Most of us throw our bills into a pile we dig through once a month, pay off what we can, then dump the records into the same black hole. Even when we get the urge to throw it all away, we worry that we might someday need those papers.

Organizing your financial papers can free up time -- no more rummaging for hours for the warranty you actually do need -- and reduce clutter and stress.

The simplest solution is to file your papers -- as soon as you get them -- in the right place. Set up an old file cabinet or get several large manila envelopes. You need three categories: papers you need for the short term, ones you need for a year or so, and ones you need to hold indefinitely.

Each month you can pay off the bills in the short-term folder and transfer anything you need to save to the other folders. Then you just need an annual cleanup to get in shape for the next year -- and for tax time.

Here's what can stay and what should go.

What You Can Throw Out Monthly
All those scraps of papers from your ATM withdrawals are only needed until you write down the deduction in your checkbook or online record- keeping program (such as Quicken). Once you get your monthly bank statement and check that it is accurate, you can throw the ATM slips out, along with deposit slips and receipts for small purchases or things you can't return.

Each month after paying your bills, you can put the receipts in the longer-term folder in case you need to refer to them. That includes your mortgage statement, phone and utility bills and credit card statements.

What You Can Throw Out Annually
At the end of the year, you'll get annual statements from your bank, your mortgage company and your brokerage or mutual fund company. You will also get the items you need for your taxes, such as your W-2 form from your employer.

Check these against your monthly statements to be sure they are accurate, then throw out the monthly statements as well as your paycheck stubs. You can do the same for your credit card receipts, mortgage bills, and phone and utility bills, unless you plan deduct those items from your taxes.

Tax Records
After you've done your taxes, gather the supporting documents and save them. Because the IRS can audit your taxes for up to seven years after you have filed them, you need to hold on to these records -- as well as copies of your return-- for that long. Make sure you also keep receipts for any deductions you have taken.

What You Should Save Indefinitely
Some things should not be thrown away for a long time, if ever:

  • Warranties and receipts for all big purchases. It is a good idea to keep warranties in order by the year they expire, so you can see easily which become worthless. And you may need receipts for insurance purposes if you have a fire, flood or other emergency.
  • Receipts pertaining to home improvements. These are necessary when computing the capital gains on the sale of your home.
  • Documents related to trusts, or passing stocks to your heirs or other beneficiaries.
  • Documentation of your retirement plan beneficiaries.
  • Annual statements from your brokerage or other confirmation of investment sales and purchases.
  • Your passport and will, and the deed for your home.
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