Simplify your financial life

November 5, 2001

Spending more time managing investments than enjoying their gains? Take these steps now to clear out the clutter.

Investing Wisely

Simplify your financial life

Jump to:Choose article section... Use a mutual fund supermarket Sell funds with similar holdings Merge and consolidate Use financial management software Bank online Hold fewer life insurance policies

Spending more time managing investments than enjoying their gains? Take these steps now to clear out the clutter.

By Anne L. Finger

Want to reduce your financial paperwork and make it easier to keep on top of bills, budgets, and investments? These tips will help put you on the right track:

Use a mutual fund supermarket

If you buy directly from various fund families, try one-stop shopping in a virtual superstore. You'll have the convenience of getting a single monthly statement instead of multiple mailings that bog you down. And because these institutions place many small investors into a large pool of purchasers, you can sometimes invest in load funds without paying the load—or put $2,500 into a fund whose usual investment minimum is $25,000.

Some funds charge transaction fees of $25 or more to offset the amount they pay the mutual fund supermarket for participation. Before investing, check with the fund supermarket to see whether such a fee applies. Beyond that, you'll pay no more for a fund through a supermarket than you would by buying directly.

In its FundsNetwork, Fidelity (www.fidelity.com ) offers 4,500 funds from more than 350 fund companies. Of these, over 1,100 funds are free of transaction fees. However, if you sell shares in one within 180 days of purchase, Fidelity will charge a fee. Use Fidelity's Fund Evaluator to zero in on the size and type of funds you want.

Charles Schwab & Co. (www.schwab.com ) also provides access to more than 1,100 funds with no loads or transaction fees, through its Mutual Fund OneSource service. It, too, levies a short-term redemption fee on those funds. Additional funds involving transaction fees are sold in Schwab's Mutual Fund MarketPlace. Go to Schwab's Find A Fund screener to select your portfolios.

Through FundAccess from the Vanguard Group (www.vanguard.com), you can explore more than 2,600 no-load mutual funds—more than 800 of which charge no transaction fees, though short-term redemption fees do apply. Funds free of a transaction fee require a $5,000 minimum investment. Check out Vanguard's Fund Finder for profiles of funds.

Sell funds with similar holdings

"Many people have the misconception that if they're in many funds, they're automatically diversified," says Brian H. Hensen, a financial planner with North Star Resource Group in Madison, WI. "But if the funds focus on the same market segment—such as large-cap domestic growth—they may well own many of the same companies."

To find where your funds overlap, go to www.morningstar.com and click on Portfolio X-Rays. You can view your portfolio in terms of asset allocation, investment style, industry sector, stock type, and in other important ways. Or ask your financial adviser to analyze your portfolio.

Before you sell any redundant funds, consider the tax consequences, cautions financial planner Robert P. Hanlon Jr. of RPH Financial Services in Stroudsburg, PA. Funds that you've had for a while may have appreciated greatly and could produce large capital gains. If appropriate, balance gains in those by also selling funds that have lost value, to create capital losses.

Merge and consolidate

If you have $500 in a T. Rowe Price account, a few thousand with Merrill Lynch, and $1,000 more with E*Trade, you'll simplify life and save money by putting your dollars to work in one place. You may save some money, too. "Many IRAs have a fiduciary custodial fee of $10 to $35 a year for each account," says Hensen. "You could be paying a couple hundred dollars in fees per year." By doing a trustee-to-trustee transfer, you can consolidate those accounts without owing tax.

If your accounts aren't tax-exempt, you don't have to pay additional fiduciary/maintenance fees for maintaining multiple accounts, but you may incur other fees. Be sure to find out about potential tax consequences before you sell investments to consolidate accounts.

To simplify further, you can take advantage of the newest trend in consolidation: account aggregation. This combines your investment, banking, credit card, and bill-paying transactions, and even your e-mail and frequent-flier mileage, on one statement. An additional benefit if you often forget your passwords and PINs: A single password will now get you access to any information about all your accounts. You can view this information mélange whenever you like. To see what a statement might look like, go to www.myciti.com .

