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.
When life gets hectic, it’s easy to fall behind on organizing your financial and tax records. All of a sudden you realize it’s been weeks since you even thought about paying bills, reviewing account transactions, or filing mountains of paperwork.
Problem is, being unorganized is a surefire way to mess up your finances. When you lose control of your finances, you lose money!
In this episode I’ll give you details on a simple, 3-step system that I use to manage my financial records and stay organized. I’ll also give you a terrific resource for figuring out exactly what financial records to keep, and for how long.
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Key Advice for Organizing Your Financial Life
The ultimate goal for organizing your financial and tax records is to have a paperless system. That would help the environment, save space in your home, and keep your documents safe from theft, fire, or water damage.
But if you’re like me, you’re probably not completely paperless yet, and still have certain documents to handle on a regular basis. My system for organizing different types of financial records will help you process them efficiently – and find them quickly later on. Feel free to copy what I do, or adjust my system to fit your needs.
The vast majority of your incoming paper—such as bills, account statements, and receipts—should be eliminated to keep you safe from identity theft and to simplify your financial life. Continually pare down what you receive each month and throw away as much existing paper as possible, keeping only what you really need.
Every time you receive a financial document through snail mail, find out if a digital copy is available, then opt to go paperless. You can always print out a paper copy of a digital document if you really need to.
Prep for the 3-Step System
To get started with my simple, 3-step system for managing your financial records, you’ll need the following supplies:
- Portable file box
- 3-ring binder
- 3-hole punch
- Filing cabinet
- Hanging file folders
- Manila file folders
You’ll find out how I use each of these items as we cover the following steps.
Step #1: Centralize Your Paperwork
The first step is to centralize where and how you process your financial documents. I keep a portable file box in my kitchen, where I open mail and go online. For you, the best spot might be in an office or a bedroom.
The file box is a temporary catch-all for everything that needs follow-up, such as receipts, invitations, and documents to be filed. Keep your file box as close as possible to where you process mail or pay bills, so it’s really convenient to use.
My file box has a lid with a handle, so I can easily move it to another room, if needed, or hide it away in a cabinet that locks. My file box has 7 hanging file folders with the following labels:
- Receipts
- Bills
- Action
- Taxes
- Shred
- File in Binder
- File in Cabinet
I’ll explain what each of these files is for in just a moment. If you have other major categories to handle, such as business mail or documents for a roommate, create more hanging folders as you need them.
The idea is that your mail and papers should never end up in piles or scattered around your home. The moment you receive any paperwork or open up your mail, decide which hanging folder to drop it in for future processing.
You’ll be surprised how good you feel when your paperwork has a home that’s centralized, organized, and portable.
See also: Records Organization Blueprint – a free download to know which records to keep and for how long!
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.
Step #3: Purge Your Paperwork
If you’ve done a good job processing your paperwork, you’ll have plenty of items sitting in your “Shred” folder. Use a cross-cut shredder that makes confetti out of your documents, instead of the kind that cuts long strips of paper. If you don’t have a shredder or don’t want one, you can take a big batch of paper to a shredding service and watch them destroy your paper.
At the end of the year, do a big purge by emptying your binder and shredding unnecessary documents, or transferring them to your filing cabinet for long-term storage, if needed. Additionally, purge your filing cabinet each year of all documents you can live without.
Never keep the originals of important documents – such as paperwork with an original signature or notary seal, passports, wills, or birth certificates – at home. It’s okay to keep copies of these sensitive personal documents at home, just make sure to put them in a waterproof plastic bag and use a fireproof safe or filing cabinet that locks.
For your most important original documents, keep them in a bank safe deposit box. Never throw them away, even if you have a digital copy. You can get a small safe deposit box for less than about $100 a year at a local bank or credit union.
To know which types of physical and digital documents to keep and for how long, download the Records Organization Blueprint.
How to Manage Your Digital Financial Files
For your digital files, be sure to store them in multiple places—such as on your computer, an external hard drive, and in the cloud—to make sure you never lose any data. Use a free service like Dropbox to easily store or share your files remotely.
Make getting more organized a priority right now! You’ll feel more in control of your finances, be better prepared for tax season, and make better decisions to improve your personal finances.
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About the Author
Laura Adams received an MBA from the University of Florida. She’s an award-winning personal finance author, speaker, and consumer advocate who is a frequent, trusted source for the national media. Money-Smart Solopreneur: A Personal Finance System for Freelancers, Entrepreneurs, and Side-Hustlers is her newest title. Laura’s previous book, Debt-Free Blueprint: How to Get Out of Debt and Build a Financial Life You Love, was an Amazon #1 New Release. Do you have a money question? Call the Money Girl listener line at 302-364-0308. Your question could be featured on the show.
