Updated: May 20, 2020
A question asked by many people is how they should organize all the financial documents. Especially people not using a computer for an electronic filing system, are often overwhelmed by the amount of paper and do not know how to handle it. If you start asking different people how they do it, you will get many different answers to this question. There a various systems existing and one each claims to be the best.
However, all efficient systems have one thing in common - they take a 3-step approach:
Collect all the documents to be handled in a central location
Process them and archive needed documents - either for short-term or for long-term storage
Destroy documents not needed anymore
1. Collect all the documents to be handled in a central location
The first step is the essential start for getting your documents organized. You should have a place on a central spot in your house - ideally near the place where you open your mail, where you store all your documents until you process them further. Example of documents going into this place are: letters with account statements, insurance statements, bills arriving by mail, receipts of your purchases made be credit or debit card or cash, investment reports, invitations or offers you need to react on. Depending on how complex your situation is and whether you prefer making just one pile of paper during this phase or whether you want to categorize already now, you will use different tools for it.
You could use either
a simple card box or manila envelope where you collect everything in it
a small desk sorter dividing the documents into receipts/documents to process or keep/documents to destroy
a portable file box with different categories (e.g. Receipts, Bills, Taxes, To react, To Shred, Filing (short-term), Filing (long-term))
If your shredder is not near the place where you open your mail, it is important that you collect everything which contains some personal information (name, address, card numbers etc.), so you can later destroy it in an appropriate manner.
Whatever you are using, you should process the content of the collection on a regular base. How often depends on you individual situation. If you have many transactions, it might be necessary going over it on a weekly base, for many however it is enough checking it monthly (ideally on the time you are receiving your bank account and credit card statements).
2. Process and archive documents - either for short-term or for long-term storage
During step two you will process your papers by reconciling your statements, paying any bills not already scheduled for automatic payments and reacting on letters and offers as needed. After this you have to decide in which category the document belongs:
Documents to be stored for a short term: those are the documents you want to be quickly accessible. Usually these are the documents of the ongoing calendar year (insurance policies, paystubs, account statements, health insurance claims, investment reports, tax related documents etc.) There are different ways of keeping and sorting them:
You can use a binder and dividers for as many categories you need
You can use a cabinet folder with as many categories you need
You can use a set of 12 manila envelopes or folders and put all the documents of each month in it
Documents to be stored for the long-term:
All tax-related information has to be kept for three years after filing your return
Tax returns by themselves have to be kept for seven years
Some documents you have to keep forever or until the disposal of the property: papers related to your real estate property or vehicle titles, wills/trusts/estate plans, birth certificates, passports, immunization records, household inventory, etc.
Also here the organization depends on the complexity of your situation. You might want to sort out your yearly folder and keep only tax-related documents together with the tax return in a separate filing cabinet/ a bankers box or another set of manila envelopes.
For the documents you have to keep forever and which are difficult to replace it is recommended to either use a fire-proof safe box at your home or in a rented safe deposit box.
3. Destroy documents not needed anymore
During step three you will shred all the papers not needed anymore. It depends on the amount of paper and the accessibility of the shredded how often you will run through this phase.
What do YOU need for your system?
In a summary, your filing system could consist of 43 manila envelopes (12 envelopes for each month of three years plus 7 for tax returns) or be made of any combinations of binders and filing cabinets.
Which one is the right for YOU? You have to find out by assessing how complex your situation is and, even more important, which system works with your personality. If you are not good in sorting papers in many categories, use less categories or file it only time-based. If it is natural to you to split the documents into different categories, you can use a more granular system. And some people simply prefer binders over filing cabinets and vice versa.
If you are still unsure, a professional like a Daily Money Manager or a Financial Organizer can help you by implementing the solution best for you.