Currently, Charles Schwab, Chase, Fidelity, E*Trade, Morgan Stanley, America Online, and Yahoo! provide some form of account aggregation, and the list of banks, brokerage firms, and other companies offering account aggregation is growing.

A caveat: To aggregate your finances, you must give the company providing the service the passwords and PINs for all your accounts. Naturally, aggregators rush to reassure customers that they implement the toughest security measures available. But keep in mind that they also gain a wealth of marketing information about you.

Use financial management software

Intuit's Quicken and Microsoft Money continue to be the leaders. (See below for a look at new features in their recently released 2002 editions.) Each program includes a planning component that relates your current finances to your long-term goals, factoring in inflation, taxes, and investment return. How can you save for college and retirement simultaneously? The software will suggest ways. It will also let you transfer data to tax software to prepare your returns.

If you've decided to buy that new Lexus, Quicken's Special Purchase feature and Money's Purchase Wizard can tell you the best way to pay for it. Should you take a loan, use savings, sell some stock? If you sell stock, the software will tell you which transactions will result in the lowest tax bill.

Financial software is most helpful if you're detail-oriented. If you fall behind in your data entry or fail to enter every check you write, the software can be more frustrating than helpful; it just speeds your access to wrong answers derived from the incomplete information you've provided.

Bank online

Want to make a deposit at 2 am while wearing your pajamas? Then online banking is for you. You can do this through your bank's Internet site, the account aggregators mentioned earlier, or financial software. Quicken and Microsoft Money connect with hundreds of financial institutions and can lead you through most transactions offline. Once you've nearly completed the operation, log on, and your transaction is processed.

Increasingly, banks allow you to make account transactions via the Internet—through either their own software or an Internet service provider such as America Online. Banks realize considerable savings from this automation, so look for an institution that will pass some of these savings on to you in the form of a reduced monthly fee or none at all.

Hold fewer life insurance policies

Why contend with several small policies—all having different face values, effective dates, and rate structures—when a single policy will do?

That's especially true with term insurance. "There are always economies of scale, and the larger the death benefit, the lower the cost per $1,000," Hensen says. "One $500,000 policy is a lot cheaper than five policies for $100,000 each." Term rates, although they've increased lately, are still lower than they were five years ago. If you have an old policy and you're still in the same health category, you can probably get a better rate today.

Consolidating cash-value policies is trickier. Although the cash grows tax-deferred, if you've had the policy for a while and the cash value now exceeds the amount you've paid in premiums, you'll have to pay ordinary income tax on the difference when you sell it. Check with your financial adviser about whether the policy qualifies for a 1035 exchange, which allows you to transfer your assets from one insurance company to another tax-free.

The author is a former senior editor of Medical Economics.

Check out the latest software

What's new in the latest editions of Intuit's Quicken and Microsoft Money? The short answer is, probably not enough to justify the cost of upgrading from a recent version. If you don't own either program or haven't upgraded in several years, however, by all means pick up one of the new 2002 editions.

One reason there have been few important changes is that these are already mature and well-polished programs. They offer so many features—some totally unrelated to personal finance—that you could spend months discovering all their capabilities.

Consider that Quicken's online instructions tell you how to use its address book to organize your Christmas card list, while Money can connect you to a Microsoft Web site that reminds you to sharpen your lawn mower blade in summer and weatherstrip your home in winter. Clearly, these programs have expanded way beyond the checkbook replacements they once were.

How can software packages that cost only about $60 each (for the Deluxe versions) provide so many features? You may well wonder—until you get bombarded with the ads that help pay the freight. Money includes pitches for a stockbroker and several of Microsoft's online services; and when you load the program, up pops a box that asks whether you'd like to register for "special offers." Quicken puts icons on your Windows screen that say things like, "Get $50 from the bank that saves you money!" Ads for Quicken's MasterCard and other offerings appear within the program.

