Which Financial Records Should Be Kept and Which Should Be Discarded?

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Like most of us, you probably find it challenging to keep up with the mountain of paper that accumulates in your home every day. Keep all your mail, receipts, and paperwork in order. A glance at the stacks of bills and receipts in your home will remind you that we are still living in the pre-paperless era, even though many businesses are making the transition.

Every action you take in your personal and financial life leaves a paper trail. The exact same thing happens when you buy, sell, or insure an item. Another pile of paperwork appears every year after tax time. How much of it should you keep and how much can you safely throw away in this week's trash? What should be shredded and what can be thrown away in the regular trash?

One of the most important reasons to keep financial records is in case you have to defend your annual tax returns. Here's a quick primer on how long you should keep various financial records, where you should put them, and what to do with the rest.

When Should Tax Returns Be Shredded?

You should keep some records of your finances forever. A list of archival materials, along with the minimum and maximum retention periods for each, follows.

At Least Seven Years

Any documents related to your taxes should be kept for a minimum of seven years. There is a three-year window in which the IRS can conduct an audit. However, in certain cases, such as if you underreported your income by 25% or more, they can look back as far as six or seven years. For more information on your particular state's statute of limitations, you should consult a tax expert.

It is in your best interest to keep your tax returns for as long as possible. In the event of a tax audit, you'll be prepared with everything you need to know. If you have questions about the accuracy of your tax returns, you can refer back to supporting documents, such as W-2 and 1099 forms, receipts, and payments, that you have kept for the past seven years. Keep all asset-related receipts, such as those from a home improvement project, for as long as you own the asset in question.

One Year

Bank and credit card statements, investment statements, pay stubs, and major purchase receipts are examples of documents that do not pertain to taxes. If you need to refer back to these documents for any reason, such as when filing your taxes or making a sizable purchase, you should keep them for at least a year.

The Federal Trade Commission recommends keeping your medical bills for one year after they have been paid before disposing of them. However, if there is an outstanding insurance dispute, you should keep the bills until the dispute is resolved. Medical bills can be difficult to understand, so keeping a record of your expenses is a good idea in case of a dispute.

As many financial institutions and credit card companies now provide electronic statements, you may no longer need to store paper copies. If you're concerned about storing paper documents for an extended period of time, you can always scan them to make electronic copies and then get rid of the originals.

The Time Period Is Shorter Than One Year

You don't need to give up precious shelf space in your home just to store unnecessary paperwork. Don't worry about archiving receipts unless they fall into one of these categories, for instance:

  • Items with a valid warranty
  • Financial Statements
  • Submitting a Claim to Your Insurance Company

After you've paid your monthly bills and they've been credited to your bank statement, you can toss them. In case you need to double-check something, check your past invoices through your online account. Invoices and bills dating back months or even years are often archived online by many businesses.

Most banks no longer send you a canceled check in the mail, but if yours does, you can safely shred it once you've double-checked the amount on your bank statement. However, canceled checks related to tax returns, such as those for charitable contributions, should be kept.

What Records Regarding Your Finances Should You Always Maintain?

We've discussed records that can be discarded after a certain period of time, but there are also many that should be kept indefinitely. These are some of the most crucial documents you should keep forever:

  • Proof of birth documents
  • Documentation proving eligibility for Social Security
  • Documents attesting to a union
  • Adoption paperwork
  • Records of the deceased
  • Passports
  • Directives such as wills and health care proxies
  • Authority documents
  • Official documents
  • Archival Material from the Military
  • Pension and retirement plans
  • Title deeds, Wills, and other Related Paperwork
  • Types of Beneficiaries

Keep all receipts and insurance policies for the duration of your ownership or until the expiration of any applicable warranties. Though, for the sake of security, it is probably best to keep them around for a while longer. Records such as titles, deeds, insurance policies, and warranty paperwork are included.

Long-term retention of health insurance policies and supporting documentation is similarly crucial. Keep these records for as long as you have health insurance. When you are certain you will never need the paperwork again, you can toss it if your insurance coverage has ended or you have switched insurance providers. It's the same if you get unemployment or disability payments. Do not get rid of the paperwork until you are absolutely sure you no longer need it.

Always better to have extra copies of documents and financial records than to find out too late that you needed them. Don't get rid of paperwork until you know for sure you won't need it again.

