I am a big believer that orderliness begets wealth. A pile of bills and statements—whether paid or not—is a sign that someone is clueless about what's coming in and going out. When you consciously open, read, and file away your bills and statements, you are connecting with your money and taking control of your life.
Being organized also makes it infinitely easier to give yourself the financial health screenings I advocate month in and month out. For example, if I told you to check your home insurance policy right now to make sure your coverage is for "guaranteed replacement" or "extended replacement," would you have any idea where your policy is? If not, you could have insufficient coverage, which could mean tens of thousands of dollars in uncovered claims.
If you're not staying on top of your money, you are putting your financial well-being at risk. Here's how to launch an invigorating spring-cleaning
Let's begin by gathering up your docs. Pull out stray files, snatch the latest round of bills, and empty that overflowing kitchen or office drawer stuffed with papers you've been meaning to get to for ages. Sort everything into six piles:
- Monthly Bills, Bank Statements, and Pay Stubs
- Investment Statements (pension updates, 401(k) statements, brokerage and fund statements, and so forth)
- Tax Returns and Supporting Docs
- Policy Documents and Deeds (insurance policies, home deed, car title...)
- Warranties and User Manuals
- Forever Docs (things like marriage license, will, birth certificate)
Next, create a folder for each type of document (except forever docs; see next paragraph) and add new papers as they come in. Then create folders within the folders: Take ongoing bills, for example. Store all gas bills in one folder, electricity bills in another, cable bills in a third, and so on. If possible, keep all folders in a fireproof, water-resistant file cabinet or box; if not, a drawer or shelf will do.
It's an entirely different ball game for the forever docs. Because of their importance, they must be put in a portable fire- and water-resistant home safe or file container—something that you can grab at a moment's notice. Why not a bank deposit box? Because you don't have access 24/7. If, God forbid, you die or become incapacitated, your relatives may not be able to access it; besides, the maintenance fee is a waste of money compared with the onetime cost of buying a safe.
For everything you're sending to the trash, I have one word of advice: shred. The FTC estimates that up to nine million Americans each year are victims of identity theft, in which personal documents are stolen and the data is used to run up charges on existing accounts or to obtain new credit or debt. That can wreak havoc with your financial life, and low-tech Dumpster diving—where a crook rifles through your garbage to find financial data—remains a big risk. At about $150 a pop, a crosscut paper shredder is a great investment; it will make mincemeat of any important papers.
Okay, now we're ready to tackle each of the piles. (If you ever need a reminder, I also have a cheat sheet on my website, SuzeOrman.com/FinClutter.) Here we go....
Next, Know What to Keep and for How Long.
- Utility Bills: Hold on to these for one year—just in case there are any billing issues. If you claim a home-office deduction, keep statements for three years because that's how long the IRS generally has to challenge tax returns.
- Pay Stubs: Save one year's worth. Once you receive a year-end W-2 statement, check it against the last pay stub. If it all matches, chuck the backup.
- Bank and Credit Card Statements: Keep for one year, but with this caveat—if you expect to apply for a mortgage, HELOC, or car loan in the near future, hoard two years' worth of bank statements. After being burned by their own no-doc policies prior to the credit crisis, many lenders are now asking for a ton of income verification before granting any loans, especially for the self-employed. If you bank and pay your bills online, you can typically access at least six months of statements at no charge. Save pdfs of them on your hard drive (or print out copies) in case you need the information; you may be slapped with a fee if you have to ask your bank or credit card company to cough them up later.
- You probably receive monthly or quarterly updates, as well as an annual summary. Once you get that annual statement, toss the others.
- If you make any trades during the year, keep a record of each transaction for at least three years.
- For nondeductible contributions to a traditional IRA or conversions to a Roth IRA, save the IRS form 8606 you filed when making the deposits. When you withdraw during retirement, it will be a piece of cake to prove you've already paid the taxes.
Tax Returns and Supporting Docs
- Since the IRS has three years to challenge anything, you must keep three years' worth of returns and supporting documents.
- Remember: If the IRS suspects you haven't reported income, it can challenge returns from the past six years. So if you are self-employed or have multiple income sources, hold on to six years of files to be absolutely safe. (By the way, there is no statute of limitations if you fail to file or if the government suspects you of fraud.)
- To learn more about IRS recordkeeping guidelines, see Publication 552 on their website (IRS.gov).
Policy Documents and Deeds
- Keep the policy statement for any active account, such as auto and homeowner's insurance, as well as the deed to your home and titles to your cars.
- Save active warranties; equally important is letting go of expired ones.
- Although the 100-page tomes covering operating details of shiny new gadgets are not financial documents, I've included them here because they go hand-in-hand with warranties and contribute to so much clutter. If you find yourself staring at a user manual for the cell phone you lost in a cab last month, trash it right now! And if you're comfortable Web surfing, get rid of all user manuals: Manufacturers have downloadable versions on their Web sites, and plenty of third-party sites amalgamate manuals from different companies (try UsersManualGuide.com and ManualNGuide.com).
- Some stuff should never, ever be tossed: birth certificate, marriage license, divorce decree, will, trust, estate planning documents, and death certificates. Make sure your family can access these important records if you die.
- I'd also suggest keeping a permanent file of all loans you have paid off (mortgage, car, school, and so on) because if you later find a mistake with how the data was reported to credit bureaus—or if an identity thief complicates your life—having those docs handy will save you much grief.
Keep It or Not?
Get Rid Of... ATM slips more than a month old. Toss them after checking them against your monthly statement.
Be Sure to Save... Receipts for big-ticket purchases that might be included in an insurance claim. And photograph the possessions; the more documentation you have, the easier the claims process will be.
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