Advertising is far from the only similarity between the latest versions of Quicken and Money. Microsoft, having failed several years ago in a bid to buy Intuit, has instead incorporated nearly all of Quicken's features and added a few more. What's called an "Emergency Records Organizer" in Quicken is an "Important Records Organizer" in Money. A "Reports Gallery" in Money is a "Reports and Graphs Center" in Quicken.

In fact, even the programs' new-for-2002 lists are strikingly similar. That's surprising, considering how secretive Intuit and Microsoft are about new versions prior to release. This year, both companies have concentrated on improving Web functionality and on making the software easier to use by adding features like automatic account register reconciliation and automatic expense categorization.

One new Money feature, called MoneySide, doesn't appear to be matched in Quicken. With MoneySide, relevant data from Money pops up in a window when you visit Microsoft partner Web sites and certain other popular Internet sites. For example, if you're researching a company online, MoneySide might list your current holdings in it. This could be a convenience, but probably not a significant one unless you spend much time at sites recognized by the program. Moreover, MoneySide works only with Microsoft's Internet Explorer and Money's internal Web browser.

Also new this year: A Suite version of Money, designed to compete with a similar version of Quicken. Both Suites bundle the Deluxe editions of the personal-finance programs with tax software (shipped later to registered owners) and modules that let you prepare simple wills and other legal documents. (Quicken Lawyer 2002 Personal Deluxe isn't compatible with last year's Quicken Family Lawyer. So if you used that program, you'll have to re-enter your data.)

Even after all these years and versions, some significant shortcomings remain in both Quicken and Money. Quicken, for example, still has confusing pull-down menus: To update investments via the Web, you use the Finance menu, not the Investing menu. Moreover, Quicken hasn't revamped its Emergency Records Organizer or Home Inventory modules in years; both now look outmoded, particularly alongside Money's feature-rich offerings.

Money, meanwhile, offers no way to track deductible auto mileage, and Quicken does so only in a special edition designed for business users. Quicken doesn't let you keep tabs on frequent-flier miles, something Money does extremely well. And neither program offers a simple way to track noncash charitable contributions.

The programs' new automatic categorization feature leaves much to be desired. Quicken, for instance, automatically categorizes charges to American Airlines as vacation travel and to Rite Aid as medicine, which may not be appropriate. The tax refunds category, where you'd undoubtedly put IRS refunds, is linked to the tax-return line for state and local refunds. Luckily, it's easy to change automatic category selections and tax links.

The home-value estimators in both programs are virtually useless. Quicken, for example, lets you download recent sale prices within 1.5 miles of your home. Great, except in many locales, properties within such distances can vary wildly in price, so the numbers may not mean much. Money lets you download a precise-sounding estimated value for your home—its number for one address we typed in was $345,967. But the program calculated that value without knowing much about the property aside from a 10-year-old sale price and an equally old assessment that has since changed. No wonder Money listed its "confidence level" in its estimate as only "medium."

Neither program has yet managed to totally eliminate errors and bugs, but we found more such problems with Money than with Quicken. Money's Express module reported that it couldn't be started because a key file couldn't be found, for instance, though the file was indeed there. Money also locked up our computer a few times, but at least Microsoft has gotten more polite: Instead of cold, cryptic messages about "fatal errors," it now announces problems in plain English and apologizes for the inconvenience.

All our quibbles notwithstanding, Quicken and Money are both now as good as they are similar—extremely good, in other words. Quicken's Portfolio Analyzer, which instantly determines break-even prices, tax implications and much more, is arguably a bit better than Money's version. On the other hand, Money boasts a few extras that Quicken lacks, such as the ability to get details of a multicategory transaction simply by holding your cursor over it. Declaring an overall winner would be tough.

There's certainly no compelling reason for upgraders to go through the trouble of switching from one program to the other. If you're starting from scratch, just buy whichever is cheapest at the store you visit. Should the prices be about the same, close your eyes and grab.

—Jeff Burger, Financial Editor

 

Anne Finger. Simplify your financial life. Medical Economics 2001;21:92.

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