One of the most important things we should do throughout life appears relatively basic. Most say they do it regularly, but it is often neglected and is usually not done right. No, we are not talking about flossing. We are talking about recordkeeping.
The right recordkeeping system can save you time, reduce headaches, minimize clutter, improve your finances, and maximize tax savings. Let’s take a look at why recordkeeping is essential, what a good recordkeeping consists of, and review tools and structure to lead to better recordkeeping.
Why recordkeeping is essential
- It saves you time. With good recordkeeping, you will save time for the following reasons:
- One of the goals of recordkeeping is to touch the piece of paper fewer times; avoid shuffling piles with other piles, picking it up, and planning to come back to it later. You will need to have a process of getting the document and taking action with it – whether it is discarding it, shredding it, paying it, and/or filing it.
- When you need to retrieve the document, you will know exactly where to go for it. No more rummaging through stacks of documents, multiple drawers, and various filing systems that don’t have the right organization.
- Minimizes stress. There is nothing more frustrating than trying to find a critical piece of information and not finding it. Similarly, our minds tend to be more cluttered when our physical space becomes more cluttered as research bears this out. This not only goes towards having too many documents lying around, but other objects that occupy our space. While we won’t go Mary Kondo on you, know that our intentionality towards organization applies to both recordkeeping and decluttering in general.
- Improves your finances.
- You will be able to better evaluate various decisions, including spending and asset performance. For example, if you don’t have records of what your spending is, you can’t track your spending to know whether you made wise decisions or are staying within your budget.
- Knowing – or, at least, being able to locate -- your various insurance coverages will help you understand whether you have proper coverage on various risks, including home, auto and life. When we can’t locate this kind of information, we tend to delay in evaluating it.
- Keeping track of purchases may be needed for insurance reimbursement when a loss occurs, for submitting a claim under a warranty, for returning certain purchased items even without a warranty, for selling items in the open market (e.g., Craigslist, eBay).
- May minimize income taxes.
- Having good records for tax purposes is not only a good practice, but it’s required.
- By having the proper basis on items, sales costs, charitable contributions, etc., your taxes can be minimized. This is a hard dollar savings that is real, and you will have peace of mind knowing that you have documentation in the case of an audit.
- Creates more space. The right recordkeeping system may decrease the need for filing cabinet space or may free up valuable drawer space. If you are like me and made the decision to simplify and live in a smaller home, space is critical.
- Saves time upon incapacity. If you were to become incapacitated, maintaining accurate records will help your loved ones find critical information. Usually, the need for this information comes during a stressful period (e.g., major health issues, death); thus, you will be doing your loved ones a favor with good records.
- Make your financial planner or CPA happy! I am somewhat selfish when I put this, but having accurate information (and in a timely manner) leads to better results from your professional.
Now that you are convinced that recordkeeping is essential, let’s take a look at what you should retain and the duration of holding onto the records.
Here is a list of items that you need to keep in the short-term (one year or less):
Length of time
Bank or credit union statements
Shred the statements that don’t have long-term importance.
Keep longer if needed for tax purposes.
Keep annual statements in pdf form.
Credit Card receipts
Keep the original receipts until you get your monthly statement; shred the receipts once reconciled.
Keep longer if needed for tax purposes.
Keep for the year until you match with your W-2.
Bills – small items or utilities
Match up with bank or credit card statements; shred once reconciled.
Bigger items or tax-related items – keep.
Records to keep for more than a year include the following:
Length of time
Until you sell the car
This will help you not only provide better maintenance, but prospective buyers may ask for the records.
You should also keep a spreadsheet of your repair history.
Keep the Settlement Statement – the document that includes all of the costs incurred when purchasing the home – not only until you sell the home but after the relevant tax audit period is up. If this can be scanned, we advise keeping this indefinitely. If scanning is not an option, keep it at least 7 years.
Major additions and improvements should also be kept since this will impact the basis, and you may need it for warranty purposes.
You should also keep a spreadsheet of all of these items.
Bills – larger items.
Big purchases should be kept indefinitely in the case of insurance or warranty claim.
Separate spreadsheet should track this item.
Records that you should keep indefinitely:
While the IRS has three years to audit returns from the date of filing in the case of good faith error, they have an indefinite period if suspect fraud.
