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

Many of us struggle to keep up with the steady stream of paper that flows into our homes, whether in the form of mail, receipts, or other documents.

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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?

There are a number of reasons to keep financial records, but the primary one is to have evidence to back up your tax returns in the event of an audit. 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. Following is a list of record types and the amount of time each should be kept for.

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. In some cases, however, such as if you underreported your income by 25% or more, they can look back as far as six or seven years. If you need clarification on the time frame that you have to file a tax return in your state, you should consult a tax expert.

Keeping your tax returns for as long as possible is in your best interest. 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. Due to the complexity of healthcare billing, it is important to keep detailed records in the event of a payment or error 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. As an illustration, unless the receipts are for:

  • Warranty-eligible goods
  • Financial Statements
  • Claims on Insurance

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 records that you should keep forever. 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
  • Wartime Documentation
  • Pension and retirement plans
  • Legal papers for an inheritance
  • Types of Beneficiaries

You should keep your receipts and insurance policies for at least the duration of your ownership or the duration of the applicable warranty, whichever comes first. Nevertheless, for the sake of caution, it is probably best to keep them around for a while longer. Titles, deeds, insurance policies, and guarantee paperwork are all examples.

Policies and paperwork pertaining to health insurance should be kept for the foreseeable future. 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.

You should always err on the side of caution when storing financial records or other documents that you might need someday. 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
  • To prevent theft,
  • Covered up so that it can't get wet or ruined
  • Excellently structured

Here are some solutions for long-term storage of your financial records, whether they are paper or digital.

File Organizing

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. The alternative 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 adequate storage for your most vital 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 the event of a disaster like a house fire or flood, a portable lockbox is the best place to keep important papers.

Keeping important papers and other valuables in a safe deposit box used to be common practice. 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 the bank decides when you can access your safe deposit box, not you.

Keepsakes in a Digital File Cabinet

The digital storage options available today make it possible to reduce paper usage.

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. As electronic paperwork becomes the norm, some banks have begun charging 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 their capacity to hold vast amounts 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.
  • Dropbox Alternative: Microsoft OneDrive
  • iCloud
  • Put Your Files in Amazon's Cloud
  • Box
  • NextCloud
  • iDrive
  • Carbonite

Besides the obvious benefits of reduced physical storage needs, cloud services also often provide added security for your data by way of encrypted networks. 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. You wouldn't want to throw away a file just to find out you need it again five years later, right?

When and How to Shred Your Old Tax Returns

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.

A study by the FTC found that 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
  • Numbers to call
  • 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 get rid of paperwork that contains private information, shred it 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:

  • T&S Office Products
  • Office Max
  • Staples
  • Postal Service/UPS
  • Centers for FedEx Office Printing and Shipping

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. Understanding what should be kept and what can be discarded can help you keep your material possessions to a minimum.

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