An old friend of mine discovered this site and asked to have lunch with me because she had a few questions she wanted to ask me about her financial situation. She was actually in good financial shape, but rather than having any sort of filing system, she would mostly just glance at old statements, toss them in a box, and forget about them. She didn’t keep track of anything that could be tax deductible or anything like that, merely relying on end of year statements for any of those. The end result? A huge trash bin in her closet full of eight years’ worth of financial statements.
The good news is that she now sees the purpose of organizing one’s financial statements: they provide a great record of where you’ve been and where you’re going, plus detailed records can be huge at tax time if you choose to itemize your income taxes. I personally look at old statements regularly to track my progress in various ways; I often use them to build various models of my spending and I’m building a huge one now to estimate some payoff dates of my student loans, my home, and our next automobiles.
The only problem is that she can’t motivate herself to even get started making sense out of this huge pile of statements. It seems so overwhelming to her that she just can’t get started with that huge pile of paper.
My solution? Declare paperwork bankruptcy (sort of) and start over from scratch. Similar to email bankruptcy, it’s an acknowledgement that the pressure of the stuff you haven’t dealt with is enough that it’s keeping you from moving forward, so you simply just leave all of the old stuff behind. Don’t worry about filing anything that’s in that bin, but don’t throw it away yet, either. Here’s the plan I proposed to her, one that might be useful if you’re feeling nervous about getting started in a filing system of your own.
First, verify all of your most current statements so that you know they’re correct. If something doesn’t jibe, dig back until you can find the source of it and get it straightened out. Don’t declare paperwork bankruptcy until you’re sure everything is fine.
Next, figure out the essential documents that should be in your filing cabinet. I made an extensive list of the basics for your home filing cabinet in the past. Most of the stuff to include is pretty basic: tax returns, pay stubs, and so on.
Then start filing all of your receipts, statements, etc. I recommend having a section for each year and then folders within that section that break down the groupings, like electric bills, pay stubs, etc. Some of the documents (like a will, etc.) are timeless and should be in their own section. I find it very easy to do this once a week and let things pile up in a “to be filed” basket until that point. I just toss everything in there – receipts, statements, etc. – and then file them all at once.
What about all of that old stuff? If it’s in your “trash bin of doom,” don’t worry about retrieving it unless it’s a lazy Sunday and you feel like pulling all of that old stuff into your system. Instead, just start filing the new stuff and leave the old stuff alone wherever you have it. Let it sit for seven years (just in case you ever need to retrieve something out of it), then burn the whole thing in a raging inferno. A couple of boxes clearly marked “old papers” in the back of your closet or in a storage space is the best place for it.