Regardless of the audit potential, there are many items on your tax returns that may be needed in the future (e.g., basis for IRA contributions).
While tax returns can be thick, the ability to retain a pdf copy should make this recordkeeping easy.
Other tax documentation
Includes cancelled checks and receipts related to deductions, retirement plan contributions, mortgage interest, receipts for medical expenses if they can eventually be used for Health Savings Account withdrawals, etc.
May even include photos and diagrams of how your home office was set up.
IRA Contribution records
Since you receive a basis in non-deductible contributions to an IRA, these records will help remind prove that you do not have to pay tax on this money when the IRA is withdrawn. A separate spreadsheet should also be maintained.
Similarly, contributions of your company retirement plan should be retained in case you need this for tax purposes, e.g., after-tax contributions or NUA basis. Your annual statement should suffice.
Birth, death, and marriage certificates
Hard copy and soft copy.
Hard copy and soft copy.
Citizenship and military discharge papers
Hard copy and soft copy.
Social Security card
Hard copy and soft copy.
If there are records that relate to litigation or potential litigation, these should be retained.
Separate tracking spreadsheets
As I referenced above, you should also track other records, using either spreadsheets or online apps. Tracking these items will help you retrieve the information when you need it and may help you become a better consumer in the future. While we will cover tracking these items in a future article, here is an initial list of the spreadsheets that may be helpful:
- Car maintenance repair. There are also a few online sources to track your repairs.
- Home purchase, improvements, and major home assets. This should include information on the roof (last replaced, cost of replacement, name of contractor, estimated life, applicable warranties), HVAC system, etc.
- Home appliance records. Should include the item purchased, date purchased, cost, model or serial number, whether a warranty is applicable, length of warranty, expected life.
- Tax spreadsheets – cost basis of IRAs, charitable contribution carryovers, net operating loss carryovers, basis of all assets (if separate documentation not available), basis of real estate, etc.
- Personal property inventory list. This should primarily be kept for insurance purposes, but this may also be needed if you were to sell some property.
We have attempted to designate these items later in this article by using an asterisk (“*”).
Recordkeeping System – Be Systemized and Be Consistent
After having addressed what records to keep, let’s review the different recordkeeping systems. A good and consistent recordkeeping system will lead to better records. Just like in sports, war, or dating, having a good plan is half the battle – executing it is the ultimate goal.
When records come in, you need to do the following:
- Have a consistent place where the records go until you address them.
- Have a consistent time and place when you address them.
- Touch the records as few times as possible.
- When you do review the record, you will need to do one of the following:
- Take action now, e.g., pay bill, record in spreadsheet.
- Trash and/or shred if not needed.
- File hard copy.
- Scan and file pdf on computer.
- Take action later. There may be some items that you can’t address. For example, you may need to call someone regarding the document. If so, file in a the “take action later” pile and address that item in a systemized fashion as well (i.e., a consistent “short-term to do pile”, consistent time and place to tackle). After you tackle that item, that record should go through the same procedure as above.
What is the best structure to keep records?
There are infinite ways to categorize the expenses, but the key is to not create too many folders. You can create main folders, and then sub-folders where appropriate (whether hard file or digital).
I’ve provided a list of major categories along with relevant items and tips under these categories. In the section below, I have shown them in alphabetical fashion. However, I generally suggest organizing them in your files by broad category.
Automobiles and Other Transportation
- Inventory list (w/ critical information such as Year, make and model, serial number, purchase date, and bill of sale). This is ideally done on a spreadsheet with backup documentation under “Inventory Records”.*
- Maintenance and inspection records.*
- Warranty information.*
- Title of property (copies). Keep originals in fire-proof safe.
- Put any insurance in the Insurance folder.
While originals should be kept in a safe manner, as noted later, certain copies should be retained for easy access.
- Wills (and any codicils)
- Trust documents (and any amendments)
- Ancillary documents (power of attorney, living wills, health care surrogate or equivalent)
- Correspondence with attorney
- Estate planning diagrams (i.e., flowchart of who gets what and when).
- “If I Croke” Letter
- List of current designees in estate planning documents, e.g., personal representative, attorney-in-fact, trustee(s), and current contact information.
- Schedule of current beneficiary designations on retirement assets, life insurance, and other types of property.
- Taxable Gift documentation.*
- Gift tax returns.
