Keeping track of old tax returns and sorting through receipts may sound about as exciting as organizing your sock drawer.
Thereâ€™s no immediate payoff to most financial record keeping, so itâ€™s easy to put it off until another day. Or another year. Plus, record keeping is a chore that can feel even more confusing and time-consuming now that so much information is stored electronically.
Raise the Stakes
Imagine a new reality TV show where you can win big cash and prizes if you can produce financial and personal documents. Â
The prize patrol has knocked at your door without warning. They want to see seven years of tax returns, the receipts documenting deductions on those returns, investment statements for your 401(k) or IRA for the past three years, receipts for the computer and new fridge you bought last year, your last three paystubs and bank statements for the past 12 months. Youâ€™re pretty sure you have all those items â€¦ somewhere. Are you a record-keeping rock star? Can you produce it all in just 15 minutes and win the $1 million grand prize?
There may not be a game show like this, but the truth is, the state of your financial records really can be high stakes. Knowing what to keep and how to keep it can save you time and money down the line. From tax audits to natural disasters, good financial record keeping can protect you and your loved ones. Plus, having financial information at your fingertips will also help you plan for the future.
Build a Foolproof, â€œYou-Proofâ€ System
If you donâ€™t already have a system that would allow you to win our fictional game show, start by imagining what such a system would look like.
Very often, our financial habits develop over time without a strategy. So try wiping the slate clean by imagining an efficient, easy-to-manage system. As you do so, maintain some self-awareness about your own tendencies â€“ the good, the bad and the ugly.
Maybe you are packrat, with drawers or shoe boxes full of receipts and financial records going back to your first paycheck. You tuck important personal documents in â€œsafe placesâ€ you then forget. Your impulse to keep things is admirable, but the system is inefficient.
Or maybe youâ€™re a minimalist, protecting yourself from identity theft and keeping files to a minimum by shredding things sooner rather than later. The impulse to purge outdated documents is a good one, but are you 100 percent sure some of those items youâ€™re shredding wonâ€™t come back to haunt you?
Chances are you are doing some things right but dropping the ball on others. If you share your financial life with a spouse or life partner, then you may have different ideas about what to keep and how to keep it. Part of creating a good system is negotiating those differences.
There are a lot of good guides out there on what records to keep and for how long. Here are some good starting points:
Organize Your Financial Documents with These 10 Helpful Categories
Does your filing â€œsystemâ€ consists of piles of paper stuffed in drawers or boxes? Do you find yourself searching through old emails or booting up an old laptop to track down important documents? This Forbes post by a Certified Financial Planner outlines 10 categories for managing your documents. Sorting everything into these categories will help you get a handle on what you have and what you may be missing.
How Long to Keep Tax Records and Other Documents
This Consumer Reports article provides a useful guide on how long to keep different types of documents. For federal tax returns, CR recommends seven years, but be aware that many experts advise keeping tax returns indefinitely because you may need to consult them for other reasons.
How Long Should You Keep Your Tax Records?
This recent USA Today article offers a more detailed rundown on how long to keep different types of tax-related documents. According to the author, â€œEven after the statute of limitation passes and you get rid of supporting documentation, keep a copy of each yearâ€™s tax return that you file. This includes not just the 1040 itself, but also any associated schedules that you sent to the IRS that year. These often are needed when you apply for a loan or other financial assistance, such as money for college.â€
Refine Your Routine
Once you have a good handle on what financial records you need to keep and for how long, then you need a plan for staying on top of things. What actions do you need to take weekly, monthly, quarterly and annually to keep your financial records in tip-top shape? How often do you need to purge your files?
And yes, you absolutely need a shredder for any sensitive documents.
If you have an accountant or financial advisor, they can help you fine-tune your system, including any special considerations related to your situation and goals. You should also ask yourself a very important question: â€œIf something happened to me, could a family member or a trusted friend easily find and navigate my financial information?â€
Are your files, both hard copy and electronic, clearly labeled? Does your spouse share record-keeping duties with you? If not, have you at least shown them how things are organized? If you were incapacitated, does someone trustworthy know how to access your hard copy and electronic files?
Your Real Reward: Peace of Mind
No, you probably wonâ€™t win a million dollars at a game show for awesome financial recordkeeping. But having a good system for financial record keeping can save you money, time and stress.
If you are selected for a tax audit, you will certainly be relieved to have your records in good order. If there is a fire, flood or other natural disaster, you will have a fireproof box with key documents that is easy to grab. If your hard drive crashes, you will breathe a sigh of relief knowing you have securely stored electronic financial documents in the cloud and have hard copies of critical documents in your lockbox or safe deposit box.
Just as important, when you are facing major financial decisions and milestones â€“ such as buying a house, changing jobs or changing your investment strategy â€“ you will have given yourself the gift of organized, accessible financial records. You wonâ€™t be guessing, and you wonâ€™t get bogged down in trying to piece together a financial puzzle.
A commitment to responsible record keeping is an important part of planning for the future, just like saving for retirement and making sure you have a will and life insurance. Itâ€™s a gift to yourself, and a gift to your loved ones.
If you havenâ€™t done so already, then itâ€™s time to make getting your financial records in order a priority. Be a record-keeping rock star. That sock drawer can probably wait.
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