Keeping Good Financial Records

Excerpted from
The New Money Book of Personal Finance
By Editors of Money Magazine

Now that you know how well you're doing financially, you're ready to learn the basics about personal finances. One mistake people often make is skipping over the basics and plunging headlong into investing. Bad idea. It's essential, first, to learn how to keep good financial records, use a bank wisely, and purchase the insurance protection you need for yourself and your family. Once you have these bases covered, you can move to the next stage: managing your money and making it grow.

It's drag to see all those papers taking over the desk your bed. But it's even more of a drag to be audited by the Internal Revenue Service and suddenly realize that the crucial receipts you need to prove that mammoth tax deduction are now mingling with the landfill on the other side of town.

Think of it this way: The moderate amount of discipline that smart record keeping requires is good practice for moving on in your financial life. If you don't have the discipline to file away crucial bills and chuck useless ones, for instance, how will you have the discipline for the far more demanding task of saving large chunks of your money for retirement?

Let's start with documents you probably already have lying around in boxes. If you're like most people, you can safely toss many of them. Here are the ones to keep and store in a fireproof file cabinet or in a safe-deposit box:

Real estate documents. These include the title to your home, the deed of purchase, your mortgage contract, and your sales contract (It's best to keep these in a bank sale-deposit box.) Also save any receipts for capital improvements or property repairs you have made, such as reroofing or adding a deck. You'll need these records to minimize the taxes you might owe someday after selling your home for a profit.

Receipts for valuable items such as furniture, silverware, furs, and jewelry. If you lack a receipt for, say, those diamond brooches your grandmother left you, have the jewelry appraised and save the appraisal forms. You'll need them to fill out an insurance claim if your house burns down or is burglarized.

Records of all personal property you own. It's best to keep photographs or a videotape of these items along with written estimates of their value. Your homeowners or renters insurer will be far more willing to accept your insistence that you owned four mint-condition Hepplewhite chairs if you can show him or her recent photos of them in your dining room. (It's a good idea to keep copies of all this at your office or in a bank safe-deposit box as well as at home, just in case.)

Warranty statements covering your major appliances or electronics, along with a receipt proving the date of purchase. Write down the make, model, and Serial number for all items, if applicable.

Old tax returns. It's crucial to keep copies of your income tax returns for the past three years. That's because the IRS can typically probe that far back if it chooses to audit you. But it's a good idea to keep all your tax returns: They can be helpful reminders of previous financial moves you made. For more information about the IRS and record keeping, get IRS Publication No. 552. Record Keeping for Individuals (800-829-3676; www.irs.gov).

Old tax-related documents. The three-year holding period also applies to documents that substantiate claims you made on your tax returns. In a tax audit, if you cannot document an expense you deducted, you may lose the write-off. So save receipts or canceled checks that prove your deductible expenses. Save your year-end W-2 forms from your employer and 1099 forms from your freelance clients for three years.

Insurance policies. Keep all policies you still hold, from life to liability, at home. But it's a good idea to create a list of all your policies and your agents and keep it in your safe-deposit box.

Legal documents. You also need to keep copies indefinitely of your will and, if you have them, your living will and power of attorney. Have your lawyer keep the originals; you should retain your copies at home. And be sure to get rid of old wills. Otherwise, after you die there could be confusion about which will is the one you wanted.

Credit-card statements. Save these for a year or so. That way, if a charge erroneously appears on your bill more than once, you'll be able to prove you already paid it. Also, if a product you bought breaks and needs to be returned, you'll remember where you bought it. The statements can also come in handy at tax time

Bank checking and savings account statements, including canceled checks. Holding on to your checks helps you keep track of where your money goes. The checks can also work as proof of payment if necessary. For instance, it helps to have a check if your landlord says you didn't pay last September's rent and you know you did. Keep these statements and checks for three years, indefinitely for home improvements.

Investment records. Save monthly statements from your mutual fund companies and your brokerage firm-print out your online statements at least quarterly. These statements will establish what you paid for an investment, so you'll have the information to compute the taxes when you sell it. After you get your annual summary statement, you can toss the monthly statements-as long as the annual statement shows all your transactions for the past 12 months. Exception: Save all trade confirmations and dividend-reinvestment statements for three years after you file a tax return declaring a gain or loss from selling securities. Save your annual statements indefinitely. If you have certificates of ownership for stocks, bonds, or other investments, keep them in a safe-deposit box at the bank.

Retirement accounts. Hold on to all annual statements from tax-advantaged retirement accounts such as 401 (k)s. 403(b)s. 457s, Individual Retirement Accounts (IRAs). Keogh retirement accounts. Simplified Employee Pensions (SEPs), and Simple IRAs. The statements will document your contributions and your earnings. It's especially important to keep annual statements from any nondeductible IRAs you may have Reason You'll need them to show the IRS which part of any future withdrawal was funded with after-tax money. Otherwise you'll wind up being taxed twice. And if you make a nondeductible IRA contribution, be sure to keep a copy of your IRS form for it, No. 8606.

Debts. Aside from your mortgage contract, you'll also want to save records for your student loans, home-equity loans, car loans, bank loans, and other large debts. Then, when they're paid off, just keep the statement that says so

Miscellaneous documents. Also keep in your safe-deposit box the following: the tide to your car, your birth and marriage certificates, your children's birth certificates, and deeds to cemetery plots you own.

Records You Should Start Keeping for Tax Time

Now it's time to get organized with the financial documents that will come rolling in this year. Doing so will make end-of-the-year tax moves much easier. For instance, if you maintain careful records of your family's medical expenses even month, toward the end of the year you'll be able to see if they'll exceed 7.5% of your adjusted gross income-the level at which they become deductible on your tax return. If they do. you can, say, shift upcoming January medical appointments to December in order to deduct them.

Don't worry. You needn't create a whole room or some fancy system for these records. Just pick up a large accordion file or a handful of individual manila folders and spend a few minutes labeling them by their deductible category. (Refer to Schedule A of last year's tax return to see what all these categories should be.) Don't forget to create a folder to stow your old tax returns, too.

For those who like to file things electronically, consider using money-management software or Websites like Intuits Quicken and Microsoft Money. Both make it easy to consolidate far-flung stock and mutual fund investments into one ledger, track bill payments and tax write-offs, store emergency records, and do your banking online.