When the weather starts to warm, many Americans seize the opportunity to open their windows, let the sunshine in and rid their houses of the dust and dirt that has gathered during the winter, finding that the spring cleaning process leaves both their living rooms and their minds feeling a lot less cluttered.
A similarly cathartic experience can be enjoyed by those who devote some time and effort to tidying up their finances around this time of year. Spring is a great season to get your finances in order, and likely save some office space and money in the process.
Here are the essential steps to spring cleaning the financial clutter in your life:
Set specific goals for yourself
In the same way that cleaning an entire house from the inside out in a single afternoon is an unrealistic spring cleaning target, so too is conquering years of financial documents in just a few hours. If you're overly ambitious in your goals, you will likely find yourself quickly feeling overwhelmed, as is the case in nearly every clean-up effort.
Set a substantive yet realistic goal for yourself before you start. Consider the scope of what you're facing, and if necessary, break up your goal into smaller tasks you can accomplish over the course of several weekends or even months. Pledge to clear out a certain number of years' worth of old tax documents, or commit to organizing one file cabinet drawer per month until you've tackled the entire thing. If you find yourself outpacing the schedule you set for yourself, or struggling to keep up, adjust your plan accordingly.
Know what needs to go
Before you can start destroying old documents, it's important to confirm that they are actually safe to shred.
Some people choose to hold on to copies of their tax returns forever, keeping them arranged by year in case they ever need to prove that they did in fact file their taxes in a given year. Also, as the Internal Revenue Service notes, copies of previously-filed tax returns can prove helpful to have around when "preparing current-year tax returns and making computations if a return needs to be amended."
Many people, however, follow the "three-year rule" when it comes to retaining tax returns, which states that you only need to keep a tax return for three years after filing it, since the IRS only has up to three years to audit you and assess additional taxes and you only have three years to file an amended return.
Yet that bit of conventional wisdom ignores the fact that the IRS can actually go back six years in the event that more than 25 percent of income was omitted from the tax return, and that there is no statute of limitations if the agency proves you have filed a fraudulent return.
Even beyond those exceptions, though, it is important to remember that the statute of limitations applies if you can prove that you filed an income tax return. As Forbes noted, if the IRS can't find a copy of your tax return, it will assume you didn't file one, and if you can't produce a copy of your return, you'll have no way to refute that claim. Though the chances of that happening are relatively low, the safest practice is to keep each and every one of your tax returns organized in a secure location, or to retain them all as digital copies that have been properly backed up and encrypted.
As long as you can prove the existence of a tax return, though, the statute of limitations still applies, meaning it's safe to toss supporting tax documents after enough time has passed. Hold onto records of supporting deductions for three years, unless you're worried about the IRS possibly going back six years after identifying a "substantial error."
The IRS also advises that employment tax records should be retained for at least four years after the date that the tax becomes due or paid, whichever is later, and that tax records should be held onto for seven years if a return claims a loss from "worthless securities or a bad debt deduction."
If you have also been storing old insurance claim documents in a filing cabinet, reach out to your home, rental and auto insurance providers or agents and ask them directly which documents you should keep and for how long.
Rid your room of redundancies
Ever clean out the fridge and wonder why you let two bottles of the same condiment go bad? If you have multiple copies of the same document, or old contracts and statements made obsolete by newer agreements, you should obviously toss the unnecessary extras.
Similarly, you should consult with your bank and financial service companies to check how long they retain electronic copies of your records, since it's possible that some of your paper documents have been made redundant by online information. When applicable, download the electronic documents and back them up on a separate hard drive or cloud storage. Use a second hard drive or pay for a secure online cloud-based backup service for maximum protection.
Send sensitive info through the shredder
Many of the documents you'll toss out contain your name, social security number and other vital personal details. Just chucking those papers into a garbage can that anyone on the street could rifle through is a great way to have your identity stolen.
To ensure that no one else lays eyes on your old utility bills, receipts, reconciled bank statements, canceled checks and appropriately aged tax documents, cut them all to ribbons. A solid shredder is the most important appliance you can have when it comes to financial spring cleaning, so be careful with the machinery. Money Talks News recommended that shredder users avoid overheating by giving the device frequent rests and occasionally oiling the cutting mechanism or running through shredder lubrication sheets. If you buy one new, consult the manufacturer's instructions to make sure you don't overfeed your shredder and cause a shutdown.
Start scanning and changing your habits
If you want to avoid taking up even more space with additional documents and continually cleaning them out every few years, change your approach to document storage going forward.
The next time you receive an important document, scan it into your computer, back up the electronic copy to your hard drive or cloud and then run the paper document through your scanner. If you put this procedure into place for all of your crucial documents, you'll never have to file another paper again.
Additionally, check to see if any of your financial institutions or services have a "go paperless" option that allows you to transition fully from snail mail to electronic documents. It's also wise set up online auto-pay for certain bills, which will stop the paper bills from piling up and keep you from ever missing a payment.
Of course, you may also discover during the spring cleaning process that there are certain accounts or services you could do without. Closing old credit cards you no longer use, especially ones with high interest rates or fees, can save you big in the long run. According to Credit Karma, you should just be sure to first confirm that canceling them won't have a negative effect on your credit score.
This spring, set aside some time to rid your financial life of unnecessary expenses, as well as excess papers, and try to finally get organized for good.
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