- Estate tax return of any family members, where applicable. This likely should be saved in a different file, with other relevant information, however.
- Bank Accounts
- Keep a separate folder for each institution.
- Account application with title.
- Short-term retention of deposit and withdrawal slips, ATM slips. These do not need to be scanned but can be discarded after reconciled.
- Monthly statements.
- Inventory of charities. This should be done on a spreadsheet and can include the contact information, your history of gifting, pledges you have made, or notes about the charity.*
- Tax-related items, including charity’s acknowledge of gift, log of mileage expenses for charitable work (again, should be kept on the tax spreadsheet), cancelled checks. receipts or proof otherwise of your charitable gifts.*
- Documentation of any pledges.*
- Backup documentation related to your current charitable interests or potential future charitable interests.
- Receipts of paid bills to daycare.*
- Contact information of daycare providers.*
- List of babysitters and special notes.*
- Keep a separate folder for each institution, where applicable.
- Inventory of credit cards. Should be kept in a safe place and password protected.
- Loan Applications.
- Correspondence related to any credit issues.
- Credit Reports, if obtained.
- Purchase receipts.
- Monthly Statements.
- Employee Handbook.
- Benefits booklet or other information.
- Separate folders for applicable employee benefits, including company retirement plan, stock options, etc. You may want to keep retirement plan under Investments.
- Paycheck stubs.
- Resume (keep updated).
- References and contact of references.
- W-2s (but I generally recommend keeping in tax folder as well).
- Assessment Reports (e.g., DISC, Strengthsfinder, Myers-Briggs).
- Performance Evaluations.
- Samples of work (for future employers, if needed).
- Receipts of all tax-deductible items with proper documentation.
- Budget - monthly and annual.
- Make a separate folder for each one. Should include home, auto, umbrella, disability, long-term care, life insurance, and health insurance. You may want to separate the folders by Property & Casualty (home, auto, umbrella), Medical (health, disability, and long-term care), and Life.*
- Policy applications, if any.
- Advertising material that was given to you as part of the sale.
- Current in-force policy.
- Schedule of all policies and contact information.*
- Proof of premium payment (bank account or credit card statements may suffice).
- Copies of past claims.*
- Account opening documents.
- Fee schedules.
- Current statements.
- Transaction receipts.
- Basis information. This may also require a separate spreadsheet, depending on the type of account and whether your investment provider has this information.*
Note if you have retirement plans, it is especially important to keep a copy of the running basis of the asset and other information. For retirement assets (e.g., IRAs, 401(k)s), you should add the following to the list:
- Contact information of providers.* (I have seen many 401(k)s temporarily lost!)
- Records of withdrawals and whether basis was “distributed” out.*
- Information on retirement plan loans.*
- Summary Plan Description.
- Investment options in company plan (but these should be readily available online so no need to save if you can access easily).
- Running basis information. This is critical for retirement-type of assets.*
- Information on prior Roth conversions.*
- Annual pension statement.
- Other pension information, e.g., pension formula, pension payout options, contact information.
- List of medical professionals. This should be kept on a separate spreadsheet with contact information, specialties, chronology of advice given.*
- Receipts of medical bills.* This should also include a list of travel-related expenses if potentially deductible.
- Tracking spreadsheet of current medical records e.g., blood type, allergies, childhood diseases, lab tests, shots, surgeries.
- Tracking spreadsheet of medical vitals.*
- Other written medical history.
- Treatment plans.
- You can either categorize these by family members or by type of document.
- Birth Certificates or Adoption Papers.
- Marriage Certificates.
- Religious ceremonies.
- Military papers.
- Current Photos of family members.
A separate file should be maintained for your primary residence, secondary residence, and any investment or rental properties.
- Deeds. (Originals kept in a fire-proof safe.)
- Settlement statements. Retain for current home and any homes sold in the last 3 – 7 years.
- Sales contract and other closing papers or legal documents.
- Listing of square footage of the various rooms and house in total. This may save a lot of time as you need various improvements, e.g., new carpeting.
- If inherited properties, retain valuation of property at date of death, estate tax return, or other evidence of relevant information on inherited properties.
- If you received gifted properties, you need to retain evidence of basis of assets received. This may include settlement statements of gifted property.