A Guide to Safely Storing Your Financial Records

Establishing a secure method of filing your financial records is one way to reduce chaos. It is just as crucial to keep your records secure. An ideal document storage solution would be one that:

  • The ability to get to it quickly and effortlessly
  • Secure against burglary
  • Covered up so that it can't get wet or ruined
  • Excellently structured

Options for long-term, secure storage of paper and digital financial records are provided.

Organising Your Paperwork

There's a widespread preference for using filing cabinets to organize one's paper records. Put papers in file folders according to categories (such as topics or years) or any other system that works for you. A further choice is banker's boxes, which can also be used for storage but are more prone to water damage.

A regular filing cabinet may not be secure enough for your most crucial records. It's possible that a home safe would be preferable. Consider purchasing a safe that is both fireproof and waterproof. There's no need to go to the extremes that you might have seen in the movies in order to secure your valuables at home (i.e., installing a hidden wall safe behind a piece of art). In case of a home disaster, such as a fire or flood, important documents can be safely stored in a portable lockbox.

Precious items and important papers could be stored securely in a safe deposit box, which was a common practice in the past. If you'd rather keep these records in a secure location away from home, a safe deposit box at a bank might be a good option. Remember that access to your safe deposit box is at the financial institution's discretion.

Keepsakes in a Digital File Cabinet

Fortunately, there are many digital storage options available now, so you can gradually phase out paper.

There is a growing trend toward receiving bills and statements electronically, either via email or through online account access, and this is true at many financial institutions and businesses. Since it is becoming more common to receive paperwork electronically, some banks now charge a fee for paper statements.

In the case of additional paperwork, you have the option of either scanning it into your computer or photographing it with your cell phone.

Having everything you've ever written stored in one place on your computer is not only inefficient, but can also slow it down. External hard drives, such as HDDs and SDDs, are another option for storing digital media; they are space-saving despite being able to hold a great deal of information. Even more portable is keeping all of your important digital files on a flash drive, though this does come with the risk of losing or damaging your files.

If you choose the digital route, it's smart to make multiple copies just in case one gets lost or corrupted. Having multiple paper copies of important documents can take up a lot of room, whereas digital backups take up very little room at all.

A second choice is to store crucial records in the cloud. There has been a meteoric rise in cloud-based solutions over the past few years.

  • Dropbox
  • Sync with your files on the go with Google Drive.
  • Microsoft's cloud storage service OneDrive
  • iCloud
  • The Amazon Drive Cloud
  • Box
  • NextCloud
  • iDrive
  • Carbonite

Not only can you save valuable real estate by storing your data in the cloud, but most services also offer security via encrypted networks, making cloud storage a great option for organizing and securing sensitive data. With the proliferation of cloud-based solutions that are mobile-friendly, you can access your files from virtually anywhere.

Consider whether you will need access to the original paper document in the future before committing to a digital storage solution. Unless you're sure you won't need it in the next five years, it's probably best not to shred anything just to make more room.

What to Do With Outdated Financial Records

It's great to get rid of stacks of old, useless paperwork around the house, but don't throw it away with your regular trash. In most cases, the information contained in these papers is too sensitive to be made public.

To paraphrase a report from the Federal Trade Commission (FTC), "more than 3 In 2019, Consumer Sentinel Network received 2 million reports from consumers, and 20% of those reports involved identity theft. Doing so makes your personal information available to anyone who wants to steal your identity and is willing to put in a little effort to find it in the trash. You may be surprised by how much data is contained in your past bills, statements, void and canceled checks, and other financial documents.

Possible contents of the trashed paperwork include:

  • Full names
  • Locations of actual homes
  • Toll-free numbers
  • Financial Identifiers
  • Bank account and payment information routing numbers
  • ID numbers for drivers
  • Mathematical Policies
  • Usernames
  • Passwords
  • Data Relating to Membership
  • Clinical Notes
  • Signatures

If you need to dispose of papers that contain personal information, you should shred them first. A home shredder or a shredding service should be used to destroy sensitive documents. Keeping your private information secure is worth the cost of this service.

The following shops provide shredding services:

  • Stationery Factory
  • Office Max
  • Staples
  • Postal Service/UPS
  • Printing and mailing services provided by FedEx Office

Free paper shredding days are also offered in many communities. See if there is anything like this happening in your area by checking the city's website.

All aspects of one's financial life necessitate copious amounts of paperwork, from regular bank statements and insurance policies to tax records and other ancillary materials. You can reduce the amount of stuff you have by the time you learn what you need to keep and what can be discarded.

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