The term "financial records" is broad. But everyone has them, and some people have way too many. Figuring out what to keep, what to toss and what to put in your shredder (and when) can help pare down that pile of financial documents and keep it from getting overwhelming. Knowing that you need some organization and a shredding schedule is the first step.
When so much of your life is digital and paperless, you may wonder why you even need to hang on to any financial documents at all. While it may be true that you don't get 15-page paper bank statements or credit card statements anymore, the information within them may still be important enough to keep at arm's reach – at least for a while.
Keeping Records for Tax Season
Tax documents have a great deal to do with why you need a record of your income, assets and expenditures. These things help the Internal Revenue Service (IRS) determine whether you reported your annual taxes accurately or if you have underreported.
How long you keep some records is driven by the government's ability to come after a taxpayer up to 6 years to audit our records and collect taxes or start legal proceedings. That is why most records that affect tax records should be kept for 7 years.
Consider also: How Long Do I Need to Keep an Insurance EOB?
What to Save for Insurance Purposes
The IRS isn't the only one who may require you to provide proof of financial information. In order to attain certain insurance policies, you will need to come up with some important documentation, sensitive information and financial statements.
To make an insurance claim, you may need any number of important documents, depending on the type of policy and claim. When it comes time for the insurance company to reimburse you for damage or loss, they will want to see receipts and documentation.
What Else to Save
There are various documents you should always save.
- Real estate documents: When you purchase a home or real estate, it's hard to forget how much paperwork you sign. And much of that has to be kept for your own records and for if you ever sell the house.
- Financial records: If you meet with a financial advisor to plan your financial future, you will need to come up with financial records and supporting documents to get the conversation started and give the advisor the information needed to help you plan.
- Business ownership records: If you own a business, you need to retain financial documents for most of the reasons above, as well as those things related specifically to business ownership. Things like paper credit card receipts, employment taxes and sales taxes. Anything that impacts your tax records and employment records is yours to track. The IRS and your state government will have specific requirements about which records you need to keep and for how long.
Consider also: Put Your Business Records in Order
What Can You Shred and When?
Now that you know why to hang on to some of those documents, the burning question is probably: for how long? Different documents have different standards and for different reasons, which is confusing.
The good news is that many financial experts, like the Federal Trade Commission (FTC), have weighed in on this and helped to create some standards. If you are ever in doubt, check in with your own expert or tax advisor.
Shred These Things Right Away
Some things don't have a significant impact on your tax return, insurance or overall financial records. Receipts for small purchases can go straight to the shredder, along with other papers that you might tend to keep:
- paid utility bills
- credit card statements
- insignificant canceled checks
- credit card offers
- receipts for paid medical bills or explanation of benefits
- expired warranties
If you think you might need a receipt to return an item, that's your call. But there is no need to retain it for any other purpose. Likewise, if you receive anything in the mail that has personally identifiable information on it and isn't something you want, shred away.
Consider also: How to Destroy Old Checks
Keep One Year Before Shredding
If you receive paper bank statements, pay stubs or credit card statements, the FTC recommends keeping these for up to a year. However, if you track this information electronically through your bank, employer or credit card company, these statements are available for download as PDF files all year long, so you may not have to keep them at all. If you have any bills or payments that were disputed at some point, keep those until you have proof that any issue was resolved.
Records to Shred After Seven Years
Records that impact your tax return should be kept together with that return and saved for 7 years. After that time, you may want to hang onto the tax return itself, but you can shred everything else. There are a number of documents that apply to this category.
- Income forms and supporting documents: Hold on to W2s, 1099s and freelance records, for example.
- Tax-related receipts or canceled checks: Save receipts for expenditures that impacted your taxes such as alimony payments, mortgage interest payments, retirement contributions, medical payments and donations.
- Documents related to a house sale: Maintain these documents because of the tax implications. This includes any receipts and records related to home improvements on the home you sold because these affect your capital gains tax.
In case you are audited by the IRS, any documents that affect your income, deductions and claimed credits are important to keep for this stretch of time.
Consider also: What Happens During an Audit if You Don't Have Receipts?
Documents You Should Never Shred
Some things are forever and should be carefully saved and protected. There are documents and records issued by governmental agencies specific to you and tied to your identity that you should always keep:
- birth certificates and adoption records
- social security cards
- marriage records
- divorce decrees
- death certificates
- current life insurance policies
These all contain sensitive information and could be used to commit identity theft against you. For this reason, it is worth safeguarding them in a locked, fireproof box or safe.
Consider also: How Long Do I Have to Keep Insurance Records?
Use Your Judgement
Some things may not be very useful to you, such as manuals for the appliances in your home, especially if you go online or call a repair service for issues. This also goes for service call records. But if you sell your house, the next homeowner may appreciate the information, so you may choose to keep one folder with these documents. Stockpiling documents can be a slippery slope though, so be careful not to get carried away.
Organize, Separate and Schedule
Knowing how long to keep financial documents won't help you much if you don't have a good system for organizing and a set time to dispose of documents that can be destroyed. It's a good idea to keep the things you'll shred annually in folders by year, so you can just drop the whole bunch in the shredder when it's time.
Tax records should be kept together by year, with a date of when to shred.
Financial records that are long-term keepers can go by document type, such as mortgages, warranties, insurance documents and home improvement receipts. When you are scheduled to do an annual shredding, go through those folders and pull out anything this year that is ready to be disposed of.
Anything in the "keep forever" category needs a home that is safer than your typical file cabinet – preferably something fireproof and locked.
Some things are forever and should be carefully saved and protected. There are documents and records issued by governmental agencies specific to you and tied to your identity that you should always keep.
Managing Paperless Records
If you have gone green and don't collect paper receipts or receive any bills or statements in the mail, you can still keep an eye on these recordkeeping standards. This just makes it easy in case you do need to produce everything from a particular tax season or pull up a record for an insurance company, for instance.
Just as you might create organization and a shredding schedule for paper documents, create a system for keeping electronic records. If you file your taxes electronically, you'll already have a PDF of the tax forms and your supporting documentation.
Add in any digital records you receive monthly or annually: bank statements, credit account summaries, insurance documents, proof of loan and mortgage payments, and anything else on your annual list. Organize it in your yearly folder.
Backing Up Paperless Records
Keep backups of your documents on an external hard drive or a secure cloud storage service. You want them accessible when you need them but secure enough that they won't get lost or compromised.
It may be tempting to keep those old folders indefinitely, but you can maintain the same shredding schedule as if you were holding onto paper.
- FINRA: Save or Shred: How Long You Should Keep Financial Documents
- Federal Trade Commission: Shredding Infographic
- Federal Trade Commission: A Pack Rat’s Guide to Shredding
- Consumer Reports: How Long to Keep Tax Records and Other Documents
- LegalZoom: Business Documents: What to Keep and What to Shred
- Illinois CPA Society: Records Retention Guidelines
- IRS: How Long Should I Keep Records
- FDIC: Your Financial Records: What to Toss and When
- Redfin: Documents Needed to Sell a House
- AARP: How Long Do You Have to Keep Tax Records
- USA.gov: How to File Your Federal Taxes
Melissa is a writer and editor from Chicago, with a background in small business ownership. After selling her business, she moved into marketing for nonprofits and now manages volunteers at a large medical association. She is a writing and editing contractor and contributed to dozens of blogs and websites.