Are your financial documents piled up in the corner of your office or under your desk? A few years ago, I was just filing papers in my cabinet, but not purging along the way. It got to the point where I couldn’t close the drawers of my filing cabinet, so I took some time to weed them out.
As I was removing the files, I wondered, What Financial Records Should I Keep and What Can I Toss? So much is done electronically now, but there are documents where a paper copy is needed. So, I googled my question and here is what I found.
Financial Documents: What to Keep & What to Toss:
Bank Statements – One nice thing (among many) about the electronic age is that banks keep statements online up to a couple of years. Our personal bank has statements online all the way back to 2006. However, you should print any canceled checks or year-end statements that you would need for tax purposes, ie – charitable contributions, home improvements, business expenses, mortgage payments, etc. If you are not going to print the statements, you really need to check them each month for errors and fees.
Bills – Utility bills can be tossed the following month when you receive your next statement and it shows that the bill was paid, unless you need the bill for tax deduction purposes, then refer to Taxes below. Any bills for big purchases like jewelry, appliances, computers, etc, should be kept permanently for insurance and warranty purposes. Permanent home improvement bills should also be kept while you still own your home.
Credit Card Statements – These can also be found online, so I’m not sure a paper copy is necessary, unless you need it for documentation for tax deductions, then see Taxes below. If you are not printing it, you should still review it closely for any discrepancies and unnecessary or incorrect fees. You should keep any credit card receipts to match up with your statement. Read more about receipts below.
Household Records – Keep all records from the purchase of your home and any receipts for permanent home improvements and selling expenses for as long as you own your home. This is very important and something that I learned while researching for this post. When you go to sell your home, the cost of permanent home improvements and any selling expenses incurred will be added to the original purchase price of your home. This final number will help to lower your capital gains tax.
Legal documents, such as wills, passports, birth certificates, marriage license, proof of paid mortgage, deed to your home, title to your vehicles should be kept permanently in a safe location such as a safe or safety deposit box.
Pay Stubs – Keep for the year until you get your annual W-2. If the information matches, you can shred your pay stubs. If the information doesn’t match, head to your human resource department for correction.
Receipts – Keep until the warranty expires or you can no longer return the item. Any receipt that supports a tax deduction, should be kept with your tax returns. For other receipts from a credit card for example, groceries or gas, keep until you get your next statement to look for any errors.
Retirement/ Savings/Brokerage Statements –
- Keep records permanently for nondeductible contributions to an IRA to prove that you already paid taxes on this money when it is time to withdrawal.
- Keep the quarterly statements for your 401k or other IRA accounts until you receive the annual statement. Check for any discrepancies. If there aren’t any, shred the quarterly statements, but keep the yearly until you retire or close the account.
- Keep any brokerage statements until you sell the security. You’ll need proof of gains or losses at tax time.
Taxes – You can be audited by the IRS for up to three years after you file your return. BUT if the IRS has reason to suspect that you under reported your gross income by 25% or more, the IRS has up to six years to audit your return. AND if you fail to file or they suspect a fraudulent return, there is not time limit on the possibility of an audit. ALSO, if you are self-employed, you should keep your returns and supporting documents for six years.
It is important to note that you should keep your returns and any supporting documents for these time periods. Supporting documents include any receipts, statements or canceled checks that support income or a tax deduction that you took.
Personally, as self-employed small business owners, we are keeping all of our previous paper tax returns for the unforeseeable future. Currently, our tax accountant has our returns in an online database–yay, no paper! But I keep any paper copies and all supporting documents neatly filed in the cabinet.
Here is a link to IRS.gov where it explains their Period of Limitations for tax returns.
Ideas For Keeping Your Financial Records Organized:
1. For our personal taxes, we keep a present year file for tax deduction documents, such as receipts for charitable contributions, mortgage tax payments, receipts for school and real estate taxes, Goodwill donations, etc. As we receive these documents, they are put into the file and at the end of the year, I have everything in one place.
2. Every year for our small business, I create a 4 inch binder, with tabs for each of our expense categories, to store the statements, receipts and invoices. I use a small accordion file with 12 monthly files for credit card receipts.
3. In your filing cabinet, group your major files together by category with sub-files. Some examples:
- Assets – with sub-files like your checking, savings, retirement, etc.
- Insurance – sub-files would be Auto, Health, Home-Owners, Life, etc.
- Liabilities – sub-files would be Auto Loan, Credit Card, Mortgage, Student Loan, etc.
- Home improvements -with sub-files for each major improvement.
- Medical records should be filed by family member.
- Professional records with sub-files such as resume, employer records, degree records, etc.
- Taxes with sub-files for each year.
DO NOT FORGET to shred anything that you are throwing away that has your personal information. This will help you avoid possible identity theft. Shredders can be found just about everywhere and are a worthy, inexpensive investment.
If you have any questions regarding a particular document and feel uneasy about whether or not you need to keep it, then please seek advice from a professional.
Do you have a method for filing your financial records that works well for you? I would love to hear about it. Please let us know in the comments.