Important Ratios for Mutual Funds

Mutual funds can confound us with their variety and objectives. There are a plenty of mutual funds which can fit all hues of risk and reward combination. While the varieties offer more options to choose from, the same varieties can confuse investors if they do not know how to understand them. Understanding the proportion of equity, objectives, and your own goal and investment horizon are very important to make the most of the fund.

Since most of the retail investors do not have time and expertise to understand the stocks and businesses behind them, they find a responsible advisor in fund manager. Mutual funds diversify the investment into various equities and bonds and thus reduce the risk entailed in the case of individual stocks. Though diversification reduces returns it reduces risk, which is an important parameter from a retail investor’s perspective.

In this article, we will focus on the important ratios concerning mutual funds (note, many of these will also apply to Exchange Traded Funds).

Ratios for mutual funds

Just like stocks, mutual funds have their own ratios that the investors need to look at to judge the investment worthiness of a fund. These ratios will help retail investors understand some of the key factors that impact their returns from mutual funds.

Expense Ratio

Expense ratio is the cost incurred in running the fund by the investment fund house. The expense ratio is calculated by dividing the operating expense by Total Net Asset Value of mutual fund. It is given in %. The figure is also expressed in bps, which is a multiplication by 100 of percentage figure.  The expense ratio is a very important parameter as the expenses are taken from the returns and hence it lowers the returns that the fund earns. A point to be noted here is that a fund takes out this amount regardless of the profit margins i.e. even when the fund runs in losses.

Expense ratio is usually less for index funds since the fund manager doesn’t need to do more research, but just needs to track a market index.

So once you have shortlisted a sector and a few funds in that sector choose a fund which has least expense ratio for investment.

Load structure

The entry load is the initial charges taken out by the fund from your investment. Hence when you buy the mutual fund, you don’t get fund units worth full value of your money. The exit load is when you sell fund units you have to pay the exit load.

As the definition specifies, it’s better to choose lower load funds.

Portfolio PE ratio

The PE ratio of mutual fund is price by earnings ratio. It simply tells you how much you are paying to earn Rs 1. If the PE ratio is 25, you are paying Rs 25 to earn Rs 1, a 4% return. This is certainly making things too simplistic as the earnings will keep growing for the companies which are part of the mutual fund. There is no hard and fast rule but a PE ratio of 20 and less is preferable. The other side is that a high PE ratio indicates that people are ready to pay higher price for the fund because the market believes that the fund value can grow faster.

Portfolio PB Ratio

The PB ratio of a mutual fund is aggregated price to book ratio of all the stocks and entities comprising the fund. The PB ratio tells you the price you are paying for a unit book value. The book value is another topic which can take many pages. Suffice it to say that book value is nothing but the value of all the assets minus the liabilities. There is no specific value which can be used to measure attractiveness of a mutual fund.

Dividend Yield

Dividend yield is the dividend distributed by the mutual fund as % of the current market price of the fund. For example,  a dividend yield of 3% and more will be great offer in Indian market as Indian companies usually do not give good dividends. The reason is not difficult to guess. India is a growing economy and most of the firms are growing faster. The companies need money to fuel the growth and hence most of the companies invest the earnings in growing the company than distributing it as dividends.

Market Cap

The market cap shows whether the fund has invested in large cap, medium cap, or small cap. The very large market cap shows that the fund has invested in blue chip companies with very large market capitalization.

Market cap helps investors realize the risks and rewards that they should expect from the fund. A large market cap fund that invests in blue chip companies will give average returns with very less risk.


Beta of the fund shows the measurement of risk of mutual fund with respect to the market. In simple language, it tells you how much a mutual fund’s NAV will move for a certain move of the market index.

If a mutual fund has a beta of 1.2, it means it will move 1.2 times the market’s move. So if the market moves up by 10%, the mutual fund’s value will move up by 12%. If the market goes down by 20%, the mutual fund’s value will go down by 20*1.2 = 24%.

