Tax season is upon us, which is the perfect time for a financial spring cleaning. Just like when you go through your closet to determine what to keep and what to donate, you can do the same with your financial life.
Get ready
Designate a room or an area for your work. Set out a staple remover and stapler, sticky notes, pencils, paper clips, and file folders as well as bins for recycling and documents to be shredded.
Gather your information
Gather all documents and papers relating to financial, tax, and legal matters, including bank, investment, and credit card accounts; insurance; mortgage, car loans, student loans; tax returns; birth certificates, marriage certificates; wills, trusts, and powers of attorney; and information related to your home and big-ticket purchases.
Determine what to keep
It is time to sort and determine where to keep essential information and what to recycle or shred. For computer files, keep a log of what you have sorted through. Here are some general guidelines:
- Keep tax returns and all supporting documents for seven years after the filing date.
- Keep all bank statements and credit card annual summaries for seven years.
- Keep a record of every new investment for as long as you hold it to track the purchase date and original cost basis.
- Keep year-end statements for each investment account as long as you own the investments in that account and shred monthly statements once you receive year-end summaries.
- Keep receipts for major purchases and for things that are insured as long as you have the item.
- Keep all records related to a home purchase and sale and any improvements that affect the home’s cost basis, or the original price of the home plus the cost of modifications that enhance the home’s value, indefinitely.
- Keep mortgage agreements (including payoff notices), car loans (and payoff notices), and documentation for any other loans indefinitely
Implement a system
Next, develop a method for keeping track of your financial life. Your system can incorporate paper file folders or electronic files, or preferably, both. Be consistent in how you organize paper and electronic files. Make sure that your information is secure and password-protect computer files.
Make a separate folder for each of the following:
Current year taxes; bank accounts; investments (one folder for each account); health insurance; other insurance policies (a separate folder for home, auto, life, and disability); house; cars; and big-ticket items (receipts for appliances, jewelry, or art and any appraisals or notes about inherited things).
While this process might take more effort than organizing other areas of your life, the rewards can be enormous. Developing a system to organize your financial life for the day-to-day and the unexpected is a significant accomplishment.
