by David Bach
GIVE YOURSELF A FINANCIAL CLEANUP
When someone calls our office to schedule a consultation about their finances, the first thing we do is send them my FinishRich Inventory Planner™. This is a tool I developed to help people get their financial documents organized. Getting organized—what I call having a “financial cleanup”—is the first thing you need to do when you decide to get serious about financial planning. You have to clean up the mess before you can move forward.
In Step Two, I showed you how to identify your values when it comes to money. Having done that, now it’s time to roll up your sleeves and get to work on the “task stuff.” At the back of this book, in Appendix 2, you will find a copy of my FinishRich Inventory Planner. Turn to this page and read through it. Don’t fill it out right now. Just take a look at it. If you want a PDF version of this, visit http://rhlink.com/9780525572947amain.
Filling out the FinishRich Inventory Planner is one of the most important exercises in this book. It’s a task that can literally change your life. But I don’t want you to stop reading now. I want you to postpone filling out the form until after both of you finish reading this book. Think of it as a “homework assignment” that the two of you will do later.
Even though I don’t want you to stop and fill out the Planner, I do want you to take some action now. What I want you to do is to get your financial records in proper order so that filling out the Planner won’t take you forever.
If you’re like most of the students who take my investment classes, I’m sure you already have all of your investment information alphabetized in color-coded files with neatly typed labels. Since you have everything carefully stored in a nice, clean, easy-to-reach file drawer, locating everything you need to fill out the Inventory Planner is going to be a breeze. It probably won’t take you more than 15 minutes or so. Right?
Just kidding. I’m well aware that most people’s filing system consists of a shoe box or old book carton into which they toss all those bank statements, stock certificates, insurance policies, and other financial “stuff” they know they should keep but really don’t feel like dealing with. Well, don’t worry about it. Even if you keep your “files” in a ratty shopping bag hidden at the back of your clothes closet, I’m going to give you a system that will make managing your financial paperwork so simple that you’ll never be disorganized again.
IT’S TIME TO FIND YOUR STUFF
Before I explain the details, I want to say something to you from the heart. This book might be able to entertain you and get you thinking about some important issues, but there’s no way it’s going to change your life unless you are willing to take some real action yourself. The system I’m about to show you is so simple that the two of you will probably be able to set it up in less than 30 minutes. But because it’s so simple you’re going to be tempted to read right through the next few pages and say to each other, “Oh, that makes sense—we’ll do it later.”
Don’t do it “later.” Make a commitment to each other right now that you will get this exercise done in the next 48 hours. Do it while it’s still fresh in your minds and you are motivated. Remember, the whole point of doing this is to improve your financial lives. I couldn’t care less about what your filing system looks like. What I care about is that you have an easy-to-use way of keeping track of your financial information—and that you have a clear understanding (meaning you’ve got it down in writing) of what you own, owe, and spend.
If you are using Mint.com or ClarityMoney.com to track where all your spending goes, this process will be easy because you already have things pretty well organized. If not, don’t worry. As I said, it shouldn’t take more than half an hour. If it takes you longer, that’s good. It means you really need to do it.
THE FINISHRICH FILE FOLDER SYSTEM™
So here’s what I want you to do. First, I want you to get yourself a dozen or so hanging folders and a box of at least 50 file folders to put inside them. If you get electronic statements, print them out and stick them in these files. Why? Because old-school paper statements will make it easier for both of you to see where you stand financially as a couple. Then I want you to label the hanging folders as follows:
Label the first one “Tax Returns.” In it, put eight file folders, one for each of the last seven years plus one for this year. Mark the year on each folder’s tab and put into it all of that year’s important tax documents, such as W-2 forms, 1099s, and (most important) a copy of all the tax returns you filed for that year. Hopefully, you’ve at least saved your old tax returns. If you haven’t, but used a professional tax preparer in the past, call him or her and ask for back copies. As a rule, you should keep old tax records for at least seven years because that’s how far back the law allows the IRS to go when it wants to audit you. I recommend hanging on to them even longer, but that’s up to you.
Label the second hanging folder “Retirement Accounts.” This is where you’re going to keep all of your retirement-account statements. You should create a file for each retirement account that you and your partner have. If the two of you have three IRAs and a 401(k) plan, then you should have a separate file for each. And don’t forget to write whose IRA it is on the top of each file. The most important things to keep in these folders are the quarterly statements. You don’t need to keep the prospectuses that the mutual-fund companies mail you each quarter. However, if you have a company retirement account, you should definitely keep the sign-up package because it tells you what investment options you have—something you should review annually.
Label the third hanging folder “Social Security.” You should put your most recent Social Security Benefits Statement in this folder. If you haven’t received one in the mail, get online and go to www.ssa.gov to request one. If you don’t have Internet access, telephone your local Social Security office (the number is listed in the front of most phone books under “Federal Government”).
