Organizing your financial records

For many people, a financial filing system means piles of unopened bills on the dining room table. The time to look at them is whenever those piles finally fall over. But this system has drawbacks, especially if you get audited by the IRS. Even if your tax returns are beyond reproach, organizing your financial records can save you and your family time, money and aggravation.

Start by dividing those stacks on the counter. Separate the bills and statements that are relevant now from the documents that you are keeping for your records. Keep outstanding bills or anything that you need to keep on hand in marked baskets or an organizer somewhere accessible. If you have trouble remembering when bills are due, mark it on the calendar.

Next, weed out the documents that are wasting precious space. Monthly statements and credit card receipts can be tossed after they’ve been balanced. However, you should keep all receipts related to home improvements; warrantied items; medical, drug and dental expenses that insurance may pay; and purchases/expenditures that you are planning to claim on your tax return.

Supporting documents for tax returns should be kept for a minimum of four years. Hang on to your tax returns indefinitely. There is a three-year statute of limitations on auditing returns, but if you have underreported your income by more than 25 percent, the government has six years to come after you. No statute of limitations applies if you file a false return or if you don’t file at all.

There is a long list of other documents you’ll also need to keep indefinitely. Basically you want to keep records of all big-ticket purchases, including the deed for your home, investments, major household purchases and car titles. Photocopy important documents like birth and death certificates, wills or powers of attorney and keep them in a safe place, possibly a safe-deposit box.

Sort the documents you’re keeping by type (except for tax return documents, which should be sorted by date). How you store them is up to you; you can use a filing cabinet with marked hanging folders, a three-ring binder with tabs or an accordion file. Whatever you choose, make sure it’s clearly labeled so that you or someone else can find records quickly and easily. If you don’t have a safe-deposit box, a fire-retardant safe is a good idea for important documents. In case someone else needs to access them, make out a master list of where things are filed and give it to a family member, your lawyer, your accountant or your financial planner.

Once everything’s organized, set aside time once or twice a month to go through your financial documents again, pay bills and file or discard records.