If you’re like most people, organizing your finances isn’t on your to-do list. However, this task is just as important, if not more important, than cleaning your house or organizing the garage. Keeping your personal finances organized and under control is important all year long (not just at tax time). When you need receipts, paycheck stubs, or 1099s, you want a system where you can find them quickly and easily.
Determine What You Should Keep
If you’re unfamiliar with what you need to file, you’ll find yourself tempted to keep everything. “Hoarding often stems from a lack of education on what you should keep versus toss,” explains Jennifer Ford Berry, author of Organize Now! “You’re terrified that you might mistakenly throw out a document that you need, so you end up keeping everything just to be on the safe side.”
Keeping extra paperwork means you have to sort through hundreds of files before finding what you truly need. This can make a simple task take much longer than it should. Instead, look at everything you’re hanging onto with the goal of keeping only what you need. Always make sure you keep
- bank statements;
- pay stubs;
- investment account statements (for college savings plans, mutual funds, and retirement plans); and
- monthly statements (if you need them for tax deductions).
For paperwork you don’t keep, ensure your information remains secure by shredding it. You can safely shred
- monthly statements (unless you need them for tax purposes);
- receipts and deposit slips (after you reconcile them with your bank statement); and
- any duplicate files you already have stored online.
Organize Your Taxes
Keeping all your tax information together will make it easier to file your taxes and to find forms if you ever need to review your tax records. According to LearnVest’s Molly Triffin, “The I.R.S. has three years to audit you once you file your taxes, so you should hold onto tax records and backup for at least that long. However, there are some exceptions to the rule: If you’ve under-reported income by 25% or more, the IRS can go back six years. If you claim a loss for bad debt or worthless securities, they can request records as far back as seven years. But if fraud is suspected, then the IRS has no time limits.” Triffin recommends keeping tax paperwork for at least seven years; you can keep it forever if you want to be on the safe side.
Whether you have a simple or a complicated return, you need to make sure you document everything listed on your taxes. Many tax documents, like 1099s and W-2s, arrive at the beginning of the year. However, other important documentation comes in throughout the year and must be organized.
According to SMEAD, a document-management company, you can keep your tax documents organized by dividing them into three categories: income, expenses, and taxes. Income documents include W-2s, 1099s, pay stubs, and anything else considered income on your tax return. Expense documents include mortgage interest statements, charitable giving receipts, college tuition expenses, paid alimony, and health expenses (medical savings account and/or health insurance if you’re self-employed). Tax documents include quarterly or estimated tax payments, real estate tax statements, and other tax documentation.
Create a Filing System
Establishing a household filing system will help ensure all of your personal financial information is organized and easy to find. Set up file folders for major categories, including records related to your job, bank, health, home, vehicles, credit cards, insurance, and miscellaneous items. “On a weekly basis, go through your received mail file and sort everything into these folders,” recommends the staff at Money Management International. “Also create a folder for the current year taxes—as you have items you’ll need in April, add them to the file so they will be easy to access come tax time.”
Sort through your filing system once or twice a year, cleaning out paperwork that you no longer need. If your file drawers are too full, remove old information to make sure there’s room for incoming documents. You can store old financial information in a secure self-storage unit so it’s out of the way, but still accessible when you need it.
Organizing your personal financial information takes some time in the beginning, but it will save you time in the end. Having your current files conveniently organized in your home and your older files securely stored in a self-storage unit will provide quick access to any financial information you need. When your financial documentation is in order, everything from day-to-day bill paying to filing your tax returns will be much easier.