If Your Finances Feel 'Complex,' It's Probably a Bad Sign

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Think about the various bank accounts, credit cards, loans and retirement funds that make up your personal finances. What words spring to mind to describe them?

If you said "complex," chances are you're finances aren't in great shape.

Chase Blueprint teamed up with the Aite Group to take a look at how Americans finances' are faring five years after the financial collapse. Their survey found an interesting indicator for an individual's financial health: The more "complex" you consider your finances, the more likely it is that your finances are in rough shape.

According to the survey, just 14 percent of people whose finances have improved since the recession say that their finances are "very complex"; among those whose finances have stayed about the same since the recession, just 12 percent described their finances in those terms. So if you feel like you've been keeping your finances simple, chances are your money situation has been stable or improving over the last few years.

But if your finances have gone downhill, it's a different story: "Among consumers whose financial health has declined, however, about three in 10 consider their financial life to be 'very complex,'" the study finds.

Is Complexity a Cause, or an Effect?

As with all surveys of this sort, it's tempting to draw a simple correlation -- for instance, that you need to reduce complexity in your financial life if you want your money situation to improve. So how do we define complexity?

Chase's Tom O'Donnell says that those who said their financial lives were complex have some things in common.

"They are borrowing from a number of different sources, have multiple financial products, and are paying multiple fees," he says. "There are lots of factors in their financial lives that they are trying to deal with."

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But if complexity is a matter of paying a lot of fees and having a bunch of loans, then perhaps we have it backwards. After all, taking out a lot of loans may be a sign that you're in dire financial straits to begin with, and if you're paying a lot of bank fees, it could be because you're constantly overdrafting, bouncing checks or paying your credit card bills late. So maybe it isn't that complexity causes financial difficulties, but that financial troubles cause complexity.

"The borrowing behavior that drives the perception [of complexity] is driven by fact that person needs to borrow," agrees Aite analyst Ron Shevlin. Still, he points out that the study was focused on how people perceive the complexity of their finances, so not everyone who described their financial life as complex was actually dealing with a confusing array of financial products. Even if you've only got a few accounts to manage, you might see that as a complex situation if you simply don't have a good grasp on basic personal finance.

So it's partly a matter of financial literacy, and the study does indeed find that those who consider themselves financially illiterate did indeed see their financial health deteriorate in the last few years. Still, Shevlin doesn't think that simply educating people is going to close the literacy gap. It's also a matter of getting over your anxiety about money and engaging with your finances, a process that can be helped along by using personal finance management tools.

"It isn't so much literacy driving perceptions of complexity, it's the extent to which people are engaged with management of their financial lives," he says. "We need to get people more involved, and get them to believe that their financial lives aren't that complex."

Matt Brownell is the consumer and retail reporter for DailyFinance. You can reach him at Matt.Brownell@teamaol.com, and follow him on Twitter at @Brownellorama.

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86 Percent of Americans Can't Ace This Simple Personal Finance Quiz. Can You?
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If Your Finances Feel 'Complex,' It's Probably a Bad Sign

A. More than $102

B. Exactly $102

C. Less than $102

A. More than $102

You’ll have more than $102 at the end of five years because your interest will compound over time. In other words, you earn interest on the money you save and on the interest your savings earned in prior years. Here’s how the math works. A savings account with $100 and a 2 percent annual interest rate would earn $2 in interest for an ending balance of $102 by the end of the first year. Applying the same 2 percent interest rate, the $102 would earn $2.04 in the second year for an ending balance of $104.04 at the end of that year. Continuing in this same pattern, the savings account would grow to $110.41 by the end of the fifth year.

Imagine that the interest rate on your savings account is 1 percent a year and inflation is 2 percent a year. After one year, would the money in the account buy more than it does today, exactly the same or less than today?


 

A. More

B. Less

C. Same

B. Less

The reason you have less is inflation. Inflation is the rate at which the price of goods and services rises. If the annual inflation rate is 2 percent but the savings account only earns 1 percent, the cost of goods and services has outpaced the buying power of the money in the savings account that year. Put another way, your buying power has not kept up with inflation.

True or false: A 15-year mortgage typically requires higher monthly payments than a 30-year mortgage but the total interest over the life of the loan will be less.


 

True

False

True

Assuming the same interest rate for both loans, you will pay less in interest over the life of a 15-year loan than you would with a 30-year loan because you repay the principal at a faster rate. This also explains why the monthly payment for a 15-year loan is higher. Let’s say you get a 30-year mortgage at 6 percent on a $150,000 home. You will pay $899 a month in principal and interest charges. Over 30 years, you will pay $173,757 in interest alone. But a 15-year mortgage at the same rate will cost you less. You will pay $1,266 each month but only $77,841 in total interest—nearly $100,000 less.

A. Rise

B. Fall

C. Stay the same

D. There's no relationship to bond price and interest rates.

B. Fall

When interest rates rise, bond prices fall. And when interest rates fall, bond prices rise. This is because as interest rates go up, newer bonds come to market paying higher interest yields than older bonds already in the hands of investors, making the older bonds worth less.

True

False

False

In general, investing in a stock mutual fund is less risky than investing in a single stock because mutual funds offer a way to diversify. Diversification means spreading your risk by spreading your investments. With a single stock, all your eggs are in one basket. If the price falls when you sell, you lose money. With a mutual fund that invests in the stocks of dozens (or even hundreds) of companies, you lower the chances that a price decline for any single stock will impact your return. Diversification generally may result in a more consistent performance in different market conditions.

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