August 2011
One of the most challenging financial tasks that people face is keeping good financial records. This includes knowing what papers to keep and what can be pitched and organizing them is a way that they can easily be found when needed. Financial record-keeping is especially important for investors because good records are necessary to determine capital gains (or losses) when investments are sold.
Want to get your financial house in order? Consider these suggestions:
- Rent a bank safe deposit box or buy a fireproof home safe to store valuable papers such as birth and marriage certificates, car titles, stock and bond certificates, mortgage documents, or the deed to your home.
- Create a home file for each stock, bond, or mutual fund that you own. Save year-end account statements that list periodic deposits and investment earnings as well as the most recent prospectus or annual report. By having all of your investment purchase information together in one place, the cost basis of shares can be easily determined for capital gains tax calculations.
- Create another file for annual tax records such as W-2 forms, 1099 forms for bank and investment account earnings, and receipts or other documentation for tax-deductible expenses. Save records for tax deductions for at least six years in the event of an IRS audit.
- Save records related to capital assets, such as a house or investments such as stock or mutual funds, for as long as you own them plus at least six more years. Some financial experts advise saving housing records (e.g., receipts for major home improvements) indefinitely in case capital gains income tax laws change.
- Prepare a consolidated list of financial assets, debts, insurance policies, contact information for financial advisors, and other important information. Then share a copy of this document with your loved ones and the executor of your will. A form for recording important financial information can be found at http://njaes.rutgers.edu/money/pdfs/importantpapers.pdf.
- Decide which records to keep and which to toss. In addition to the records noted above for income tax purposes, other “keepers” include canceled bank checks and bank statements for at least a year, recent utility bills, purchase and warranty information for appliances and electronics, and credit card account numbers and policy disclosure information. Items that can be “pitched” include receipts for purchases after warranties have expired, old utility bills, and ATM receipts and deposit slips after transactions have been shown correctly on a bank statement.
Organizing financial records may not be the most exciting way to spend a day, but the rewards are worth it. With organized records, you can find documents easily, handle tax disputes with confidence, document ownership of specific assets, potentially save money on tax bills (e.g., capital gains taxes), and help others handle your financial affairs, if necessary. Take the time to get your financial house in order. You’ll be glad that you did.
