We all know we need to ‘keep track’ of our finances but what exactly does that mean? What do we need to keep a record of and how long do we need to keep it? To avoid us all drowning in paperwork and filling up our houses with bills and receipts, there has to be a cut-off point.
It’s essential to put together a filing system that works for you. If you are unfortunate enough to be involved in a financial dispute or a formal investigation, you will need your records to put forward your side of the story. You can store the paper version of the document or electronically scan them into a digital format which takes up less space. However, you may still want to store the originals in the loft, just in case.
Documents that need to be stored
Anything relating to your tax payments and Individual Retirement Arrangements (IRAs) needs to be stored safely. Three years is the absolute minimum because the IRS has three years from your filing date to audit your return. However, they have six years to challenge your return for underreported (more than 25%) gross income so it makes sense to keep them for longer.
You also need to keep retirement/savings plan statements indefinitely because you may need to refer to them when you retire. However, the good news is that bank records need only be retained for one year. With the introduction of on-line banking and paperless statements, it is much easier to access banking information.
When you make a purchase using one of the credit card swipers in a retail outlet, you should retain the receipt until you get your monthly statement to check it against. Then you can shred the original receipts but retain the statements for seven years. This is especially important if they contain if tax-related expenses.
Any paperwork relating to your house needs to be retained whilst you are still living there and for six years after you move out. This includes documents relating to the purchase price and receipts for all the improvements and alterations that you have made. Then, of course, there are the expenses incurred in selling the property, such as legal fees and real estate agent’s commission.
How to store your financial documents
Group items together by subject, so store all tax documents together and then sub-divide by year. This will enable you to get at what you need quickly. Invest in some storage boxes but don’t rely on natural materials, such as cardboard, as these can get damp and are vulnerable to vermin. If you are scanning and storing documents electronically, you will need to ensure that you can recover the data easily.
Don’t make the mistake of storing papers in several different locations around your home. Choose one location and stick to it.
The really important documents such as wills, birth certificates, and stock certificates need to be placed into a fire-proof box. Alternatively, you could look into hiring a safety deposit box where you can be sure that they will be safe.