Thursday, March 30, 2006

Organizing Your Financial Life

Most of you probably know that I really enjoy reading David Bach's articles and books...I think that they are well written, easy to read, easy to understand, helpful, and contain easy to implement suggestions. I was reading his latest article over at Yahoo! Finance about Getting Your Financial Life Sorted and wanted to share it with our readers. Many of us probably have piles of financial paperwork lying on our desk or in a drawer someplace and it may tend to be fairly unorganized. Getting my finances organized was a must for me because I am probably semi-OCD when it comes to neatness and organization.

The article states that all it takes to get your financial life organized is some time, some hanging folders, some file folders, and all your financial paperwork. I would also add that a filing cabinet would be nice...all this stuff sitting on your desk might become a little much after a while. You then use the hanging folders for the following top level categories(in blue) and the file folders for information in the subcategories (in yellow):
  • Tax Information
    • Each tax year gets a folder for the past 7 years and all tax documents are kept in here (Bach suggests keeping information for the last 7 years)
  • Retirement Accounts
    • Each different retirement account gets a folder for your statements
  • Investment Accounts
    • Each brokerage account gets a folder for your statements (Bach recommends holding these for 7 years as they impact your taxes)
  • Social Security (we just use our retirement folder for this)
    • Your updated SS Benefits Statement should be kept here
  • Bank Accounts
    • Each separate account should get a folder for your statements
  • Household Accounts
    • House Title
    • House Improvements
    • House Mortgage
    • Utilities
  • Credit Cards
    • Each credit card should gets a folder for your statements
  • Other Liabilities
    • School Loans
    • Car Loans
    • Personal Loans
  • Insurance and Medical Records (we have separate folders for these)
    • Car Insurance
    • Homeowners/Renters Insurance
    • Health Insurance
    • Disability Insurance
    • Life Insurance
    • Medical Records
    • Dental Records
  • Family Will or Trust (we don't have...but we probably should)
    • Keep copies of them in this folder
  • Children's Accounts (we don't have kids yet, so no folder here yet)
    • Keep a folder for any accounts that you children have setup for their statements

Mrs. RS and I actually started doing almost this exact system many years ago and it has worked relatively well. I would caution you that it does become tedious to go through your folders to clean them out every so often and it is also tough to know how long to hold on to certain documents. My guess is that I do not hold on to most things long enough, at least according to some of the lengths of time that were stated in the article. For instance, I was always told that taxes should be held for at least 3 years since that was as far back as an audit could go. Bach says 7 years...that is news to me. The last word of caution is that these files can become awfully large after a few years. We filled a two drawer filing cabinet in no time at all. So, make sure you buy one that is large enough.

This system makes it very easy to find any information that you might need and it only takes a few seconds to file statements when they come in (once the initial setup is done). I would definitely recommend this system for organizing your financial life, it really helps.


Blogger Todd DeLuca said...

I enjoyed reading your post. Here are two thoughts.

First, the following is a link to a fascinating description of a simple filing system which can help answer the question of when to throw something away.

Second, personally I divide each year into categories and when I am running out of space, either mentally or physically, I can take an old year and archive it in a storage box. Since I tend to remember when (significant) things happened, it is easy to find an old document, should I need it, which I almost never do.

3/30/2006 5:34 PM  
Blogger Jocular Jarhead said...

Just a note on tax info: The reason people suggest 7 years for tax records is because that is the amount of time that you are allowed to go after the IRS for an error that you made.

HOWEVER... The IRS is allowed to audit up to 10 years worth of your records. If you are planning on not spending time in jail for tax evasion, you may want to hold onto 10 years worth of your records, just in case you need to prove your case.

I know this because I was a VITA rep a few years ago and we had to sit through a class, that was given by the IRS, before we were allowed to do taxes.

4/01/2006 7:13 AM  
Blogger RS said...

Thanks to both of you for the info.

Wow...10 years. Where the heck did I hear 3 years from. Guess I will have to start holding onto my tax info for a little longer now.


4/01/2006 5:30 PM  
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