Creating an Organized Financial System
There
is a lot of paperwork involved when handling your finances. Each month you
have bills to pay, every year you file a tax return, you have receipts
for purchases and you have important documents that deserve special
attention. Having an organized system instead of just putting
everything into a drawer or box can save time and reduce the stress of
not being able to find something when you need it.
Some
general record keeping guidelines
- Tax
information - There is a general three year statute of limitation
for your taxes. This means the IRS has three years from when you
file your return to start an audit. (There is no limit for
fraudulent returns). Therefore, you need to keep documents that
support items on your tax returns for those three years. Each year
you can throw out the three year old documents, but you should
keep copies of tax returns forever.
- Storage
of important papers - There are some papers that deserve special
attention. Documents to keep forever include: wills, powers of attorney, birth certificates,
marriage documents, divorce or child care orders, trust documents,
business agreements, military records and other such permanent
records.
- There
are other documents that should be kept as long as they may be
needed:
- Insurance
policies - as long as they are in effect or until a claim could
no longer be filed.
- Loan
documents - until they are paid off.
- Deeds
and real estate papers - as long as you own the property plus any
period for tax purposes.
- Employee
benefits information - as long as you are employed or until the
benefit no longer exists.
- Investment
records - as long as you own the investment plus the three year
tax reporting period.
- Receipts
and warranty information on major purchases - as long as you own
the item and could make a claim.
- Monthly
statements - Each month you receive bills, statements and other
financial information that you need to handle. There is a great
temptation to keep everything, but that is really not needed.
- Recurring
monthly bills - Once you have paid your insurance, rent, mortgage
and utility bills, there is no need to keep them. You will have a
canceled check to document payment and unless there is something
special about the bill, you can dispose of them.
- Credit
card statements - Even though there is no requirement to keep
these statements, you may want to save them for some period (a
year) in case there is a dispute, you want to return an item or
if you want to be able to analyze your spending.
- Bank
statements and canceled checks - Some people keep every canceled
check and others toss most of them. Certainly you should keep
canceled checks that support any tax deductions and any that you
think may come in handy. Otherwise, canceled checks can take up a
lot of space. Bank statements are a bit different. You may want
to keep them for some period (three years or so) so you can
document your payments for important items. Together with your
checkbook register, you would be able to identify when and how
much you paid for almost anything.
Creating
a filing system
Most people end up using filing folders in a drawer to keep their
financial records. If you do not have a drawer to use, buy a plastic
storage bin. Buy a box of folders and label them for each type of
expense you normally have and for other types of records you plan to
keep - rent, utilities, auto, insurance, home ownership, family, employment,
bank statements, retirement, medical and any other categories you
consider useful. File folders are inexpensive so you may want to buy a
box of them and create new folders when you like.
Once
you have the files set up, you just put your receipts, statements and
other information into them. There is a good chance that some of the
folders will get quite bulky over time. When that happens, you can
start a new one or better yet, toss out what you do not need.
Paying
your monthly bills
There are only two general rules that apply here:
- Pay all
bills before any late payment fees are charged.
- Keep
accurate records.
You
receive bills throughout the month and each has a due date. These due
dates will be different and spread throughout the month. Therefore, you
should pay bills twice a month. Since some of the due dates will be the
end of the month and you must count on a couple of days for mail,
consider the 10th and 25th of the month as bill paying days. Sticking
to this schedule will make it simple and you will avoid late fees.
When
a bill arrives in the mail, open it, take a quick look at it to make
sure there is nothing unusual about it and put it in a file folder (the
"To Be Paid" folder). On the two days each month you pay
bills, simply take that file and pay the bills. That is also when you
should look more carefully at each bill. That way, you will become more
familiar with how you are spending your money and you can have a double
check to make sure that everything is accurate. After the bill is paid,
you should write the date you paid it and the check number on the bill.
You then just file the bill or statement in your file folder that that
category.
Managing
your checking account
Accurate financial records, especially with your checking account, are
a must. You need to know how much money is in your account before you
write checks and you must avoid bouncing checks. This means you have to
record each check and ATM transaction. This sounds simple, but it is
easy to forget an ATM withdrawal or write a check and forget to record
it. Recording each withdrawal and check is simply a habit you must
develop.
And,
you must reconcile your account each month. Your checking account
statement has a form on the back. You may want to consider using
personal finance software like Quicken or Microsoft Money. You can
write checks with these programs and they make balancing your account
easier. If you use this type of software, do not forget to enter your
ATM transactions and individual checks you write.
