Personal Finance

What Is the Best Way to Store Your Financial Records?

We may be moving toward a paperless society, but the truth is that there are plenty of documents we still need hard copies of. And even digital copies of important documents should be stored securely. So what's the best way to store your financial and identity records?

What Financial Records Should You Keep?

When it comes to tax returns, the IRS advises that you keep them and the documents used to prepare them for at least three years. Even if you're not worried about an audit, there could be errors on your returns or other issues that may require filing an amendment or taking other action down the road. You may use many different documents when preparing your returns. These usually include the following:

  • Canceled checks, credit card statements, receipts and any other proof of payments made to validate any claims or deductions on your return
  • Forms proving your income, such as W-2 and 1099 forms
  • Forms related to property, particularly if you've bought or sold a home, or own investment properties
  • Financial records related to any investments you may have, such as stock transactions or account statements, college savings statements (529 plans and the like), and retirement account statements, such as traditional and Roth IRA statements

The IRS has up to six years to initiate an audit if you haven't reported at least 25% of your income. As a rule of thumb, plan to keep records anywhere between three and seven years. It's better to err on the side of holding on to these forms for a longer rather than shorter time period.

You should also have documents for your bank and investment accounts on hand, as well as a list of and supporting documents for your loans, mortgages and other debt. You will also want hard copies of your insurance policies, as well as any wills, trusts and other important legal documents.

Finally, your identity documents are also an important part of your financial records. These include your Social Security card and your passport, among other items.

Where Should You Keep a Hard Copy of These Documents?

You might be tempted to collect these papers and store at least some of them in a safe deposit box at the bank. While that may seem like a good idea, consider that you can't access these documents quickly at the bank. And if the owner of a box dies, the box is typically sealed.

Instead, consider getting a fireproof safe for your home. You will be able to access it at any time, and it will be covered by your home insurance policy. To prevent it from being stolen in the case of a home break-in, you should get one that can be secured to the floor or wall.

How Do You Store Important Files Digitally?

Chances are, you'll want to store copies of important documents digitally as well. That can be a good idea—as long as you secure them properly.

If you're storing documents on your computer, you should encrypt the folders where you keep them. Encryption is a process that encodes a file so that only people who are authorized can access it. Typically, you'll need a special password to access your encrypted files. That way if someone is able to access your computer, they can't get access to those records easily. Both Windows and Mac operating systems offer encryption abilities for your files. You can also get third-party encryption software like VeraCrypt, which is free to use and works for Windows, MacOS and Linux.

When It's Time to Let Go

If you're confident that you've kept some of your important papers long enough, don't simply throw them into your paper recycling bin. It's important to shred all documents with any personal identification or financial information. If you don't do your own shredding at home, use a provider who will shred the documents while you wait. Protecting your identity is critical, and these important documents tend to have lots of information that thieves would love to get their hands on. Make sure that doesn't happen.