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Creating an Organized Financial System

There can be a lot of paperwork handling your finances.  Each month you will have bills to pay, every year you will file a tax return, you will have receipts for purchases and you will have important documents that deserve special attention.  Having an organized system instead of just putting everything into a drawer or box can save time and reduce the stress of not being able to find something when you need it. 

General record keeping guidelines

Tax information

There is a general three year statute of limitation for your taxes.  This means the IRS has three years from when you file your return to start an audit.  (There is no limit for fraudulent returns).  Therefore, you need to keep documents that support items on your tax returns for those three years.  Each year you can throw out the three year old documents, but you should keep copies of tax returns forever.

There are some papers that deserve special attention.  Documents to keep forever include: wills, powers of attorney, birth certificates, marriage documents, divorce or child care orders, trust documents, business agreements, military records and other such permanent records. A safe deposit box is the ideal place to store these records. 

There are also other important documents that should be kept, but only as long as they may be needed:

  • Insurance policies – as long as they are in effect or until a claim could no longer be filed.
  • Loan documents – until they are paid off.
  • Deeds and real estate papers – as long as you own the property plus any period for tax purposes.
  • Employee benefits information – as long as you are employed or until the benefit no longer exists.
  • Investment records – as long as you own the investment plus the three year tax reporting period.
  • Receipts and warranty information on major purchases – as long as you own the item and could make a claim. 

Each month you will receive bills, statements and other financial information that you will need to handle.  There is a great temptation to keep everything, but that is really not needed.

  • Recurring monthly bills – Once you have paid your insurance, rent, mortgage and utility bills, there is no need to keep them.  You will have a cancelled check to document payment and unless there is something special about the bill, you can safely dispose of it. (Be sure to shred any documents that have account numbers or other sensitive personal information.)
  • Credit card statements – Even though there is no requirement to keep these statements, you may want to save them for some period (a year or so) in case there is a dispute, you want to return an item, or if you want to be able to analyze your spending.
  • Bank statements, check images, and cancelled checks – You should keep check images or cancelled checks that support any tax deductions and any that you think may come in handy.  Otherwise, once you have reviewed and verified them, you can shred them.  Bank statements are a bit different.  You may want to keep these for some period (three years or so) in order to document your payments for important items.  Together with your checkbook register, you will be able to identify when and how much you paid for almost anything. 

Creating a filing system

Most people end up using filing folders in a drawer to keep their financial records.  If you do not have a drawer to use, buy a plastic storage bin.  Buy a box of folders and label them for each type of expense you normally have and for other types of records you plan to keep – rent, utilities, auto, insurance, home ownership, family, employment, bank statements, retirement, medical, warranties, and any other categories you consider useful.  File folders are inexpensive so you may want to buy a box of them and create new folders when you like. 

Once you have the files set up, you just put your receipts, statements and other information into them.  There is a good chance that some of the folders will get quite bulky over time.  When that happens, you can start a new one or better yet, review and toss out what you do not need.