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Spring clean your finances in 6 steps

By Jodi Helmer

The arrival of daffodils, W-2s and marshmallow Peeps means one thing: spring.

During your annual spring cleaning frenzy, it's not just the rugs and windows that need a good polish and shine. Spring is also the perfect time to organize and refresh your finances.

These six steps will help you get started:

1. Clear the clutter: If the receipts and statements in your filing cabinet (or the shoebox in the closet) date back to the Reagan administration, it's time to sort and shred.

Spring clean your finances in 6 steps

The IRS requires taxpayers to maintain tax records for all income, deductions or credits claimed on their federal returns for at least three years. (Each state has its own rules concerning documentation; consult your tax professional for state-specific requirements).

For all nondeductible expenses, it's OK to shred statements as soon as payment is posted to your account.

Signing up for online statements and paying bills electronically might reduce paper pileup but create electronic clutter.

"Going paperless is wonderful, providing users understand that an effective e-filing system needs to be as organized as a [traditional] filing cabinet," says Regina Leeds, professional organizer and co-author of "One Year to an Organized Financial Life." "Moving all statements and receipts to a single folder on the desktop is just as bad as stuffing them in the file cabinet. Organization is essential."

Be sure to back up all files stored electronically in case of a computer crash.

2. Safeguard important documents: Financial documents such as savings bonds, life insurance policies, deeds and property titles and stock certificates should be stored in a fireproof safe or a safe deposit box at the bank, according to Leeds. Make an inventory and -- just in case -- formally authorize a trusted adviser or family member to get access to the material.

3. Organize payments: "A lot of people with credit card debt spread out over multiple cards have no idea how much they owe or what their interest rates are on their debt," says Dorothy Barrick, financial counselor for the nonprofit debt management counseling group GreenPath Debt Solutions.

Barrick suggests gathering all recent financial statements and listing the amount owed on each credit card, along with minimum payments and interest rates. From there, establish a plan to pay off one card at a time. Though it's always fastest and most economical to pay off the highest-rate debt first, some people keep motivated by quickly paying off small debts completely, regardless of rate. 

"Paying down your debt will give you a sense of satisfaction and may also improve your credit score because you're using less of your available credit," Barrick says.

Setting up automatic payments for recurring bills such as car loans, the cable bill or monthly mortgage is a one-time task that offers ongoing benefits.

"You're less likely to incur a late fee because you forgot to send a payment," says Luke Reynolds, chief of outreach and program development for Federal Deposit Insurance Corp.

4. Consolidate accounts: Instead of keeping track of multiple credit card bills and statements from several checking, savings and investment accounts, consider which accounts could be closed or consolidated.

Bigger investments draw better rates, says Reynolds. "You might be able to get a better deal if you consolidate accounts because it may bump you up to a higher interest rate tier," he says.

Juggling too many credit card accounts may make it easier to forget about payment due dates, increasing the likelihood of missed or overdue payments.

According to Reynolds, there is another benefit to managing fewer accounts: It makes it easier to monitor account activity and identify possible fraudulent use.

Before rushing to close credit accounts, remember, it could result in a short-term drop in your credit score.

Paying down your debt will give you a sense of satisfaction and may also improve your credit score because you're using less of your available credit.

-- Dorothy Barrick
GreenPath Debt Solutions

It's a good idea to keep your oldest credit card because "one factor of your credit score is how long you've had credit,"  Reynolds says.

5. Shop for better interest rates: A little bit of research could net better rates on everything from your mortgage and car loan to your savings account.

When looking for better rates, "shop within your own bank and compare their rates to those offered by other financial institutions as well," suggests Reynolds. "And don't just shop online because not all institutions offer their products over the Internet."

In comparing interest rates, read the fine print. For example, does a bank require a minimum balance to switch to a higher interest savings account? What are the terms and conditions linked to a zero percent card offer? What are the closing costs associated with refinancing a mortgage to a lower rate?

"You have to look at the overall cost of the switch, not just the monthly payment," says Reynolds.

Your credit card company may also be willing to grant an interest rate deduction. According to Barrick, cardholders with good credit scores and solid payment histories often qualify for reduced rates, which can help eliminate debt more quickly.

"It never hurts to pick up the phone and ask," she says.

6. Assess current investments: Ann C. Logue, chartered financial analyst and author of "Socially Responsible Investing for Dummies," suggests an annual investment review.

"For many people, their largest investment accounts are tax-advantaged retirement funds," notes Logue. When to review those accounts? Now. "Spring is a good time because they can consider investments with their taxes."

If you have an investment adviser, make an appointment to review your investment accounts. Never worked with an adviser? Consider hiring one.

"A good planner can help make sure your investments meet your goals, fit your risk and return preferences and suit your tax situation," Logue says.

Your financial institution or employer may make referrals to financial advisers. If you're doing your own search, Logue suggests asking about education and experience as well as their fees. Planners may work on a fee basis, commission or a combination of both.

"The fee structure "may affect whether you can afford the planner, the types of recommendations you get and the incentives the planner has to work with you," she says. "None of these is inherently better, as long as you understand that nothing comes for free."

See related: FICO's 5 factors: The components of a FICO credit score

Published: February 27, 2012


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