- Insurance Information on properties.*
- Contact information of HOA contacts or neighborhood association information, if relevant.
- Mortgage information. You can keep in this file, but I prefer to keep under debts. Do whatever makes sense for you.
- Tax Notices and proof of payment.
- Improvement information. Receipts of cost of improvements.*
- Records of any losses.
Note that we did not address keeping records for businesses or rental real estate. Obviously, it is critical to retain records and track such expenses for tax purposes as well as evaluation purposes.
- Purchase receipts of large items, broken down by type of asset.*
- Clothing (if material).
- Any recent valuations, if applicable.*
Schools – Pre-College
- Correspondence with schools, teachers.
- List of child’s current teachers and contact information.*
- Grade transcripts.
- Special papers created by your child.
- Extracurricular information.
School - Colleges
- Applications by child.*
- Contact information.*
- Financial Aid Forms, Information.
- Receipts of expenses paid for tuition, books, room and board, etc. Good records can be critical come tax time.*
- At this point, the child should obviously be maintain their own file for many college records.
- Most recent Social Security Statement. You can discard the previous years once you confirm the accuracy of the new statement.
- Correspondence with Social Security Administration.
- List of Social Security Numbers of family members.*
- Most recent 3 years’ tax returns, including supporting schedules. Note that supporting schedules contain valuable information and should be retained. You can archive tax returns that go beyond that, e.g., 7 years. Ideally, you can archive all years’ electronically.
- Tax-related information for the year. While you can collect the tax-related informaiotn under other files, I like to collect this in the tax return file to make it easier to collect the data for preparing taxes. After your taxes are filed, you can then transfer the document to the non-tax file.
- Income items that are not filed or saved elsewhere, e.g., alimony receipts (although not includable under current tax law), gambling income and losses, 1099s.
- Deductible items that are not filed or saved elsewhere, e.g., proof of charitable contributions. 1098s.
- Sale information.
- You should keep a spreadsheet of relevant income items and deductions to date for tax planning purposes as well as estimated taxes paid for the current year.
- Communication with any local, state, or federal tax authorities.
- Proof of taxes paid, including estimated taxes.
- Communication with your CPA or tax preparer, if any.
- Other relevant tax information that may be needed for proof.
Warranties and Manuals
- Maintenance contracts, e.g., HVAC, lawn, appliances.*
- Owner’s Manuals for personal property. You may want to break these down by the type of asset.
- Warranties. You may want to break these down by the type of asset. For some assets, you may elect to keep the warranties in other folders, e.g., autos, home.
- Staple a copy of the receipts to the warranty information.*
- List of return policies, if relevant and material.
Discard these items when you no longer own the asset or when the warranties are clearly past the expiration date. If you sell the asset, some of these items may be helpful for the buyer.
Other recordkeeping categories
You may obviously have other records that you should maintain, e.g., hobbies, community activities, child-related items. The key is to obviously come up with rules on what you should retain, for how long, and in what manner. You don’t want to create too many categories but enough categories to where you can locate the information relatively easily.
Should I keep a hard copy of my records?
I’m a big fan of going paperless whenever possible as the benefits include easier retrieval and space savings. In today’s day and age, there is no reason to keep as much paper as we did previously. Most of the documents can be stored in pdf form on our computers and/or other digital storage medium. Cloud sharing may also be an option. Take security precautions into account when storing information digitally, of course. Having a good scanner will be well worth if you do need to digitize many records.
Some items will need to be hard copy and should be placed in a safe place. You can store those critical items in a safe deposit box or a fireproof safe. A safe deposit box isn’t cheap as it may range form $60 - $300/month (2019), but certain financial institution may provide a discount or provide this free of charge for certain-sized relationships. A fireproof safe is often more convenient and more economical over the long-term, but there is a larger initial cost ($150 - $1,500 as of 2019) and it takes up space, of course. Even if you do need to keep these in hard copy form, it will be important to digitize many of these documents for easier retrieval or if you need to share with loved one. Items that should be kept safe include the following:
- Estate planning documents (wills, trusts, etc.)
- Social Security cards and passports
- Marriage and birth certificates
- Automobile titles
- Property deeds
- Loan documents
- Honus Wagner baseball cards.
- Personal property inventory (and perhaps photos).
- Signed golf scorecards where you scored the hole-in-one
- Certain key tax information.