3 Steps for Organizing Your Financial and Tax Records
Learn Money Girl's simple, 3-step system to help manage your financial records and stay organized. Plus, she reveals a great resource for determining which records you should keep - and for how long.
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Step #2: Process Your Paperwork
Once you master the first step of centralizing your paperwork, make a habit of processing all of it on a regular basis. My goal is to clear out everything in my file box once a week. Remember to never waste time handling and filing any item that you should get rid of to begin with.
Let’s review how I use and process paperwork in each of the 7 hanging file folders in my file box:
1. Receipts folder: this is where I put all paper receipts. More merchants are offering email receipts, so look for opportunities to reject paper. You can create a folder within your email application called “receipts,” and move them there.
Receipts are important because you should verify the amounts and categorize each of your expenses, such as groceries, clothing, entertainment, and so on, so you know exactly how you’re spending your money. I use, and highly recommend, a personal finance software like Quicken. It links up with all of your financial accounts and automatically imports and categorizes your bank and credit card transactions.
Tax-related items might include investment statements, qualified charitable donations, safe deposit box fees, job hunting expenses, or tax preparation bills. Categorize these expenses properly and move the receipts to your “Taxes” folder so they can be attached to your tax return—or scan and file them digitally.
Receipts for expensive items, such as jewelry, electronics, or appliances, should be kept in case you need to know their original value or make a warranty claim. You can move them to your “File in Cabinet” folder to keep for the long-term, or scan and file them digitally.
Any paper receipt that you don’t need to keep should be moved to your “Shred” folder. Never throw away a receipt without destroying it first. An identity thief can use even the last 4 digits of your debit or credit card number against you.
2. Bills folder: this is for incoming paper bills, until you pay and transfer them to another folder to be filed or shred. As I’ve mentioned, you should opt to go paperless and stop processing paper bills altogether.
If you’re not using online bill pay, I can’t emphasize enough how incredibly easy and convenient it is. If your bank doesn't offer it for free, consider switching to one that does, such as Capital One or USAA. Paying bills online allows you to send an electronic or a paper payment to any individual or company with the click of a button. You’ll never have to write a check, lick an envelope, or buy stamps again because even paper checks are printed and mailed for you!
With online bill pay, you specify the account you want funds transferred from, and the date you want them taken out. If there’s a problem, such as a payment getting lost or not arriving on time, your bank will correct it. But I’ve been using online bill pay for many years and have never had a problem.
3. Action folder: this is for anything you need to do, such as reading a letter, researching an offer, or responding to an invitation. Once you’ve completed the action item, transfer it to another folder or throw it away if it doesn’t contain any personal information.
4. Taxes folder: this is for tax-related transactions, so you don’t forget to claim them at the end of the year. Also, you need sufficient backup for every tax deduction you claim, in case you get audited. And by the way, the IRS considers digital copies just as good as the originals.
There are several options for managing your tax receipts until you attach them to your annual return, depending on how many you have. You could:
- Scan digital copies and shred the paper receipts
- Transfer the paper receipts into your filing cabinet
- Transfer the paper receipts to a sleeve or pouch in your binder
- Leave the paper receipts in your hanging “Taxes” folder in the portable file box until year-end
5. Shred folder: this is for receipts you’ve processed, paperwork you don’t need to file, or sensitive junk mail, such as preapproved credit card offers. Remember to never waste time handling and filing any item that you should get rid of to begin with—just drop it here.
If you’re not using online bill pay, I can’t emphasize enough how incredibly easy and convenient it is. If your bank doesn't offer it for free, consider switching to one that does,
6. File in Binder folder: this is for documents you want to keep for the short-term and have quick access to in a 3-ring binder, such as loan statements or insurance policies—but only if you can’t get electronic versions of them instead! They’ll get 3-hole-punched and put in your binder.
If you have many categories of documents, you may want to organize them with tab dividers. However, if you don’t have documents that you want to access quickly, or you prefer to keep everything in your filing cabinet right off the bat, you may not need a 3-ring binder.
7. File in Cabinet folder: this is for documents you want or need to keep for the long-term, such as copies of legal documents, product warranties, education records, and sentimental items - anything for which a digital version isn't available. Create a manila file for each main category. Each manila file should sit in a hanging file folder in your cabinet drawer; that keeps it upright and spaced out, so it’s easy to file new documents or find existing ones.