KonMari-ing Your Financial Life

N7FUTW0RY5 You’ve likely heard about The Life-Changing Magic of Tidying Up, Marie Kondo’s how-to manual for decluttering and organizing your home. And you’re pretty much ready to have your life changed. Maybe that’s the New Year’s resolution you’re eyeing, maybe you’ve already started, or maybe you don’t know about any of this, but still want to tackle the piles of important (maybe?) papers that seem to accumulate.

 

I like Kondo’s philosophy of simplicity and streamlining and only keeping what truly makes you happy. It dovetails nicely with my approach to financial planning and how I encourage my clients to think about their financial lives: spend meaningfully and with intention, determine an investment philosophy that reflects your risk tolerance and time horizon, execute a simple strategy in line with that, then stick with it and ignore the noise. But just because last year’s tax return doesn’t spark joy doesn’t mean you should discard it. Here’s a list of what can be shredded and what should be kept (and for how long, and in what format).

Note: you’re probably receiving many of these electronically - just ensure you can access them via the provider’s website for as long as you will need, otherwise download them regularly. And even digital files can get cluttered and scattered, so title and organize them in a way that makes them easy to find if needed. Remember, if you switch banks or brokerage firms, make sure you have the appropriate statements for each account. You can likely access them even after account closure, but you’ll probably incur a fee to do so. 

 

Once you know these are correct, they're no longer needed. Sign up for e-delivery of these wherever possible to reduce clutter. Shred these now (or soon):

  • ATM receipts: once you record the transaction
  • Bank deposit slips: once the funds appear in your account
  • Receipts for things you bought on a credit card: when charges appear on your statement, unless you need it for a return or a warranty
  • Credit card and bank statements: when paid/reconciled
  • If any of the above relate tax deductions, see below for how long to keep tax backup documents

You might have to hold on to these a little while longer to make sure everything looks right, but at least once a year, you can purge these:

  • Utility bills, if not needed for business deductions (such as a home office): after a year
  • Paycheck stubs: once reconciled with your W2 and annual Social Security earnings statement
  • Brokerage statements: once you get your annual statement (see below for an exception). 
  • Medical bills and supporting payment documentation: until you know for sure the provider has acknowledged payment in full, by you or your insurance company. And keep in mind that you can deduct unreimbursed medical expenses in excess of 10% of your AGI (7.5% if you're over 65).

The IRS can generally audit a return for three years from the due date, but it's six years if a substantial underreporting of income is suspected. So keep these (digital is fine) for seven calendar years: 

  • Backup documents for tax returns (but not the return itself - see below).
  • Receipts for capital home improvements. They will be necessary to substantiate the cost basis of the home - capital improvements increase the cost basis and could lower your tax bill when you sell. Retain them for 7 years after the tax year during which the home is sold, not the year the improvements were performed.
  • Statements for taxable brokerage accounts if: 1) they prove what you paid for an investment purchased before 2011 (cost basis for securities bought in 2011 or later will be tracked by the brokerage firm) and 2) you don't have the accompanying annual statement. Retain until 7 years after the tax year in which the security is sold.

Scan and keep indefinitely:

  • Tax returns with proof that you filed and paid (if you owed)
  • IRS forms relating to nondeductible traditional IRA contributions and/or Roth conversions
  • Retirement and brokerage account annual statements
  • Receipts for large purchases, for insurance purposes
  • Payoff information for all satisfied loans
  • Annual Social Security benefit estimate statements

Keep hard copies indefinitely:

Some things just need to be kept in their original forms. Usually, a fireproof home lockbox or safe is preferable to a bank safety deposit box for these, since safety deposit boxes can be difficult to access in case of your death or incapacity. If your original estate documents are in a sealed safety deposit box, your heirs, executor, trustees and others you've asked to carry out your wishes will incur additional expense and delay in making sure those wishes are honored. Make sure a trusted relative or friend knows where the lockbox is and how to open it. 

  • Wills, living wills, powers of attorney, health care proxies
  • Marriage license
  • Birth certificates
  • Adoption paperwork
  • Deeds and titles for real estate
  • Citizenship papers
  • Custody agreement
  • Divorce certificate
  • Military records