Get your financial house in order. Here's how to pare, organize and shred your piles of documents. It's easy, smart and cathartic.
Spring, with new life popping up everywhere, is the source of many an impulse to start afresh. The spring cleaning tradition reaches back a long way, as Country Magazine’s readers’ tales of spring cleaning with their families attest. Apply the tradition to the mess of files and financial records — paper and virtual — that have piled up in your life.
Here’s how to get going:
1. Set a goal
A project like spring cleaning can eat you alive, unless you set some limits. Decide what you want to accomplish. You can always return to the job next week or next year, so make it manageable. Some ideas:
- Clear out two years’ worth of old tax documents.
- Sort through one or two boxes of old papers or file cabinet drawers.
- Clean out the closet that’s stuffed with old papers.
2. Know how long to keep paperwork
Don’t get carried away and toss absolutely everything. Here’s what to keep, and for how long:
Copies of your tax returns. Keep these forever. “They help in preparing future tax returns and making computations if you file an amended return,” the IRS says. Also, old tax returns offer proof, should you ever need it, that you filed taxes in those years.
Supporting tax documents and receipts. The IRS recommends that you keep supporting documents for as long as you can be audited or held responsible for the filings. Here are a few rules of thumb:
- The IRS says it generally audits taxes back three years, so keep records supporting deductions at least three years after a return was due or filed. However, the IRS also says, “Generally, if a substantial error is identified, the IRS will not go back more than the last six years.” So you may want to hold onto records for six years to be sure you’re covered.
- Keep payroll tax records six years.
- If you filed a fraudulent tax return, you’re on the hook forever, so hold onto supporting documents.
- If you failed to report income worth more than 25 percent of the gross amount you reported, you’re liable to the IRS for six years.
Documents to support an insurance claim. To help substantiate a claim should you ever need to make one, ask your home-, rental- or auto-insurance companies or agents which documents you should keep and how long to hold them.
3. Discard papers if you have stored electronic copies
Before tossing documents, check with banks and financial services companies, including your 401(k) provider, to learn how long they retain electronic copies of your records.
4. Back up
Download electronic copies of bank and insurance records and other important documents to your computer and back them up onto a separate hard drive or cloud storage.
5. Back up your backups
It’s smart to have backups for your backups. Use a second hard drive or buy a subscription to an always-on backup service that constantly copies your entire computer’s contents to a secure cloud storage for a minimal fee.
The Wirecutter’s review of backup plans recommends Crashplan first and Backblaze second. “Both allow for unlimited storage of one or more computers for roughly $4-5 a month, depending upon how far in advance you pay,” the article says.
For more on backups and paring back files on your personal devices, read 5 Steps to Spring Clean Your Tech
6. Decide what to shred
Toss instruction manuals for things you no longer own, utility bills, receipts, reconciled bank statements, canceled checks, old newspapers and correspondence unless it’s really precious.
After refinancing your mortgage you can get rid of most of the paperwork. Keep the entire set of documents from your last refinance. Otherwise, “you only need to keep the closing summary that documents your costs and the paid-in-full letter from the old mortgage,” says Consumer Reports.
7. Buy a scanner and use it daily
Get into the practice of scanning and then shredding documents you want to retain. Organize your computer files so you can easily drop them into the right folders. The Wirecutter recently tested and reviewed portable document scanners.
8. Don’t toss it, shred it
Don’t risk identity theft by throwing personal documents into the trash.
If you don’t have a shredder, or if yours isn’t powerful, safe or easy to use, buy a new crosscut (for best security) shredder. Read Good Housekeeping’s reviews of 25 shredders.
Or, if your shredding is fairly lightweight (a few things a month), take The Wirecutter’s advice — the site tests products before recommending — and buy the $50 AmazonBasics 12-Sheet Cross-Cut Paper/CD/Credit Card Shredder. For harder duty, The Wirecutter prefers Fellowes 100% Jam Proof Shredder, 73Ci 12-Sheet Cross-Cut, which sells for around $150.
Few people are willing to shred years’ worth of documents at home. But if you are one of them, give your shredder frequent rests to prevent overheating and oil the cutting mechanism often or use shredder lubrication sheets. Read the manufacturer’s instructions before testing your shredder’s limits.