for a $0 tax bill come April 15, and adjust your income tax withholding with your employer as necessary. A consultation with a tax professional would likely be helpful.
9. Review Your Health & Life Insurance Policies
Your health insurance and life insurance requirements evolve as you get older. Someone with a spouse and children likely needs more life insurance than an unmarried person living alone. Research how much life insurance you need, if any, before talking to a sales rep. If you don’t feel you need to work with a sales rep, you can look into life insurance online through Bestow. You’ll be able to receive a quote in seconds and apply in just a few minutes.
Likewise, you need different health insurance at different phases of your life. If your job doesn’t provide it, you have plenty of options for health insurance without employer benefits. Get creative as you look into the best health insurance plans in your budget and location, and don’t ignore association health plans or the public ACA exchanges. To avoid having any gaps in insurance, you can also look into short-term health insurance through AgileHealthInsurance.
Also consider opening a health savings account (HSA) through Lively in combination with a high-deductible insurance plan. In addition to the low premiums, you can benefit from the unique triple tax benefits of an HSA.
10. Automate Your Savings
One way to automate your savings is splitting your direct deposit to go into not just your checking account, but also a savings or investment account. But that’s far from the only option.
You can also set up automated recurring transfers to take place every payday. For example, you could set your mortgage payment to go out automatically each month and pay more than the minimum payment if you want to pay off your mortgage early. There are also automated savings apps, like Acorns, to save your spare change. Plus, certain online banks, like Simple.com, include round-ups on purchases made.
By automating good behaviors like saving money, you ensure they actually happen. Plus, automating your savings offers a great way to trick yourself into saving more because it takes the temptation out of spending. With less money calling to you from your checking account like a siren, you simply adapt to spending less.
11. Automate Your Investments
A few investors just love researching and picking stocks. They find the process itself fascinating and make a hobby of it.
I’m not one of those investors. And chances are, neither are you.
In the 20th century, investors had one choice: They could either pick stocks and overpriced mutual funds, or they could spend an arm and a leg on hiring an investment advisor. Fortunately, times have changed.
Today, investors have hundreds of excellent low-cost index funds to choose from. There are also dozens of outstanding robo-advisors, like Betterment and Robinhood, to manage their investments for them. Many of them charge nothing at all.
I use Schwab Intelligent Portfolios, which is free for investors who put at least $5,000 under their management. You can set up optional automated transfers into the account weekly, biweekly, or monthly. They do the rest, based on an asset allocation they propose based on your needs that you approve before they start investing on your behalf.
You can even automate other types of investments beyond stocks and bonds. I experimentally invested a little money with Fundrise’s private REIT, for example, to diversify my real estate investments. They offer automated recurring investments too, as do several other real estate crowdfunding companies.
12. Review Your Asset Allocation
Your ideal asset allocation changes over time. As you get closer to retirement, you should start easing away from stocks to avoid sequence of returns risk. In their place, you should gradually opt for more stable, income-oriented investments, like bonds and lower-risk real estate assets.
Your asset allocation also drifts on its own over time as certain investments in your portfolio outperform others. You need to periodically review your portfolio, even when you don’t plan to change your target asset allocation, so you can rebalance your portfolio to return to your target.
Even within asset classes, you should periodically rebalance. For example, if your international stocks outperformed your U.S. stocks over the last year, your portfolio would have drifted out of balance. Too much of your stock portfolio would now consist of international stocks. Rebalancing forces you to sell high and buy low. It also keeps your asset allocation appropriate for your age, goals, and risk tolerance.
Imagine that you aim for 50% U.S. stocks, 30% international developed countries’ stocks, and 20% emerging markets stocks. Then, U.S. stocks have a terrible year, while emerging market stocks explode. That leaves your asset allocation out of alignment. So you sell some of your emerging market stocks while they’re high and buy up U.S. stocks while they’re low.
If you don’t want to bother with asset allocation and portfolio rebalancing yourself, either hire an investment advisor or open an account with a robo-advisor. They will recommend an ideal asset allocation for your age, financial goals, and risk tolerance. Once you approve their recommended allocation, they automatically rebalance your portfolio for you.
13. Create a Simple Monthly System for Tracking Key Numbers
It’s possible to get too fond of looking at your financial figures, like Scrooge McDuck constantly playing with his gold coins. However, most Americans have the opposite problem: they don’t pay enough attention.
There’s a saying in the business world: “That which gets measured gets done.” In practice, it means you should determine the most important tasks and indicators of progress, and track them regularly.
I set out to create an extremely simple spreadsheet to track my own financial progress each month. I knew that if it took me more than five minutes to do, I’d end up blowing it off. So I started by picking just three numbers: savings rate, investable net worth, and FI ratio (financial independence ratio or FIRE ratio).
Your savings rate is the percentage of your net income that you save each month. If you earn $5,000 per month and save $1,000, you have a savings rate of 20%. The higher your savings rate, the faster you build wealth.
Your net worth is the sum total of all your assets, minus your debts and other liabilities. You don’t have to manually calculate this yourself each month. Use a free tool like Mint.com or Personal Capital to track it for you automatically.
Finally, your FI ratio is simply the percentage of your monthly living expenses that you can cover with passive income from investments. If you live on $4,000 per month and you have $1,000 in monthly passive income, you have a FI ratio of 25%. The higher your FI ratio, the faster you can reach financial independence.
Create your own system for tracking your key financial numbers, and make sure it takes no more than five minutes of work each month.
14. Review Your Credit Report for Errors
The credit bureaus make mistakes all the time. According to the Consumer Financial Protection Bureau, one in five Americans has an error on their credit report. Luckily, you can check your credit report for free once a year from each of the three main credit bureaus.
Your financial spring cleaning makes a great time to pick through your report and look for errors. If you find any, you can follow the simple process of disputing credit report errors. It’s free and requires little effort on your part.
Once you’ve fixed any errors, consider signing up with a free credit monitoring service, like Credit Karma. They not only keep you posted about changes in your credit scores, but they also alert you if they notice suspicious patterns that might indicate identity theft.
A clean home and clean finances don’t happen by mistake. They only happen when you go out of your way to make them happen.
Over time, your needs change as you meet your short- and mid-term goals change. Sometimes, even your long-term goals need a second look to make sure they truly represent your ideal life.
Set aside some time this spring to review your finances and tweak them where necessary. My life changed when I started tracking just those three financial numbers every month. By taking the steps above just once a year, you can steer your life where you want it to go, rather than just drifting downstream like too many of us do.
What financial spring cleaning tasks do you plan to undertake this year? Do you have any additional tasks to add?