The pervasive spread of electronics in our lives has not lead to a decline in paper. We get copies of everything and statements from everyone. The problem arises with what to do with all of it—the reams and boxes and file cabinets and drawers of paper.
Most of us don’t know what to do with the paper in our lives, so we hide it away in the attic or indiscriminately throw it away, hoping that we’ve saved what’s important and don’t need what we’ve discarded. Unfortunately, there are no government-mandated labels for documents that prescribe what to keep and for how long like there are warning labels on medicine bottles or dietary information on foodstuffs. What a shame!
In the absence of labels that guide us in the handling of our paperwork, we need our own system for sorting through the piles, making sense of each piece as we touch it. We recommend that you simply answer the questions below for each document in your life. Answering these questions is about the efficient and effective disposition of the financial paper in our lives. It is about keeping your records straight; it is about moving beyond the sort-sift-box-trash method of paper storage to an informed, organized approach to financial record keeping.
But, why bother? Why bother to keep anything at all once you’ve read it one time? What’s so important about all of this paper that we need to keep it, and be organized about how to keep it? What are we afraid of that causes us to hoard paper?
Fundamentally, by filtering all financial documents through these questions, you’ll know what to do with them once you’ve read them, eliminating any guesswork. This allows you to immediately discard what you don’t need and save what you must, all with the peace of mind that comes from knowing that you’ve done the right thing. You’ll have the confidence that comes from knowing that you’ve done the right thing. You’ll be able to minimize the clutter in your drawers, cabinets, and the attic because you won’t be saving what you don’t need. You’ll have records that adequately and appropriately detail your finances and help you to manage your money better. You’ll regain space, time, confidence, and possibly cure the common cold—WOW!
What to Ask?
Fundamentally, knowing why to keep a document, where to keep it and for how long should be sufficient guidance in handling most documents.
Apply the following filters to any document to develop an appreciation for why you should keep it. If a document passes any of these litmus tests, move onto the next question. If it doesn’t pass any of these filters, dig deep for a legitimate reason to keep it. If not for sentimental reasons, then why?
Demonstrate Ownership: Some documents (deeds and purchase receipts quickly come to mind) are evidence of your ownership of a specific asset. Others, such as a carefully crafted household inventory, demonstrate ownership for insurance purposes in the event of loss, damage, or theft. Records that demonstrate ownership also serve to maintain accountability (“this is mine, not yours”).
Establish Basis: Basis deals with your cost and date of ownership. In the event that you dispose of an asset, certain records are invaluable in determining your profit and, therefore, your tax liability. So, items that establish basis and adjustments to basis are critical to keep.
Measure Performance: Knowing the score (read: how well you are doing) is important when trying to ascertain whether or not you are meeting your financial expectations. Bank and brokerage statements are examples of records that help to measure progress in achieving your goals. Many records are necessary to provide period-to-period benchmarks for keeping track of the score.
Support Taxes: Many papers need to be kept because they support a claim you’ve made on your tax return (calendars for claims you make as an employee for expenses on Form 2106). When in doubt, keep documents supporting the claims you make on your tax return.
Provide Benefits: Some documents identify a benefit to which you are entitled (DD Form 214 is an essential document for securing veteran related benefits). Keep those to demonstrate your claim of a benefit.
Document History: In combination with your goals, historical records should be the foundation for future financial decisions. Professionals will need to review where you have been and what you have done in the past in order to help you move forward. Knowing the history of assets can be useful for legal, tax, and family issues. For example, when dealing with collectibles, a history of owners may not only be important to authenticate an item, but may also enhance its value. A history of purchases, such as with systematic investments and equity dividend reinvestment plans (which can adjust the basis of an investment), can play a pivotal role in financial decisions and results. Don’t underestimate or overlook the value of historical records on the future of your finances.
The relative importance of a specific piece of paper, its ability to be replaced, or its value all contribute to determine the location to store a particular document. The more difficult a document is to replace, the more critical is the security and quality of its storage. When documents are difficult or impossible to replace—Social Security Card, DD Form 214—they should be kept in a safe deposit box or fireproof security container in your home. Many documents can be stored electronically. For the routine paper you decide to maintain, fire resistance cabinets away from possible water damage is most prudent.
Knowing how long to keep a document is getting to the heart of the matter. Keeping things in perpetuity may be necessary; often it is not. However, doubting Thomases and others who question may want permanent archives of all papers out of fear, attachment, etc. Just be mindful that it often isn’t necessary to leave heirs an attic full of 20-year-old bank statements and pay stubs from your first job. The time frame for keeping financial records should be, in part, the basis of a periodic purge of outdated or not needed papers.
More statements—bank, credit, investment—now are offered by providers in electronic form. This is a wonderful innovation. You should inquire with your providers about how long they keep and allow you access to your statements in electronic form. Their policies in this regard should influence how long you keep these records in your files.
This overview is not intended as a be-all, end-all reference to home record keeping. However, we feel that it provides a solid start for improved maintenance of the important documents in our lives. We hope that you find this information useful as you continue to be inundated with paper.