A beta of -1.2 means that the mutual fund and market move in opposite direction with mutual fund moving more. For example, if market moves up by 10%, the mutual fund’s value will move down by 12%.

Sharpe ratio

Nobel laureate, Bill Sharpe, devised a formula known as Sharpe Ratio. This ratio measures the returns with respect to risk taken by the fund. The formula is return of fund in excess of the risk free return divided by the standard deviation of its returns.

Sharpe ratio = (Return of the fund – risk free return) / standard deviation of the return of the fund

A higher Sharpe ratio is preferable as it denotes higher returns for the risk taken. A negative Sharpe ratio indicates that the fund is performing worse than a riskless asset.

Standard deviation

Standard deviation of a fund is measure of its volatility. A high volatility shows the risk is high. However, as we have just shown above Sharpe ratio is a better measure than just looking at standard deviation in isolation.

The last words

These ratios are very important for investors to know. Most of the mutual funds scheme document will provide the ratios anyway so investors do not have to calculate them. Look at the ratios and decide for yourself. In the end, these ratios will drive the performance of the fund.


Are You Really Ready to Retire?

So you’re approaching the tail end of your career and hopefully you’ve done your self the favor of investing in a 401k or other type of IRA, perhaps coupled with a portfolio of mutual funds, stocks and other investments, you may even be one of those lucky few who have a pension. I am sure that you may have some very well thought out day dreams about what your retirement will look like, but if you are in a state of debt those ideas are just that; fantasies. Keep in mind that your wealth is determined by the value of your assets minus the cost of your liabilities.

If you are 55 and have elephant debt (debt that is at least more than half of your net income) you are in a world of hurt. Here are the facts about your situation, you are debt heavy and your working years are numbered, now assuming you are not one of those tragic figures who currently finds himself unemployed you have a window of opportunity to salvage your retirement outlook and bring your retirement fantasies closer to fruition. Your first step on your escape from retirement limbo is to zap all unnecessary weigh-downs. Weigh-downs are avoidable expenses that are holding you back from becoming fiscally sound before retirement; cable or satellite bills, phone bills, smart phones, buying bottled water instead of getting a filter for your faucet, taking vacations, buying new cars instead of repairing your current ones, frivolous purchases, etc.

By now you are thinking that I’m telling you that you that you have to downgrade your lifestyle; the truth is that I am only telling you to take into account the many leaks that are in your financial boat and attempt to plug them up.

Instead of paying $30-$200 a month for cable or satellite get Netflix or Hulu for less than $10 a month do this and you save yourself $180-$2,280 a year. Instead of buying cases of bottled water for $4-$6 a case buy a faucet filter and save dramatically each year. Instead of paying for a redundant land line consolidate your phone service to just your cell phone, secondly unless you truly need a Smartphone for your work than just get a normal cell phone that does what it is supposed to do; make and receive phone calls, do these two steps and save your self at least $1,000 a year, if not far more. Hold off on taking a vacation for the time being and instead put the money towards saving you financial future, this will save you at least $1,200-$5,000 a year.

Assuming that your elephant debt was not caused by buying a luxury car, you have a yet another way to pay off your elephant debt; don’t buy a new car! Instead of buying a new car drive the one you have and keep up with regular maintenance, literally drive it till it dies and you will instantly generate a net savings for your self of at least $5,000 a year. Do all of these things and you will have at least $6,588 on the low end and up to $12,592 at the high-end.

Keep in mind that you probably have other weigh-down expenses that only you could know about and so I leave it to your judgment what your course of action should be regarding them. For some people cutting off weigh-down expenses alone will put them on the right track towards being financially solvent by the time they retire, the rest of us probably face dramatic changes to our operating procedure. If you own a boat or even a plane it may be the time to liquidate those assets in order to free up cash flow towards paying off debt. Now chances are that your kids have moved out and you no longer need as big of home as you have, you could capitalize on this situation and either rent out rooms or down size to a smaller home. Keep in mind that I only recommend down sizing in extreme cases when no other alternative is readily available. Remember your goal is to be in a position to actually achieve your dreams when you retire, you can’t hope to do that if you are weighed down by debt.


