When cleaning the aforementioned closet, you separate your clothing into piles—things you want to keep, things you want to toss, and things you're not quite sure of. With paperwork, you do the same.
Take the statements or bills out of their envelopes. Open them to full size (unfolded they take up less room). Staple the pages of each month's statement together so they don't get lost.
If you find a bill that needs to be paid, write a check on the spot, put it in an envelope and stamp it so you don't have to deal with it again. Then immediately record the transaction in your checkbook register. Don't let the fact that you're spending time getting organized result in late fees on your credit card bills.
Then put the paperwork into the proper folders, oldest bills first, so that when you open a folder the newest statement is right on top.
Next: #3 Diminish