Label the fourth hanging folder “Investment Accounts.” In this folder you put files for each investment account the two of you have that is not a retirement account. If you own mutual funds, maintain a brokerage account, or own individual stocks, each and every statement you receive that is related to these investments should go in a particular folder. If the two of you have both individual and joint accounts, create separate files for them as well.
Label the fifth hanging folder “Savings and Checking Accounts.” If you have separate checking and savings accounts, create separate file folders for them. Keep your monthly bank statements here.
Label the sixth hanging folder “Household Accounts.” If you own your own home, this one should contain the following file folders: “House Title,” into which you’ll put all your title information (if you can’t find this stuff, call your real estate agent or title company); “Home Improvements,” where you’ll keep all your receipts for any home-improvement work you do (since home-improvement expenses can be added to the cost basis of your house when you sell it, you should keep these receipts for as long as you own your house); and “Home Mortgage,” for all your mortgage statements (which you should check regularly, since mortgage companies often DON’T CREDIT YOU PROPERLY*). If you’re a renter, this folder should contain your lease, the receipt for your security deposit, and the receipts for your rental payments.
Label the seventh hanging folder “Credit-Card DEBT.” Make sure you capitalize the word “DEBT” so it stands out and bothers you every time you see it. I’m not kidding. I’ll explain later how to deal with credit-card debt. For the time being, my hope is that this won’t be one of your larger hanging folders. You should create a separate file for each credit-card account you and your partner have. For many couples, this folder may contain more than a dozen files. I’ve actually met couples with as many as 30. However many files you have, keep all your monthly statements in them. And hang on to them. As with tax returns, I keep all my credit-card records for at least seven years in case the IRS ever decides to audit me.
Label the
eighth hanging folder “Other Liabilities.” In here go all of your records dealing with debts other than your mortgage and your credit-card accounts. These would include college loans, car loans, personal loans, etc. Each debt should have its own file, which should contain the loan note and your payment records.
Label the ninth hanging folder “Insurance.” It will contain separate folders for each of your insurance policies, including health, life, car, homeowners or renters, disability, long-term care, etc. In these folders put the appropriate policy and all the related payment records.
Label the tenth hanging folder “Family Will or Trust.” This should have a copy of your most recent will or living trust, along with the business card of the attorney who set it up.
If you have children, put together a folder labeled “Children’s Accounts.” It should hold all statements and other records pertaining to college savings accounts or other investments that either or both of you have made for your kids.
Label the next folder “Real Estate & Other Investments.” If you own rental property or any other additional investments put them in this folder.
Finally, create a folder called “FinishRich Inventory Planner.” Here’s where you’re going to put the worksheet on this page after you’ve filled it out. This folder will also contain a file in which you keep a running semiannual total of your net worth—a vital record that will help you keep track of your financial progress.
That’s it. You’re done. Thirteen folders—12 if you don’t have children. Not so bad, is it?
As you begin the process of putting together your file-folder system, you may find you are missing some documents. In some cases (e.g., your Social Security Benefits Statement or your will), this may be because you never received or created the document in question in the first place; in other cases (e.g., copies of old tax returns), you may have inadvertently thrown them out. Whatever the reason, don’t worry about it. Just put the files together as best you can and simply make a note of what you don’t have. By the time you reach the end of this book, you will be totally organized and well prepared to fill in all the gaps.
Right now, you should feel great about the progress you’ve just made. Now that the two of you have started the process of getting your financial house in order, you’re already in much better shape than when you first picked up this book.
WHAT IF MY PARTNER DOESN’T WANT TO DO THIS EXERCISE WITH ME?
Let’s face it. Even if you’re in a serious relationship right now (married or otherwise committed), the chances are slim that you and your partner simultaneously woke up one morning and said to each other, “You know what? We should head down to the bookstore and find a book about how couples can learn to manage their money together. Then we should read the book and get our finances totally organized. It will be a ton of fun and really help our future.”
More than likely, one of you purchased this book on his or her own because he or she is concerned about your financial future as a couple. Chances are that this partner is really eager to get going on these exercises, while the other partner is a bit less motivated—maybe a lot less motivated.
Why do I say this? Because, for whatever reason, the fact seems to be that opposites attract. This is certainly true for most of the couples I know. Neat people wind up with people who are messy. People who understand how important it is to squeeze the toothpaste from the bottom of the tube marry people who are “middle squeezers.”
I’m not going to try to be a therapist and pretend I know why we do this…we just do. And while differences can add real spice to a relationship, they can also cause real problems. Indeed, nothing motivated me to write this book more than that story I related in the Introduction about the woman who told me her marriage felt like a plane with one jet engine going full force ahead while the other was going full force in reverse. She wanted to bail out of the plane before it crashed. That story was really sad. And it’s more common than not.