Risk vs. Reward – Are you a Risk Taker?

I am sure that many of you will understand what I mean by the title, “Risk vs. Reward.” In just about any walk of life, if we do not take any “risks” our rewards by not doing so are generally much lower.

That is not to say there is anything wrong with individuals whom do not wish to take any risks, in financial circles these people are referred to as “risk adverse” and it is a perfectly acceptable view to take on both your everyday life as well as financial matters.

Taking Risks – Risk vs. Reward

There is of course a major consideration in taking risks and that is the higher likelihood that you may fail at whatever task you take on. Whether that is investing your hard earned money into a savings vehicle which is considered to be “high risk” or a lifestyle change which you cannot guarantee will work out.

Risks and Benefits

To illustrate this point further let me give you a personal example. When I was starting out in life and as most young men do, I wanted to get a house of my own. The cost of a mortgage payment, with what was my young and small income, was significant at that time. I didn’t have much room to move in terms of financial commitments but it did mean I could get my leg up onto the property ladder at the ripe age of 18 years. This was a significant risk to me, could I afford it? Would I have to sacrifice my social life? What about the hidden costs?

All these questions and more were going round my head (and my wallet!) but after weighing up all the options I decided to take the risk and purchase my first house. For me, it was the best “risk” I had ever taken and after only 3 years of living at the address the value of the property had raised by some 45%. This enabled me to move up the property ladder to something bigger and in a nicer neighborhood and some 20 years later; I have the house of my dreams.

The Risks of Failure

Things could of course have gone completely differently. If I had purchased this first home just 4 or 5 years ago the chances are I would not have made any money at all, in addition, I probably would not have afforded the large deposits lenders now require in the wake of the biggest financial meltdown for 50 years!

Consider the Risks

You will have heard of the term “calculated risks.” This is an excellent concept and helps people understand the pitfalls in taking actions. By assessing the background to the risk you are considering and looking at many of the details associated with it, you will be in a better position to consider the options at hand. Knowledge is most definitively power when discussing risks, gather everything you can about the problem and set time aside to consider them.

Even with taking “calculated risks” remember that risks are “risks,” you have to go into them with a open mind and importantly a mindset of success – the bigger the risk, the larger the reward, but just make sure you understand all the risk attributes as much as possible before making a decision.


Risks Associated with Annuity Products

As most individuals know, an annuity is a series of payments that are paid over an interval specified in a contract and whose value is determined by several different factors. Annuities are generally purchased through insurance companies; however, there are some investment companies who offer them. There are three primary types of annuities, fixed, indexed, and variable annuities, and each different form has its own advantages and disadvantages. Educating yourself about the various risks associated with investing in annuities will allow you to determine if this is the most advantageous method of investing for yourself.

Risks Associated with Annuity Products

One of the primary risks of annuities is that they are often subjected to the same volatility as mutual funds in regards to market conditions. In particular, variable annuities are much more subject to the fallout of these market conditions. Essentially, the yield that produce is not adjusted for increases in the annual cost of living or for inflation, unless it is specifically specified in one’s rider. Annuities with these riders are significantly more expensive. In essence, the draw that you would receive from an annuity today will not stretch as far in 20 years. In this arena, fixed annuities are much more inflexible than indexed or variable annuities.

The second most common risk that is associated with annuities is that of annuity death and survivorship risk. This risk is primarily applied to fixed annuities. For example, once the premium of an annuity has been surrendered, it is again unattainable, even if you were to die after only receiving two or three payments from the annuity. Essentially, your estate will not receive any money or settlement back from the insurance company. Another consideration is that with these fixed annuities, your survivors, such as a wife or children, will not receive any benefits from the annuity. In order to remedy this problem in regards to a spouse, a joint life annuity should be purchased as an alternative.

