Yesterday, I spent several hours setting up an electronic system to maintain most of my records instead of using a filing cabinet system as I described a while back.
What is an electronic financial document system?
Basically, it just means that instead of saving paper copies of your financial records, you save them all electronically, saving only paper copies of the most vital documents. This can save a tremendous amount of space, plus make it much easier than before to find and search through your documents.
Here’s an example: let’s say you wanted to find all of your credit card charges for gas in the last year. With paper records, you’d be going through the filing cabinet for an hour: with an electronic financial document system, you just click a few times and search through a handful of PDF files, retrieving the info you want in just a few minutes.
The benefits of such a system include:
It saves space Having all of your financial documents in electronic form is a lot more space-efficient than having a filing cabinet.
It’s easier to search Finding the specific information you need in an electronic system is much quicker than in a system of file folders, especially if your question is rather esoteric. This is especially true come tax time. To me, this is the true benefit of electronic financial documents.
It’s easier to back up Backing up an electronic system basically involves a blank DVD and a DVD burner (or even a CD and a CD burner for a small archive). That’s a lot easier than a filing cabinet full of photocopies.
On the other hand, the drawbacks of such a system include:
It takes longer to file things away When you get a new document, you have to scan it and add it to the system. This can take substantially longer than merely putting it in the appropriate folder in a filing cabinet. This can be mediated, though, by having an efficient system as described below.
It’s slightly less reliable. Filing cabinets typically don’t have disk errors. The best thing you can do is to make sure you have a paper copy of everything truly vital and also be sure to have plenty of backups.
It’s slightly less secure. You will probably want to have some security on the drive, such as having it attached to your desk with a steel cable or something to that effect, as well as data security software like TrueCrypt. A hard drive is much easier for someone to take than a locked filing cabinet.
What do I need?
Here are the components of the system I’ve set up.
A home computer Yep, that’s the basic piece. A few free USB ports and a CD or DVD burner are also needed peripherals.
An external hard drive Over time, this data will really add up. Plus, you’ll want the ability to easily move this archive to another computer. Thus, I recommend an external USB hard drive for storing this data.
A scanner / printer These may or may not be two separate devices. You’ll obviously also need the software for both.
Adobe Acrobat Standard (not Reader) This is my preferred format for storing the documents. Acrobat does a great job of handling character recognition from your scans, making it possible to do text searches of all of the stuff you scan in. Plus, Acrobat files are quite portable.
Blank DVDs These will be used for backups. I highly recommend monthly backups for all of your data, but especially for this type of data.
How do I do it?
This is a step-by-step example of how I set up my filing system. Your filing system may differ – the important part is that it makes sense to you.
First, I devoted an entire external hard drive to financial storage. This meant that everything on this external hard drive was nothing but financial documents. It connects via USB and is hidden in a locked desk drawer. I get it out when I need it.
On that drive, I created a series of top level folders for each entity I conduct financial business with. I have an IRS folder for my taxes, a Vanguard folder for my investments, an Alliant Energy folder for my electric bill, and so on.
Within each folder, I have a folder for each month. “December 2006″ and so on. Within each of those folders, I store the actual scanned documents with a filename that includes the date I received it as well as a brief explanation of what it is. So, in Alliant Energy / March 2007, I have a scanned copy of the bill I received during that month as well as a copy of my receipt for the online bill pay.
I also have a series of “shortcut” folders based on year. At the top level of the drive, I have a 2007 folder, and under that folders for each month. Inside of each of those folders is a direct alias to all of the folders on the drive for that month. This saves time in searching for documents.
Actually getting the documents in there is simple. I just scan them directly into Adobe Acrobat, save them appropriately, then shred the document. Once it’s shredded, I save the shreddings for campfire kindling (seriously, shredded documents makes for great kindling). I only save documents of vital importance.
Once you are used to the routine of scanning and shredding, it becomes very simple to archive all pieces of financial information that come your way. I am now actually archiving grocery receipts and so forth to make it easy to analyze my shopping habits.
In short, even though it takes a bit of work, it’s well worth the extra effort because of the constant convenience of having your financial information at your fingertips.