Part II - What to do with all that paperwork

Mar. 28, 2001 - So many people are always talking about how they need to get organized -- well if you're one of them - Millian is her to help you organize your financial life.

Last week we talked about how to get organized so that when tax time comes, it's easier to prepare your taxes, or have them prepared by a professional. Here's a recap - The key is a well-kept checkbook. To do that, you only have to follow three simple steps:

1. Pay everything by check;

2. Deposit everything;

3. Reconcile your bank statements.

Do these three things, Millian says, and everything you need to do your taxes is in one spot.

Of course there's documentation to back up your expenses and income - and that brings us to this week's topic - what to do with all that paperwork?

Receipts
Of course you've saved all the receipts for your expenses -- but they're all crammed into a big manilla envelope aren't they? Well, seeing as they are your first line of defense should you ever get audited, Millian says keeping them organized can be a lifesaver in the long run. "Receipts are the documentation to backup your checkbook and your tax return," she says.

"All you need to do is file them in alphabetical order by who you paid money to in one of those A-to-Z expandable files.

"At the end of the year, you can just transfer them to a box with your tax return, bank statements and the rest of your financial paperwork." Label the box clearly with the year of the return, store it away in the basement and forget about it....for five years, that is!

Tax returns
Contrary to popular belief, you don't have to keep all of your records forever. "You only need to keep them for five years," Millian says, "because after that, the IRS won't audit that year's return."

That doesn't mean you should pitch the whole box, by any means. But you can clean some of the paperwork out and reduce the amount of space they take up in storage.

"After five years you can shred most of it," Millian says, except the following, which you should keep forever:

• A copy of your tax return
• Any paid receipts for things you still have such as your house, car or anything that you have insured such as jewelry. "That way you've got the receipt as proof of value if your property is lost or damaged."

Which bring us to...

Insurance policies old and new
"You should keep all of your insurance policies, even if they've expired because there are so many insurable items that show up years later," she says. "If you don't know who you had the policy, you have no protection."

Think about this example: Ten years ago, a neighbor slipped and fell on your front porch. They didn't sue you or even go to the hospital and the incident eventually faded from memory. A year later, you changed insurance companies to get a better rate. Last year you've moved to a new home in a new neighborhood and changed insurance companies yet again.

Today, you receive a notice in the mail that your former neighbor is suing you for ongoing hip pain and surgery resulting from the accident.

"It's the insurance company you had 10 years ago that is going to handle this claim, not your current insurer." Many people have a misconception about what insurance is for, Millian says.

"Insurance isn't just to pay off a claim," she says. "The insurance company is also someone to represent your side and fight the claim if you are sued. That's part of what you are paying for with your premiums.

"You don't have to lay out all the legal fees - that's what insurance is for."

Millian M. Toms is a Royal Oak-based CPA and business advisor. She is also an active member of the community including The Optimists and Greater Royal Oak Chamber of Commerce. 

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