Another potential risk that must be taken into account is that of the annuity company’s failure risk. Annuities are not monitored or insured by the FDIC or any other governmental agency. If the insurance company that has issued your annuity fails, then you will also suffer the financial loss without any course for redress. The majority of states within the United States offer some form of insurance that will protect the investment you have made in your annuity; however, this insurance is expensive, and it also usually has monetary limits. For example, the monetary limit of this protection will be around $100,000.

When you are developing a risk control strategy to protect your annuity, it would be ideal for you to contact the insurance commissioner of your state to confirm the fact that your state has a guaranty association. Furthermore, you will need to make inquiries regarding the financial limits that would be applied to your particular annuity. Taking these monetary limits into consideration, it will also be possible for you to divide annuity protection amongst multiple insurance companies to maximize the amount of protection that is available.

Annuities provide a helpful source of income when an individual is developing their overall retirement plan. However, there is a certain amount of research and preparation you should perform before you begin investing in an annuity portfolio. All of the risks that are associated with fixed, variable, and indexed annuities must be carefully scrutinized to assess the risk associated with each one. Furthermore, you must consider that if the need for you to surrender your annuity early should arise, then there will be various fees and penalties associated with early withdrawals or insolvency.

saving money

Top 5 Ways to Save for the Future (Despite the Recession)

Thinking about your distant financial future can be difficult when you’re struggling just to make ends meet right now.  With the global economy mired in a long-term recession, unemployment levels plateauing, and people everywhere trying to stay afloat in the stormy sea of government bailouts, corporate disillusionment, and a housing market that has tanked, now does not seem like an opportune moment to start planning for your retirement.  And yet, the earlier you start, the more you stand to set aside for your twilight years.  Not only will you be putting more funding into your future, but you will also be earning more by the time you draw your final paycheck and exit the working world.  So even if you can only contribute a few bucks here and there, you can find ways to invest in yourself.  Here are the top five methods of saving for retirement.

How to Save Money in a Recession

Savings Plan
Savings Plan

1.       Set a budget, cut debt, start saving. The reason so many of us fall behind is that we’re spending more than we’re earning (making saving impossible).  Take the time to balance out your finances so that you can start paying down your debt, and then you can begin to save in earnest.  As a bonus, you’ll also be improving your credit score along the way, meaning you’ll have the ability to buy a house or start a business later on.

2.       401K. There is absolutely no better solution for your future financial needs than a 401K.  Most businesses offer you the opportunity to contribute pre-taxable income to a retirement account, and whatever percentage you elect to donate will automatically be withdrawn from your check.  You won’t even notice it’s gone!  Plus, companies that offer matching programs will equal your contribution to the account, generally up to about 5% of your earnings (but you have to put the money in first).

3.       Stocks and bonds. These can be a bit more risky than other types of investment, but they offer the best chance to grow your money.  And as long as you hold a diverse portfolio, you won’t lose your shirt just because one area hits a wall.

4.       Invest in a home. These days it may seem like investing in property is a useless endeavor.  If you’re looking to buy and sell quickly, you’re probably right.  But if you plan to hold onto a house for several years, you have time to make upgrades the smart way, increase the value of your property, and wait for the right time to sell for a sizeable profit.

5.       Keep working. Who says there is a time limit on viability in the job market?  Frankly, if you’re looking for a paying position at the age of 65, you’re bound to have a pretty hard time finding it.  But there’s no law that says you have to give up employment just because you hit a certain age.  By continuing to work (with all the opportunities available on the internet and no way for employers to know your age, you level the playing field) you can continue to add to your accounts, or start new ones, instead of simply siphoning off your retirement funds.


Choosing an Investment Option: What to Look for

The simplest answer is often the right one and this is also true for the features of a good investment option. When you are choosing an investment option you should be looking for an investment which returns more money than you originally invested, and which doesn’t require more of your time than you’re willing to invest.

