Organizing Your Financial Records
Photo Credit: Jan Antonin Kolar, Unsplash
Key Points
■ Recordkeeping should be simple. Whether you use file cabinets, boxes, or bins, create a system you can follow.
■ When you save a piece of paper or an email, know why you must keep it. This will help you determine how long to keep it.
■ Very few of your financial records should be kept “forever”. All other items should be purged at least once per year.
Every time they open their mail or email, many individuals struggle. "Is this important?" they wonder. Is this something I need? Is it something I should keep? "Should I get rid of it?"
The organized person lives somewhere between the paper squirrel, who keeps everything just in case, and the purger, who dumps everything in the garbage. Being organized is not easy, but taking the steps necessary to keep your financial records in order is a chore with many benefits, the most important of which is a good night's sleep.
Keys to Success
Keeping financial records in order helps alleviate much of the stress of living in an increasingly complex society. We all play several roles as children, parents, spouses, partners, investors, citizens, and employers, each with its own trail of paper. This information will assist you in organizing your records by covering the following critical topics:
■ What records should you keep?
■ How long should you keep them?
■ How should you keep them organized?
■ How can you ensure that someone has access to your records in an emergency?
What to Keep
Understanding why you need records will help you determine which ones to preserve.
There are several reasons to maintain financial records. You undoubtedly have papers and documents that will only be needed in the case of an emergency, a death in the family, or an unexpected turn of events, in addition to maintaining track of paperwork linked with day-to-day consumer activities such as making purchases and paying down debt.
Many experts recommend categorizing your documents based on their intended usage, grouping short-term and long-term items together.
Short-term files would include items from the past year, such as:
■ Unpaid bills
■ Paid bills
■ Bank statements
■ Canceled checks
■ Credit card statements
■ Health records
■ An updated resume or updated employment records
■ Income tax receipts for deductions, income, etc.
■ Major purchase receipts
■ Insurance policies
Your long-term files should include items such as:
■ Bank statements (past seven years)
■ Canceled checks (past seven years)
■ Receipts for home improvements
■ Income tax records and backup for the previous three years
■ Gift tax returns
■ Inheritance papers
■ Retirement investment statements
■ Reports from trusts
■ Birth certificates
■ Social Security cards
■ Wills and living wills
■ Powers of attorney
■ Car titles
■ House titles/deeds
■ Investment account statements (If year-end statements have all tax information, these are typically the only ones you need to keep.)
■ Pension plan statements
■ Annuities statements
■ Mutual fund statements
■ Stocks and bonds
A Rule for Keeping Your Documents: Three, Seven, or Forever
At least once a year, clear up your short- and long-term files, with short-term data being deleted or moved to a long-term file. Shred any sensitive documents containing the account, Social Security number, and date-of-birth information. Here are some broad suggestions for how long you should store your papers
Keep Three Years:
■ Household bills
■ Credit card statements
■ Receipts for minor purchases
Keep Seven Years:
■ Canceled checks
■ Check registers
■ Bank statements
■ Pay stubs (If you worked for the same employer all year, your year-end stub should have all your information.)
■ Tax returns and supporting documentation
Keep Forever (Or until assets are sold):
■ Receipts for home improvements
■ Receipts for major purchases
■ Annual investment statements
■ Gift tax returns
■ Inheritance papers
■ Insurance policies
■ IRA statements
■ Mutual funds statements
■ A copy of your will
■ Healthcare proxy forms
Where to Keep Everything
Whether your records are kept in a file cabinet, cartons, or a shopping bag, dividing them using file folders or tabs is essential to simplify finding what you are searching for. While only you can decide which filing system is ideal for you, keep it in mind.
■ Keep it simple — use generic and commonplace terms
■ Clean out your files once a year
■ Keep the most recent files accessible
■ Keep all files in one place
If you utilize the short-term/long-term filing method, keep a "to be filed" space and write "short" or "long" on each piece of paper. During your yearly cleanup, certain short-term files will be converted to long-term files, while others will be discarded.
For Computer Users
Many people now get financial statements through the Internet and maintain vital financial information on their home computers, making their PCs a key source of data that needs to be accessed. It is critical to back up computer files, maintain backup data in a secure location, and keep computer passwords with your other vital information.
Though experts agree on a few guidelines, only you know the ideal approach to retain your documents. Make your system simple to maintain, simple to use, and simple to alter. If you organize your files in this manner, you will benefit from having a simple system for others to grasp.
Safe Deposit Box
A safe deposit box can be a secure location to preserve valuables and critical documents. However, certain crucial items may not need to be kept in a safe deposit box.
What to keep in a safe deposit box
■ Stock certificates
■ Coins, stamps, and other collectibles
■ Auto titles, mortgages, and deeds
■ Original copies of birth, marriage, and death certificates
■ Adoption papers
■ Divorce and child custody papers
■ Videos or photos of the contents of your home for insurance
What not to keep in a safe deposit box
■ Original copies of wills
■ Powers of attorney
■ Insurance policies
■ Anything that may be needed in the event of death
A Word of Caution
Safe deposit boxes may be sealed in the case of death (inaccessible even to those with a key). As a result, preserving the originals of papers required in the case of death (see list above) in a safe deposit box is not advised. Holding these original papers in a separate, secure location may be prudent, while only copies are kept in the safe deposit box.
Providing a Key — a Letter of Instruction
Suppose a catastrophe such as a fire, water main break, blackout, or electrical disaster occurs. In that case, chances are a family member, neighbor, or landlord already has a key that will allow that person inside your home. It seems reasonable to leave a key with someone. Similarly, you should construct a "key" to your vital financial data and make sure it is in the custody of someone you trust.
In addition to leaving this key in your home with your financial documents, make sure at least one person you trust knows where it is. Even a file labeled "financial key" or "in case of emergency" in your financial files may be helpful to the person tasked with putting together your financial data. Remember that no matter how organized you are, if your papers cannot be discovered, they will be useless to someone attempting to assist in a crisis, and having a financial key in the hands of someone with access to your information, whether a spreadsheet or a list, is valuable in an emergency.
What about taxes?
There are two sorts of tax information to be worried about: information required in the event of an audit, and information required to substantiate your income claims.
Back up your returns
While the IRS can pursue false or fraudulent returns indefinitely, the IRS can audit you for up to three years from the day you submit your return and follow underreported income for up to six years. Maintaining tax returns and accompanying documents for seven years (since the IRS has six years from the filing date to investigate) is a sensible approach to retention of tax documentation.
Exception
While many of your critical files will serve as backup for taxes, save those documents permanently if your tax returns contain information concerning a house purchase or sale.
One Last Thought
While it is not as easy as "when in doubt, toss it out," common sense plays a significant role. When filing a document, consider if you have ever required that sort of information before and why you are retaining it. If the replies are "no" and "just in case," throwing them away is generally safe.
Important Disclosures
This material is provided for general and educational purposes only and is not investment advice. Your investments should correspond to your financial needs, goals, and risk tolerance. Please consult an investment professional before making any investment or financial decisions or purchasing any financial, securities, or investment-related service or product, including any investment product or service described in these materials.
Portions of this article were sourced from the work of MFS Heritage Planning. Neither MFS nor any of its subsidiaries are affiliated with Optima Capital Management.
Our Insights
