Keeping Financial Documents

Drowning in a Sea of Paper

Its that time of year. You are getting all those tax forms in the mail: W2, 1099, 1098, 1095, etc. You probably get bank statements, brokerage statements, and bills. Once your taxes are done, you will get copies of your returns to keep. When do you throw it all out? Can you ever throw it out?  What financial documents do you need to keep? My dad died in 2013 and not only did I find every bill, bank statement, and tax return from the past 50 years, I also found bank statements from my grandparents. My parents had just packed each year in a supermarket back and thrown it into a large closet. Is there a better way? There sure is!

Electronic Filing for financial documents

The best way to keep all this stuff is on your computer. You don’t need the paper and everything will be easier to find and take up a lot less space if its on your computer. A lot of statements are available online now, so you don’t even need a scanner for them, but there will still be some things you will need to scan. Luckily, doing this is easy and I will explain how.

Get a Scanner

The printer you have already might scan, but if you don’t have one, I recommend buying a multifunction printer/scanner which has a duplexer in the feeder. The feeder will feed pages, so you can scan multiple pages without putting each one into the scanner individually. The duplexer in the feeder will actually flip the pages so you can easily scan double-sided pages with no intervention into one document.

Or use your Smartphone

Maybe you don’t get very much paper you have to scan or you are on the road a lot. You can use the camera on your phone or tablet instead of a scanner and there are several apps which do a great job. I recommend Scanbot Pro or Scanner Pro. Scanbot Pro is free, but you will need the $5.99 OCR package as an in-app purchase. Scanner Pro is $3.99. With either app, way under $10 gets you a very usable scanner with your smartphone. It won’t be as fast or easy as a scanner, but it works.

Filing Cabinet

Create an electronic filing cabinet. You can think of it just like a physical filing cabinet, except you have folders instead of files. Use a system which is logical and will allow you to find things. I use a top level of folders by year and then within each year, I have a folder for bank accounts, another one for investments, another one for taxes, etc. You can go as deep in hierarchy as necessary to keep yourself organized. Then just put your files in their appropriate folders.

--File Cabinet
   --2014
   --2015
   --2016
      --Investment Statements
      --Bank Statements
      --Taxes
         --Charity Thank You
         --W2 and 1099 Forms
         --Tax Returns
   --2017

File Format

When you scan, you will have a choice of file format for your financial documents. Always use PDF files. PDF stands for Portable Document Format and this format of file is easily readable on any device including your phone. It supports multiple pages within one document and even allows you to add a password to the file. Stay away from formats such as jpg or tif because the file size will be larger and you can’t get multiple pages per file. Also stay away from any proprietary file formats. By the way, when you get your statements online, they are always in PDF format.

Helpful Software

You don’t actually need any additional software other than free PDF reader software. Adobe Acrobat Reader works as a good PDF reader, just download it from their website. Chances are you already have it. But a PDF editor program can be helpful. A PDF editor can usually allow you to print to PDF (although there is a free program called PDF creator that does this too). It also allows you to combine PDF files, export them to a word processor or spreadsheet, delete pages, add a password, and more. Adobe, which originated the PDF format, sells Adobe Acrobat for a yearly service fee. I’m sure its great software, but Nuance Power PDF and PDF Architect both do the job for much less. There may be others you can find by searching.

Another software program I use is Presto! PageManager. This software gives you a visual view of your folders with thumbnail images of your documents. It allows some limited manipulation of your files in either PDF or JPG format. It comes with a printer driver so you can create PDF documents by printing other files, webpages, or emails. It also works with your scanner to create searchable PDF files by using Optical Character Recognition (OCR). This allows you to search your PDF files. Besides Presto! PageManager, Nuance PaperPort has similar features. This software is optional, but I find it invaluable in working with my electronic file cabinet.

Cyber Security

You always need to think about cyber security if you keep your important financial documents in electronic format. The hackers are just waiting to steal your information and if they can get it from your computer of smartphone, they will. So here are a few tips to keep your information safe:

  1. Always be safe when reading emails or messages. This means never clicking on a link in an email which opens a webpage and enter information on the webpage (such as username and password). Always assume that the email you get from your bank, broker, cousin Harry, or anyone else could have come from a hacker. Use your normal way to get to your bank’s website or use Google or Bing to search for the link. Never click on an email link. The most common way hackers get into your information is via social engineering. Social engineering just means they trick you into revealing your information via email, instant message, or calling you on the phone.
  2. Keep your computer physically secure. If you store your important documents on your home computer, then it should be a desktop computer at home in your locked house. It should have a password on it. If you are using a laptop or other device which travels outside your home, then think about what happens if it gets stolen. I recommend using encryption on your hard drive so if the laptop or mobile device is stolen, the thief will not be able to get into it. Microsoft has Bitlocker built into their professional operating systems, but you have to enable it. VeraCrypt is a free program that works on Windows or Apple OS X. For mobile devices, Apple IOS has built-in encryption (Yea!). Android devices are really the wild west. In fact Android is so insecure, I cannot recommend using the devices for any data storage, email, or messaging.
  3. Back up your data securely. Have you read about ransomware? It’s when a hacker gets into your computer and encrypts all your files, doesn’t let you access them and asks for a ransom to unlock access to your own files. If this ever happens to you, just tell the hacker to get lost if you back up your data regularly. You can use Google Drive manually or there are streaming backup services such as iDrive or Carbonite which do a great job. You can just set it and forget it and all your files get backed up. You can even use Google Drive as a remote drive on your computer and just store all your files on it all the time. Just make sure you back your Google Drive up somehow (maybe just to another folder on Google Drive). icloud and Microsoft’s OneDrive have similar feature.
  4. Use good passwords. Don’t use Password1 or abcdefg as a password. Do use complex randomized passwords. Here is a great website to create them: http://passwordsgenerator.net/ . Write them down on a piece of paper or use a password manager such as LastPass to remember them. Try to remember the most important ones, but use the password manager for the rest. Make sure you use a different password for every service or login.
  5. Make sure you securely wipe data from your hard drive when you get rid of your computer. Use a program like Eraser or Darik’s Boot and Nuke to securely overwrite your hard drive before recycling your computer. You can also remove the drive from the computer and physically destroy it (a sledgehammer works great, but wear goggles!).

What to Keep

So, now you have a method for keeping your documents. What do you actually keep? I recommend keeping the following:

  • All Bank Statements
  • All Brokerage Statements
  • Your Insurance Policies and renewals
  • Your Credit Card Statements (so you can keep track of what you bought when and for warranties)
  • Your paystubs (Yes, you should keep them, but especially keep the last one of the year)
  • Most current utility bill (No reason to keep them all unless you might need them for taxes)
  • Records of auto service and repairs
  • Records of home improvements
  • Receipts and thank you letters from charity donations
  • W2, 1099, 1098, and all other tax-related forms
  • Copies of your tax returns
  • Medical Explanation of Benefits from your insurance
  • Medical bills or receipts

This is probably not a complete list, but you get the idea. Even though your bank or other financial institution keeps your statements online for you, I don’t trust that you will always have access to these documents when you need it. So I always download them to my own computer and I suggest you do the same. If you still write any actual physical checks, I recommend downloading images of the cancelled checks. Very handy in the case of a dispute or if you have the need to prove you paid for something. The banks all destroy these images within a few months.

How Long to Keep Documents

Keep your tax-related records for 7 years. The IRS has 6 years to audit you if it thinks you under-reported 25% or more of your income. You should keep bank statements and credit-card statements as long as you have the items you purchased on the statements. Certainly for at least 7 years. I recommend keeping paystubs, or at least the last paystub of the year until you retire. I had the case where I applied for a job and the company hired a background-check company to verify all my previous employment. I had worked for a company 15 years before which had gone bankrupt so they couldn’t verify my employment. This could have been a deal-breaker, but luckily I had my old paystubs to show them which they accepted as proof of employment.

Keep car-related documents for as long as you own the car. Keep insurance documents while you have that insurance policy, but I discard old auto policies after about 3 years. If you get into an accident, keep a copy of your policy for the year you were in the accident forever. Keep your medical bills and insurance EOBs for 5 years both for tax purposes as well as billing issues with your medical providers. Keep home improvement records for 7 years longer than you own the home (for tax purposes).

Keep vital documents like birth certificates, marriage certificates, divorce decrees, and wills in a fireproof safe or safety deposit box at your bank. Keep life insurance information there too. It is often useful to have copies of these documents at home. These copies can be electronic too!

How to Discard Documents

After reading this article and taking action, you will probably have a lot of paper you want to throw out. WAIT! Don’t throw these important documents in your garbage because its a security risk. Instead you need to shred or burn the documents. I own a shredder at home and another one at work, but if you don’t have access to a shredder and don’t want to buy one, there are other choices. Many towns and counties have shredding services available. These services might be on a specific day once or twice a year. Save up your documents and bring them to the shredding event. If you have a wood fireplace or fire pit, just burn your documents with your wood. Old bank statements make great fire starting material! Just make sure you dispose of your outdated documents in a way that makes them unreadable.

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