This sounds very simple, but becomes decidedly more complex when you look at just how many different ways there are to increase your investment. Therefore, you should start your search for good investment opportunities by speaking to people who are well and truly entrenched in the industry – this includes brokers, friends who are investors, your financial planner or anyone with pertinent inside information to seek personal advice and a greater understanding of how investments work.

You may think you have to look for a long term investment, or one which is high risk, but a good investment is simply one which yields you more money than you started with. At the same time, you don’t always know how much your investment is worth because you don’t find this out until you sell it. Therefore, while there is always a risk involved because you never know when you will be liquidating your investment, and at what sort of profit, there are several criteria you can look for.

What to Look for in an Investment

1 – Secure initial capital

This is where the risk is involved, because if your initial capital is safe, and you come out of your investment with the original amount you invested, you’ve lost nothing but your time. However, if you lose your initial capital, then you have lost both your time, and your means to accumulate more passive income through investments.

Therefore, a good investment option will strike the balance between risk and reward, based on your financial situation, and the amount you are investing. If you are investing $100 you may opt for a riskier investment option than if you were investing $100,000 because you can afford to lose your initial capital in the first instance.

2 – Profit

Keeping in mind that inflation can be as much as 4% each year, for your investment to make a profit, it must be returning more than 4% annually. As a result, property investment can be a good choice if you are looking for a reliable property because values always increase over the long term.

While the property market fluctuates, there is usually no bad time to buy an investment property because prices are going to go up. The best property investment you can make is a swift one, so that your property can start accumulating capital growth and equity as soon as possible.

3 – Liquidity

Where property investment offers you strong profits for the future, if you want to get rich quickly from your investment, or easily liquidate it for cash or other investment options, you should look elsewhere because the time it takes you to sell your investment can eat into your profits.

However, when you invest in shares you can easily log into websites where you can buy and sell shares in a matter of minutes. Plus, the market for shares in large blue chip companies is strong and plentiful so there is little risk of being stuck with shares you don’t want or need.

4 – Benefits

While there are opportunities to make short term gains with some targeted buying and selling of investments, you’re often in it for the medium to long term. Therefore, you should also look for other benefits, besides the increase of your initial investment, to tide you over.

With property investment for example there are a myriad of tax benefits you can take advantage of because all of the expenses such as your loan interest, rates and maintenance are deductible on your tax, and you can also claim depreciation on items such as the hot water service of the property.

The costs associated with shares are also deductible, including the interest you pay on your margin loan if you have borrowed to invest. You can also reap tax benefits from franking credits, or imputation credits because the companies you are invested in have already paid tax on their profits, and so investors receive franking credits on their dividends. Your share dividends can be a way to supplement your income as many large companies pay their share holders monthly or quarterly dividends for each share.

There can also be significant benefit in having a diverse investment portfolio, scattered across property, shares, bonds and cash, and even simply making sure your shares are invested in a wide range of companies. This ensures that if one of your investments suffers a loss or fails, your overall investment profitability and return won’t be affected. This is also quite easy to achieve because in many cases you can buy small share parcels of just $500 to diversify your investments.

5 – Cash flow

The level of cash flow you need to achieve from your investment will depend on your financial situation, and the amount you are investing. For example, if you are investing in property with the aim to benefit at tax time, you need to still remember that your investment loan repayments must be paid each month, before you receive the benefits back.

Therefore, make sure you carefully analyze your budget and projected returns, remembering you may not always be able to rely on investment income to maintain your cash flow.

6 – Legitimacy

One way above all that you can ensure you are making a good investment, which will secure you good returns with manageable risk is that you are investing in a legitimate venture. There are countless scams circulating which promise investors big returns on their initial outlay, but if you don’t do your research, you are putting that initial capital at a very big risk, for not reward.

A long established, yet still popular investment scam to watch out for is a Ponzi scheme, where the scammer collects funds from new investors as part of an investment syndicate, and instead use those new funds to appear to pay returns to existing investors, without every actually investing anything.