THE BEST PLACE TO START WITH YOUR PARTNER IS BY GETTING ORGANIZED
People always ask me what’s the best way to start if you and your partner have never worked on your finances together. More to the point, they want to know, is there a way to get started without inevitably winding up in a fight?
My answer is simple. You set up what I call a Money Date™ (covered in Step Nine) and then on your first date it’s a “clean out the money files” date. That’s what the FinishRich File System is all about. You say to your partner, “Hey, it’s time we got our money files organized.” Think of it the same way you think about cleaning out the garage: it’s one of those chores that’s so easy to put off, but don’t you feel great after you finally get it done!
So here’s what I recommend if this book wasn’t a joint purchase but, rather, the result of one of you feeling it’s time to get serious about your finances: approach your partner with this chapter and suggest that the two of you schedule two hours to put together a new file system. Now, here’s a sneaky suggestion. If your partner isn’t interested in working with you on this, simply start doing it without him or her. Just sit down at the kitchen table (or wherever) and start setting up the files. You’ll be amazed how fast your significant other will come around and want to get involved.
Pulling together all your financial records and setting up a new filing system tends to spark the interest of even reluctant spouses and partners. After all, it’s a little more serious—and important to their future—than cleaning out the garage.
DON’T BE TOO AGGRESSIVE: OFFER HONEY, NOT VINEGAR!
Enthusiasm is a great thing. But too much can be counterproductive. One of the worst things you can do when you want to move forward positively in a relationship and deal with your finances is to start jumping all over your partner about what he or she is not doing.
I learned this the hard way when I first started doing my “Smart Women Finish Rich” seminars. Women would leave my seminars so excited and motivated that when they got home they would announce to their partners or spouses things like, “We are doing everything wrong. I just had this class with this financial advisor and now I know that you’re going to die before me or divorce me for some bimbo, so show me where all our money is right now so I can fix the mess you put us in!”
Which was not quite what I had in mind.
After a few concerned phone calls from angry husbands and boyfriends wanting to know what I had been telling their wives or girlfriends (to which I would meekly reply, “Um, all I said was that they should do their financial homework and get their financial files organized”), I realized the importance of diplomacy.
As my Grandma Bach used to say, “You catch a whole lot more flies with honey than with vinegar.” In other words, if you want to make planning and managing your finances a fun process that the two of you will undertake together, you should take care to raise the issue nicely.
That’s just what a client of mine named Betsy did. She had attended one of my seminars and realized immediately that she needed to talk to her husband, Victor, about organizing their records, which by her own description were “a total mess.” Fortunately, she also realized that if she jumped all over Victor about it, he probably wouldn’t react well.
“What I did,” she told me later, “was say to Victor, ‘Honey, I’ve got a huge homework assignment from this seminar I took and I know I’m going to need your help. Do you think we could work together on it this weekend, because I’m not sure I can do it without you?’ ”
This proved to be the perfect way to raise the subject. No one was accusing anyone of anything (like letting their finances fall into disarray). Nor did it look like one partner was trying to take sole control of the couple’s money. Because Betsy presented it as something she needed to do but couldn’t without Victor’s help, he was more than happy to work on it with her. What’s more, she added, “When I showed Victor what the assignment was, he readily admitted it was something that we should have done years ago.”
In the end, Vict
or wound up being grateful to Betsy for getting them to clean out their financial garage—and for realizing that they should be handling their finances together, as a team. “I have to admit it really felt good when we finished filling out the inventory worksheet that weekend,” he told me. “For the first time in years, Betsy and I really discussed where our financial life was. By getting all of our assets and liabilities down on paper, we were finally able to see in black and white where we actually stood and how much our family was worth. While I always sort of had a running total in my head, filling out the inventory made it clearer and easier to deal with. I have to say, it’s quite a weight off my shoulders to have Betsy now involved with our money. It takes some of the pressure off of me.”
So remember to go for it and really do this project!
SMALL SUCCESSES BUILD CONFIDENCE AND MOMENTUM
Creating a filing system at home for your finances is not a big deal. In fact, it’s such a small thing that it’s easy to rationalize not doing it. You can say to yourself, “Yeah, sure, it sounds like a good idea, but we’ve got that stuff pretty much handled.”
But stop for a moment and imagine what would happen if you actually went ahead and did it. Imagine if you actually made a “Money Date” with your partner to work on your finances together, and then the two of you got everything organized. Imagine how it would feel if every month when it came time to deal with your bills and other financial obligations, you could simply open up a file drawer and know where everything was.
If all this simple exercise does is give you a little more financial confidence, it’s worth its weight in gold. The average American spends over ten hours a day on screen time. All I’m asking is that the two of you plan to spend just two hours sometime in the next few days to get all of your financial information organized.