Creating a File System

For some people, getting their financial house is order is more daunting than undergoing root canal. Financial records left to run amok can seem intimidating as you look at boxes and file cabinets overflowing with documents. Fear not, friends. Organizing your financial records is as easy as it is well worth the effort.

Where do you start? These days, just about everyone has a separate room in the house, or at least a corner of the bedroom or the dining room, with a desk, maybe a personal computer, and some space to pay bills and conduct their personal business. If you open your mail in the kitchen, keep a file drawer handy. If you have a home office, get an "in-box" for bills and other personal mail. The key is not the sophistication of the space, but just having a dedicated place to handle your bills, your paperwork and your money. Experts say a well set-up work area or home office can help just about everyone reduce stress, improve productivity and add more personal time everyday.

More and more people are turning to multitask computer programs like Quicken or Microsoft Money that automatically remind them of the bills to be paid, handle the math calculations and make money management almost a pleasure. Plus, if you have both a computer and a modem, you can link your financial software to on-line services that let you keep track of your spending. A PC-based personal finance software package also eliminates what the American Bankers Association confirms as the single largest reason people overdraw their checking accounts: Math errors. That's because money management software makes calculating balances a no-brainer even for those who aren't math experts.

Unfortunately, the personal computing era has done little to back up its claim as the gateway to the "paperless" era, so organizing your paper documents is a must. You can start by keeping all of your essentials in one spot. Keep most used items -- store stamps, envelopes, stationery, file folders and note pads -- within arms' reach on your desk. If possible, place bookshelves and filing cabinets nearby. Create an "In" box for mail and "To File" box. Post a running supply list to refer to when replenishing your stock.

Then, go through all your financial records. Throw out all the records that you no longer need, like old credit card statements, pay stubs, and ATM receipts that are more than a year old. Throw away the payment books from loans that are now paid off, including your car. Toss expired guarantees and warranties, and instruction manuals from items you've discarded or sold.

Be practical. Some papers are stored just for sentimental reasons. Ask yourself what's the worst thing that could happen if you threw it away. If absolutely necessary, could you get another copy? If you really want something for just sentimental reasons, transfer it to your scrapbook or cedar chest. Shred the papers you plan to throw away. Your old personal papers are gold mines of information for thieves who may want your Social Security number or account numbers.

After you have thrown out your old financial records, develop a file system for the ones you keep. Here's a short list of the documents you're going to have to hang onto for a while:

Tax returns -- The Internal Revenue Service has three years from the time you file to audit you. But if you've underreported your income by 25% or more, the IRS has six years to challenge your returns. And there's no statute of limitations on investigations of taxpayers who fail to file or who file fraudulent returns. So to be safe, keep copies of your tax returns and supporting documents, such as receipts for charitable contributions and miscellaneous deductions, for at least six years.

Investment records -- If your mutual fund company or broker provides a year-end summary statement of your transactions, you can toss the monthly reports. Just make sure you have some record of all your trades, particularly purchases. That way, you'll have the original price of your stocks or fund shares when you sell, which will determine how much you owe in taxes. Also:

Keep trade confirmations for a couple of years after you sell stocks or fund shares, in case the IRS has questions.

Save records of all contributions to a non-deductible individual retirement account. That way, you'll have proof you already paid taxes on the money when it comes time to start taking distributions. Otherwise, you may end up being taxed twice.

Credit card bills and bank statements -- Visa and MasterCard have advised customers to review their credit card statements for potential duplicate charges. Even if you don't find any errors, you may want to hold on to your credit card bills for a few months as a precaution. The same goes for your bank statements.

Deductions -- Charity receipts, church donations, etc.

Medical records -- Receipts and insurance payments for dentist, doctors, hospitals, prescriptions,

Home records -- The deed to your house, your property tax paperwork, receipts for home repairs, warranties, etc.

Vital statistics -- Passports, birth certificates, marriage and divorce papers.

After you earmark the documents you'll need, file them. Make a separate folder or file for each topic (i.e. bank account, loans, credit cards, taxes) so that each item is easy to file and find. After you have separated your records, put the folders in a storage file that is easily accessible.

Set up a monthly budget and schedule. Unless you pay each bill as it arrives, set time aside either monthly or bimonthly to pay your bills. If you use a money management program, you can set it up to provide automatic reminders of the bills due. Otherwise, use a simple file folder and an index card file: Put the due dates and bills on index cards, and file them by the due dates. This will help you remember to pay your bills on time, avoiding service or late charges.

Balance your checkbook and charge statements each month. Go through the monthly checks you wrote, ATM receipts and any other direct deposit/withdrawals from your account. Compare the amounts on your charge statement with your receipts. Notify the bank that issued the credit card of any errors as soon as possible. Federal law provides protection from mistakes only if you make notification within 60 days.

Here are some more tips to help you get fiscally fit:

Cutting down to one charge card per adult, two if you use one for home and one for work. This reduces statements and bill-paying time.
Consolidate your bank accounts, if you have several.
If you can, pay bills by automatic deduction. Most utility bills can be handled this way.
Cut junk mail by contacting the Direct Marketing Association at: www.dmaconsumers.org/consumerassistance.html and ask them to remove you from their direct mail lists. Or, write them at: Mail Preference Service, Direct Marketing Association, P.O. Box 9008, Farmingdale, N.Y. 11735- 9008.
Consider professional help. Your financial management includes day-to-day living, estate planning and tax strategies. This means you need a budget, a will, a trust, perhaps, and tax advice. If you don't know where to start, consider a consultation with a financial planner to get you started.

Also, consider setting up an online bill-paying program through your bank and/or other lenders. With the increased safety of the Internet (financial companies are adding things like security firewalls all the time now) you can safely and easily pay your bills online. They're much easier to manage that way, with no paperwork or lost documents.

How Long to Keep Vital Documents?

Just like a gallon of milk, there's an expiration date on your critical financial documents. Some you keep a year, some you keep a lot longer.
Here's a snapshot of how long to hang onto the important tuff:

Old credit card statements, pay stubs - one year
Bank statements, cancelled checks - three years
Income tax returns -- six years
Home improvement records -- ownership plus seven years;
Investment records (IRAs, pensions, insurance policies etc.), real estate records and transactions, stock records, personal records (birth certificates, military, marriage/divorce, adoption, custody agreements, naturalization papers) -- permanent.

Setting Your Long-Term Financial Goals