You can easily find information on legitimate investment options because information about shares for example is available on the news, the television, the newspaper and financial websites. As a result, you can maintain an accurate picture of the value of your investment. Plus, when companies are listed on the stock exchange, they are required to report regularly to their shareholders through announcements, where they share details of their full and half year financials, and anything else which could affect share prices such as acquisitions and divestments, while also responding to any queries regarding movements in their share price.


Do Online Brokerages Really Give You the Best Deal?

For many years we’ve seen the mass advertising conducted by online stock brokerage firms. They offer another avenue for trading stocks and other financial products, often at a comparatively lower rate than in-person brokers and firms.

Several of these online brokerage companies have become household names. But given the regular ups and downs of the stock market, do these firms really offer you the best deal in terms of your overall investing experience?

What Services to Expect – And Not To Expect

When discount brokerages first made the scene into the financial services market, they readily admitted that they offered “no frills” service, in return for little or no investment advice and very low cost trading options.

However, with the advent of more firms offering online share trading, the products and services offered have expanded. For example, where once you could only trade individual stocks, these online firms now offer more research and tools for trading, as well as updated news about the market and investing trends.

As an online investor, you will likely also have access to an online investing “community” where you can interact with other investors. And, some online brokerage firms offer national service centers and even local branch support. So in effect you could be getting the best of both worlds.

Does Convenience Come with a Cost?

As good as some of the services offered sound, however, there could still be a “cost” to you. For example, although you have access to service centers and branch support, you may not work with or speak to the same person more than once. This means that there may not be one particular advisor assigned to your account who is looking out for your specific and personal financial needs and goals.

Calculating Your Needs

One popular tool offered by many online investment firms is a calculator designed to help you determine how much you need to invest over time to reach a certain amount of assets in your portfolio. This tool could help to offset the lack of personal investment support, and for those who prefer to take control of their own investment accounts, this tool is a great feature. However, for those who do not wish to follow the market’s every move, then it may not matter what the results of the calculations are if you are unable or unwilling to take the time to act on them.

How Much Advice Do You Need?

The lower cost and convenience have made it possible for just about anyone to control their own investments with online brokerages. As some will tell you, however, even though these firms provide access to research and advice, you may still have to take the time to dig for exactly what you need. If this is something you are not prone to doing, then placing your funds with a full service brokerage that provides real time human advice may be your better option.

Research is Key

Most online trading firms do offer a good amount of access to market research. You will often have access to real time market information and quotes, as well as analysts’ opinions of whether a specific stock or fund has a Buy, Sell, or Hold rating. Again, if you have the time and desire to track your own investments, this research is a must. However, all the information in the world won’t help if you do not or cannot take the time to read it and make the proper buying or selling recommendations.

What to Look Out For

Just like most advertising, take the online brokerage firm commercials you see at face value. For example, an online investment firm that offers trades for “as low as” $7 may only offer this price to someone who makes a certain amount of trades per month or opens a specific type of account at the company.

Therefore, be sure to read all of the fine print before opening an account and handing over any funds. Often it’s too late to back out if you later discover these requirements.

Tips to Invest Successfully Online

With the wide myriad of pros and cons to investing with an online brokerage firm, what it really comes down to is the time you have to spend monitoring your accounts. Similar to many other products and services, if you have the time and the desire to spend on your investing activities, then working with an online brokerage may be just the thing for you. If not, however, your higher commission dollars may be better spent with a full service broker who will regularly monitor your funds and take the appropriate actions when necessary.


Why You Shouldn’t Tap Into Retirement Accounts

Individuals must learn how to manage their finances in a way that takes into consideration short, mid and long term goals.  A short term goal might include building an emergency fund in a savings account to which you have instant access.  Mid term goals might include saving for a car or down payment for a house.  Long terms goals of course involve saving money for your retirement years.

As you might guess with each goal, different savings strategies must be considered.  If you fail to use the right strategy you may end up losing a significant portion of your savings.  This is the case when you invest money in your future via a retirement plan and then tap into those resources for financial needs that arise before you retire.  Since most retirement plans are by design intended for long term investments, the penalties and consequences of taking your money early can be significant.  Here we look at a few of the negative consequences that go hand-in-hand with early distribution of retirement funds.

