May 6, 2022
If you’re anything like, well, just about everyone, you don’t give too much thought to when, why, or how you store financial records.
Your filing system may consist of several cardboard boxes stuffed with tax returns from years past and bank statements from who knows when shoved in a corner closet.
Here’s a quick guide to determining when to hold on to your personal financial records — and when to let them go.
What Are Personal Financial Records?
Personal financial records are any type of documents, whether printed or electronic, related to your money and assets. This information commonly includes:
- Paychecks and paystubs
- Bank statements
- Invoices and receipts
- Deposit and withdrawal slips
- W-2s and income tax returns
- Mortgage and personal loan files
- Investment documents
- Insurance policies
Timelines for Keeping Good Financial Records
Financial Records to Keep a Year or Less
- Receipts for Small Transactions. Feel free to shred bank deposit slips, ATM receipts, and proofs of purchase for gas, groceries, and other everyday transactions once you’ve confirmed the amount charged to your debit or credit card is correct and you’re certain you won’t need the paperwork to return any of the items.
- Utility Bills. Unless you need them for business-related deductions on your taxes, there’s no reason to let monthly bills for electricity, water, and phone service collect dust on your desk longer than three months. Just make sure each statement shows that your previous payment was received.
- Pay Stubs. Hold on to all of your pay stubs for the year until you receive your W-2 (or 1099 if you’re self-employed) so you can ensure the income and deduction totals from your checks match the numbers printed on your tax forms. You’ll also need three to five months of recent pay stubs on hand if you plan to apply for a loan.
- Periodic Statements. For the most part, you can discard monthly and quarterly statements for your mortgage, investments, and checking and savings at the end of the year, provided the information on them jibes with annual summaries you receive for each account.
- Credit Card Statements. Since Uncle Sam doesn’t accept credit card statements as sufficient documentation for tax purposes, there’s no reason to keep paper copies more than a few months. Again, the main thing is to confirm all the charges correspond to your individual receipts and you have proof of your last payment.
Financial Records to Keep Up to Seven Years
- Tax Returns. You’ve probably heard that the IRS has three years from the date you file your tax return to conduct an audit. But did you know that this limit only applies to errors made in good faith?
If the government suspects your income was under-reported by 25% or more, the IRS can slap you with an audit up to six years later. So, to be safe, tuck away your tax records, as well as supporting receipts, documents, and worksheets, for at least seven years.
- Medical Expenses. Health insurance claims often generate scores of paperwork, even for simple procedures and routine exams. Regardless, you should keep premium statements, medical bills, and supporting documents for health care-related expenses for five years — seven if you need them to support an income tax deduction.
- Charitable Contributions. Save receipts, acknowledgment letters, and other records detailing money or property that you donated to your church, United Way, Salvation Army, or any other charitable organizations for seven years. To make things easier, file this information with your income tax returns for the appropriate year.
Financial Records to Keep Until Obsolete
- W-2s. Make a point to retain your W-2 forms until you start receiving your Social Security benefits. They’re your best proof of earnings if you ever need to verify your benefit amount.
- Insurance Policies. You can get rid of insurance policies as soon as the coverage expires, with one exception: occurrence policies. These records cover you for damages that happened during the time the policy was in place, even if the claim is made when you no longer have the coverage. Hold these documents permanently.
- Capital Improvement Records. If you make substantial upgrades to your home, it’s best to keep any receipts, warranties, plans, and permits related to the materials used and work performed until you sell the home. Of course, if you take any income tax deductions on the project, you should retain the documents for at least seven years, even if you sell the property before that period is up.
- Mortgage Documents. Regardless of the length or type of mortgage you have, maintain copies of all documents for your home loan until it’s paid in full. Better still, store the records in a safe place for up to seven years after you settle the debt.
- Automobile Records. Aside from a home, your car or truck is probably the most expensive purchase you’ll make. So, you’d do well to keep any paperwork for your vehicle — including service records and receipts — until you sell it, trade it in, or get rid of it some other way.
- Warranties. If a product or service you purchase comes with a warranty, hold on to the paperwork as long as you own or use it. Select components may be guaranteed longer than others, and the documents often include contact numbers to help you track down repair companies and parts suppliers.
Financial Records to Keep Forever
- IRA Contributions. Although there’s no way to avoid paying taxes on your retirement savings, keeping records of your contributions will help to ensure you don’t overpay the government once you start taking money from your traditional IRA. (You can always convert your savings to a Roth IRA and enjoy tax-free withdrawals once you reach retirement.)
- Proofs of Property Ownership. Few pieces of paper carry as much weight as deeds of trusts, promissory notes, and other records of ownership for homes, land, and property. These documents prove even more valuable in property disputes or if you find clerical errors when you’re selling property and other large assets.
- Final Legal Documents. As uncomfortable as it may be to think about and discuss, you need to set up and maintain wills, trusts, powers of attorney, and advance medical directives for you and your loved ones, particularly as you (or they) get older. These legal documents are crucial for designating properties and rights and honoring the deceased person’s final requests.
- Personal Information. Even though birth certificates, Social Security cards, marriage certificates, and death certificates aren’t technically financial documents, they’re inextricably linked to your finances. These records can impact everything from getting a job and qualifying for loans to taking out insurance and administering death benefits.
How to Organize the Financial Records You Keep
- Shred old paperwork. It’s no longer enough to tear old paperwork and throw it into the trash can or recycling bin. Identity theft and fraud accounts for billions of dollars in damages each year, and old-fashioned dumpster diving remains one of the preferred methods crooks use to hijack the information they need.
When it’s time to get rid of financial records, shredding is the quickest, safest, and most effective way to dispose of the paperwork. The $50-100 you’ll spend for a paper shredder can potentially save you hundreds or thousands of dollars — and an immeasurable amount of headaches and stress— that you stand to lose if your Personally Identifiable Information (PII) winds up in the wrong hands.
- File time-sensitive documents. Store financial documents you need to keep readily available in a safe, out-of-the-way place in your home. Ideally, you should arrange them alphabetically in individual folders by the topic or name of the product or service provider and lock them in a desk drawer or filing cabinet. At the least, keep your records organized in banker’s boxes hidden from plain sight.
- Purge files periodically. Make a habit of going through your financial files at the end of each year to remove documents that have expired or are no longer needed. Remember to shred the paperwork before pitching it and store the remaining files somewhere they won’t be damaged or stolen.
- Secure “forever records.” Since you don’t have to frequently lay your hands on wills, deeds, birth certificates, and other “forever records,” keep them locked in a fireproof box or safe until you need them. Another option is to rent a safe deposit box at your credit union or bank.
- Back up digital files. We live in a digital age, so there’s a good chance many of your financial records are saved electronically. For those documents that aren’t, you may want to scan the paper versions and keep digital copies as a backup or a replacement for the original files.
Either way, you should save digital files to an external hard drive that you store in a secure location in your home (or in a safety deposit box). Access-anywhere cloud-based services like Dropbox or Google Drive with built-in security features are also good options.
Hoarding every credit card receipt, pay stub, and bank statement you’ve ever received just isn’t necessary.
You’re far better off to organize and prioritize your financial records, store appropriate files in a safe yet easily accessible location, and get rid of documents you no longer need in a timely manner.
It’s an approach that makes sense, both from a fiscal and physical point of view.