Business Record Keeping — How Long to Keep Financial Records?

When it comes to financial basics, and your money matters become more complex, you need a proper record keeping guidelines. Gone are the days when the bankbooks and canceled checks were the only pieces of paper we had to keep and organize. Now, bank records, bank statements, bank account, savings account records, mutual fund statements, deductible expenses, and bunch of other papers threaten to drown us. In this situation, having an effective and efficient record keeping are more important than ever. There should be a record keeping guidelines that save our days.

The good news for you is that personal financial record keeping should not be a daunting task. It is really no big hassle to set up and actually use an organizational system to keep financial records and paper in order and within reach when needed. Even better, if you get into the habit of maintaining good records when your situation is fairly simple, the task of looking after your records will be less of a chore when things do become more complicated.

If you’ve ever filed a federal tax return, you should keep a copy permanently. The returns can help establish a long-term condition and progress of your financial health and budgeting, but you’ll need them in case the feds target you for an audit. If nothing else, if the IRS asks a question about a particular return and you don’t have it, they’ll charge you for a copy. Then how long to keep financial records with a sound and proper duration time? That doesn’t mean you need to stash your returns’ supporting documents for eternity as well. This is because the usual statute of limitations for tax audits is 3 years (as many as 6 years if the government has reason to believe you underpaid). So it’s a always good practice to keep supporting papers with your returns for at least six years.

Storing and keep bank statements for the same 6 years period provides further protection from audit hassles. The IRS routinely conducts what are known as “economic reality” audits, reviews of taxpayer records that don’t seem to jibe with a certain level of lifestyle. So, if you have a million-dollar house on a $30,000 income (an admittedly extreme, if not altogether unattractive, example, but you get the idea), bank records can be critical in proving you haven’t done anything underhanded.

Maintaining a good bank records can also help out in other ways. Say, for instance, in the past six years you have $60,000 more in bank deposits than you declared as income. It turns out you got $10,000 a year in tax-free gifts from your parents, which is perfectly legal. But that can be hard to prove with just the tax forms and bank records can be very helpful in an audit to document a record of cash flow.

So how long to keep financial records? Likewise, hang onto annual statements detailing all forms of investment again, if you’ve got them, your home, stocks, bonds, mutual funds, and other types of investments for at least three years after you sell them (items such as quarterly statements can be tossed as you receive updates). While these, can provide much-needed ammunition in the event of an audit, they’re also an essential element of your tax preparation, since they document how much you made (or lost) from your initial investment. Moreover, keeping investment records handy can skirt a major headache, as anyone who has tried to get financial records in the vicinity of April 15 can attest to (duplicate statements can take weeks to obtain, and some fund families and brokerage houses will charge you for the additional copies).

Of course, all the preaching in the world about the importance of comprehensive financial record keeping rings pretty hollow without a strategy to make the task less daunting. Start by breaking down to keep financial record into smaller components. Rather than organize your papers every 6 months or annually, set some time aside every month to put your papers in order. Nor does your task necessarily have to involve some sort of high-tech, New Age organizational mechanism; buy an old fashioned accordion file, and label the various pockets for keep bank statements, mutual fund statements, credit card records, or whatever is appropriate. Then sit down once a month with all pertinent papers, and put them where they belong.

One overriding principle to bear in mind when organizing your records is to keep everything as visible as possible. The more difficult you make it to locate something, the less successful your search for it later on will likely prove. So, when sorting out your monthly records, take the time to pull the statements from their mailing envelopes before placing them in a file. For even greater convenience, attach a note to each file indicating how long to keep financial records and you need to keep those particular papers; that way, you can tell at a glance what needs to stay and what can go. Staple multi page statements together. Otherwise, they have a tendency to go all over the place.

For many who are out of school and working, the challenge of keeping and organizing receipts is perhaps the biggest record keeping nightmare of all. But there is a simple solution: Use your appointment book or calendar to help keep tabs on what you spent and when. As you pay an expense that affects your taxes, just take the receipt and clip or tape it into your calendar. That handles the tasks of holding onto receipts and tracking when you incurred the expense in one simple step.

Now that you have a proper and sound strategy in hand, get ready to enjoy the benefits of orderly and accessible record keeping. For one thing, having good financial records keeping will save you money if you have your taxes prepared by someone else. In every moment you take to better organize things on your end will mean less time spent when your tax pro’s clock is ticking. If you do your taxes yourself, think of the money you’ll save on aspirin knowing where things are. Then there’s the psychological comfort in knowing that any question about your finances has an answer accurate, up to date, and at the ready. And that beats a desperate, headfirst dive into a crumpled mountain of papers any day.©