Why You Should Leave Your Money in Retirement Accounts

  • Early withdrawal penalties.  With any retirement savings plan that limits withdrawals to those who have reached age 59 1/2, it is important to avoid taking money before that age.  If you do, you will be slapped with an early withdrawal penalty of 10%.  If this was the only penalty, one might be willing to take the hit to their finances in order to access their cash early, however it is only the beginning of possible penalties.
  • Pay attention to loan provisions. You might be tempted to access the money in your account due to the ease at which you can do so.  As a general rule, companies do not set restrictions to how you can use your own retirement money as long as you are willing to repay the money as set forth by the plan.  In most cases you can borrow up to half of your contributions (not to exceed $50,000) with five years to repay the money. Since you are basically paying yourself back, this might seem like an viable alternative to a traditional loan, especially considering the attractive interest rates.  The downside of this option is the fact that should you lose your job your loan must be paid back in full immediately.  In this struggling economy where no job is safe, this is a risk best avoided whenever possible. See these articles for more information about 401k loans and TSP loans.
  • Loss of growth opportunity. Regardless of how or why you might tap into your retirement account, one of the biggest negatives is the loss of growth opportunity.  What many people do not think about when borrowing from their 401k is how much that money could be working for them if left alone in the account.  For this reason you should really consider the bigger picture before taking money from your retirement account that could be of better use right where it is.

Most people will agree that while accessing money in a retirement account could certainly help improve their personal finances in the short term, in almost all situations it is better to leave that money in the account and look for alternatives to borrowing from your retirement.  What seems like a great idea today might not be such a good idea in the long run.


Consolidating Bank and Investment Accounts

There are so many aspects to managing your personal finances that it can sometimes be a challenge keeping everything together.  In order to realize financial security in your life you must be able to juggle several tasks simultaneously.  You will have to know how to make money, save money, invest money and pay bills on a regular basis to ensure all of your financial goals can be reached.  With so many balls in the air at the same time, many people find it beneficial to consolidate their accounts to keep all of their finances in order.  Here we look at how you can consolidate your financial accounts and the benefits that can be realized by doing so.

Benefits of consolidating financial accounts

Consolidating bank accounts

It is not uncommon for individuals to have several accounts at different banks.  This could be due to several factors.  For example, you might use a bank with a convenient location for day-to-day transactions, or you might use an online savings account for lower fees and higher interest rates.  The problem with having your money spread all around is the difficulty in keeping track of your finances.  Managing multiple accounts increases the likelihood of making mistakes or noticing errors that could end up costing you more money in the long run.

By consolidating your bank accounts into one bank you can often save money across the board with reduced fees or other rewards such as favorable terms and interest rates as a result of having multiple accounts with one bank.  When you keep all of your accounts in one place you can receive consolidated statements which make it easier to see all of your finances in one easy place as well as providing convenient documentation that may be needed for tax season.

Consolidating investment accounts

When you have your investments spread out and managed by different brokerage firms or mutual fund companies, it is often difficult to know exactly what is going on with your money.  Consolidating investment accounts with one firm can offer the following benefits.

  • Keep track of investments. When all of your accounts are managed and located at the same place it is more convenient to track your assets. You can see in one place how your investments are performing.
  • Keep track of changes. Fees, commissions and policies are subject to change with each company.  These changes can be hard to follow if you have your accounts spread out, however by having your accounts in one place you can easily keep track of changes that can impact your money.
  • Special perks. The bigger your account, the bigger the perks you may receive. Some companies will reward bigger account holders with free services or reduced fees and commissions.

Making an informed decision.

There are many benefits associated with consolidated financial accounts, however this step may not be right for everyone.  It is important to consider both the advantages and disadvantages of any moves you make in regards to your personal finances.  What works for one situation may not work for another making it all the more important to make an informed decision.