To manage your financial life better, start with a financial spring-cleaning. Just like when you go through your closet to determine what to keep and what to donate, you need to do the same with your financial life.
Get ready
A few things before you get started.
- Designate a room or an area of a room for your work.
- For online files, keep a log of what you have sorted through.
- Set out the key office supplies including: a staple remover and stapler, sticky notes, pencils, paperclips and file folders.
- Bins for recycling
- Bags for documents that need to be shredded
Gather your information
Gather all documents and papers relating to financial, tax, legal, and health care matters, including things such as:
- Bank, financial, and credit card accounts
- Insurance
- Mortgage, car loans, student loans
- Tax returns
- Birth certificates, marriage certificates
- Wills, trusts, and powers of attorney
- All medical and school documents for you, your spouse, and your kids
- Any information related to your home and major purchases
Determine what to keep and what to toss
Now that you have gathered, it is time to sort. Determining where essential information is right now, where you should keep it, what to toss or recycle, and what to shred. Here are some general guidelines that I follow:
- Keep tax returns and all supporting documents for seven years after the filing date.
- Keep all bank statements and credit card annual statements and summaries for seven years.
- Keep a record of the purchase for every new investment, or the confirmation, for as long as you hold the investment. This documentation provides the original cost, or original cost basis.
- Keep year-end statements for each investment account as long as you own investments in that account. If you transfer investments to a new account at a different firm, you will need the cost basis information.
- Shred monthly statements once you receive year-end summaries for your investment accounts.
- Keep receipts for any major purchases and for all 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.
- Shred anything with identifying information that you no longer need. I keep both a recycle bin and a shredding bin in my office.
Implement a system for keeping track of information
The next step in the financial spring-cleaning is to develop a system for keeping track of your financial life. Your system can incorporate paper file folders or electronic files, or preferably, your system uses both.
Security Measures
Make sure that your information is secure by doing the following:
- Password-protect computer files, especially those relating to your financial affairs
- Store vital papers, such as birth certificates, wills, Social Security cards, and passports, in a fire-safe box at home or a safety deposit box at your bank
Financial Files
For your financial files, make a separate folder for each of the following:
- Current year taxes
- Bank accounts
- Investments (one folder for each investment or account)
- Health insurance (for the policy and to track claims)
- Other insurance policies (a separate folder for home and auto, life, and disability)
- House (for maintenance provider contacts and for receipts or invoices from renovations or significant repairs)
- Car(s)
- Big-ticket items (receipts for appliances, jewelry, or art and any appraisals or notes about inherited items)
Nonfinancial Files
Create a folder system for your nonfinancial life. These files include:
- The kids’ schools (one folder for each child)
- The kids’ activities (program schedules and information, waivers, etc.)
- Health forms (extra copies of physical forms for camp, sports, etc.)
- Trips (upcoming travel and a file for trips that we have taken as a reference)
- Gifts (what I give each year to my friends and family members—to avoid repeats—and to the people who help make my life easier—house cleaner, dog walker)
- Family history (news articles, obituaries, programs from weddings and memorial services, notes on family lore, genealogy)
Additional Considerations
Taxes
Keep taxes in mind as you organize your financial life.
- Most investments provide 1099s and other year-end tax documentation. A 1099 is a statement detailing the amount of dividends, interest, and capital gains earned during the year. Some investments are structured as partnerships and provide a year-end, or annual, K-1 instead of a 1099. A K-1 shows an investor’s share of partnership income for a given year.
- Keep all investment documentation relating to the present year in the current tax year file.
- Keep all other details, such as the record of the initial investment and anything that affects the cost basis, in an investment file. The cost basis is the initial amount of the investment plus anything that affects the original cost such as stock splits or reinvesting dividends. This kind of information is necessary for tax reporting after you sell an investment.
- Keep track of this year’s donations and the acknowledgments, thank you letters, and emails, in the current year tax file.
Beneficiaries
Review your beneficiaries for all insurance, investment, and retirement accounts. Make sure your beneficiary designations are consistent with your will. Outdated beneficiary designations and inconsistencies can cause big problems.
Going paperless
Consider signing up for paperless statements. Not only are paperless statements an environmentally friendly option, they will significantly reduce the amount of time you spend opening envelopes, filing, and, eventually, shredding.
Out of the mailbox does not mean out of mind, however. Make sure you check your online statements at least quarterly and note which of your monthly bills are on automatic pay.
