MoneyCounts: A Financial Literacy Series

Spring Clean Financial Clutter

Dr. Daad RizkThe Pennsylvania State University

301 Outreach Building

University Park, PA 16802

dar39@psu.edu

Learning Objectives

• Identify financial clutter

• Learn why and how to clean financial clutter

• Differentiate between permanent and temporary records

• Use budgeting as a tool to clean financial clutter

• Use Tax forms to clean financial clutter

Why Clean Financial Clutter?

• Spring cleaning can clear clutter in your personal financial life just like it does for your closets and garage– Take control of your finances - budget– Simplify financial record’s keeping for year end tax– Practice financial literacy skills

• Consolidate bank accounts• Proper use of credit cards• Debt Management

– Reduce stress and save time in the long run

Identify Financial Clutter

• You can’t clean financial clutter if you don’t know what and where it is! – Make a financial inventory list of

• Financial accounts• Credit cards• Assets• Debts

– Collect financial papers from all sources• Around the house, in the car, shoe boxes, etc.,

Sort Before You Shred

– Sort financial records according to categories• Monthly bills, paystubs, Bank statements • Tax forms• Retirement & investment documents• Warranties and user manuals• Policies and deeds• Permanent Records – birth certificate, passports,

will, marriage license, etc.,

To Shred or To Keep?

• Buy a Shredder & a large Pizza! – Rule of thumb

• Any document you can get copies online for free, you do not need to keep• Documents that you foresee needing for a purpose and can not get copies

online for free, keep as needed (Bank statements and tax records to buy a home)

• Shred financial clutter at least once a year for the prior year! – Daily items, cash receipts after you log in your budget, credit card

receipts after you match to your monthly billing statement, etc., • Know the difference between temporary records and permanent records

– The need is short term or long term

What to keep for 1 year?

• Paycheck stubs• You can get rid of once you have compared to your W2 & your Social Security

earnings statement

• Utility Bills • Throw out after one year, unless using them as a deduction for a home office –

then you need to keep them for 3 years after you’ve filed your tax returns.

• Cancelled Checks • Unless needed for tax purposes or can be retrieved online

• Bank Statements • Unless needed for tax purposes or can be retrieved online

• Quarterly Investment Statements • Hold onto until you get your annual statement

What to keep for 3 years?

• Income Tax Returns – keep in mind that you can be audited by the IRS for no reason up to three years

after you filed a tax return. If you omit 25% of your gross income, that goes up to 6 years and if you don’t file a tax return at all, there is no statute of limitations

• Medical Bills and Cancelled Insurance Policies• Records of Selling a House

– needed for documentation for Capital Gains Tax• Records of Selling a Stock

– needed for documentation for Capital Gains Tax• Receipts, Cancelled Checks and other Documentation that Support Income or a

Deduction on your Tax Return– keep for 3 years from the date the return was filed

• Annual Investment Statement– keep for 3 years after you sell your investment

What to Keep for 7 years?

• Records of Satisfied Loans– If you borrow private loans from banks or lending institutions

• If you are a student and have federal student loans, what do you need to keep?

– Just because the Department of Education/Servicer has your student loan on file on NSLDS, this does not mean you should not keep your own copies of those documents

Current or Active Documents

• What to Hold While Active– Contracts– Insurance Documents – Homeowner’s Insurance and Auto Insurance Policies

until new renewal arrives, then throw out– Stock Certificates– Property Records – including original Settlement Statement from when you

purchased the home, as it shows closing costs and settlement fees paid. These maybe added to the cost basis calculation when you go to sell your home.

– Stock Records– Records of Pensions and Retirement Plans– Property Tax Records Disputed Bills – keep until the dispute is resolved– Home Improvement Records – hold for at least 3 years after the due date for the

tax return that includes the income or loss on the asset when it’s sold

Permanent Records

• Tax Returns – You may want to keep your tax returns indefinitely. The IRS destroys original 1040s after 3 years, but you

and your heirs may need information from the returns at some point in the future.

• Marriage Licenses• Divorce or Separation Agreements• Birth Certificates• Death Certificates• Social Security Cards• Wills• Living Wills and Advanced Medical Directives• Trusts• Estate Documents• Powers of Attorney• Deeds• Records of Paid Mortgages

Temporary Records

• Receipts saved for Budgeting purposes– Grocery receipts– Personal purchases – Miscellaneous receipts

• Receipts to support billing/monthly statements– Charges on credit cards– Charges on debit cards– ATM withdrawals

Home Improvement?

• Home Improvement Records and Cost Basis• If you plan to sell your current home at any time in the future and you have made

home improvements that add to the value of your home, you should keep all your sales receipts for items purchased for the improvement, (like a sink and the hardware to install the sink), credit card statements showing purchases if no receipt, and checks to contractors. When you go to sell your home, you will need to establish a cost basis, which is the original cost of the property, plus any improvements made by you, the owner. You will want to keep these records for at least 3 years after the due date for the tax return year that you sold your home in.

• Improvements can be items such as:• Remodeling the interior of the home• New roof or deck• Installing utilities on a building lot (new well or septic)• Numerous other improvements performed by the owner, see IRS.gov for

more details

Review Tax Withholding

• Spring is the time to review your W4 with your employer to adjust for the tax year– Check the calculator at http://www.irs.gov/ – Set up files for your tax related documents– Review new withholding by the IRS to prepare

yourself for the next tax year– Use 1040 and supporting schedules to

organize your financial documents

Tax Forms – 1040 & SD

• Use 1040 tax form and supporting documents to help organize your financial records

• http://www.irs.gov/pub/irs-pdf/f1040.pdf

– Income

– Adjustments to Income (AGI)

– Taxes and Credits

Schedule A (itemized deductions)

• Allowable deductions for taxpayers– Medical and dental expenses

– Taxes you paid– Interest you paid– Gifts to charity– Casualty and theft losses– Job expenses– Other miscellaneous deductions

http://www.irs.gov/pub/irs-pdf/f1040sa.pdf

Review Bank Accounts

• You do not need more than 1 or 2 Bank accounts (checking and saving)

– Review your bank accounts, consolidate and close unused accounts

– Numerous accounts mean more fees, paperwork, and risk of identity theft

– Open a saving account if you do not have one!

Review Investments

• Consolidate Brokerage Accounts to reduce clutter– As with bank accounts, brokerage accounts can be consolidated to reduce

financial clutter in our lives. – Take inventory and review what types of brokerage accounts you have because

only accounts of the same type can be combined. • For example, the contents of a trust account can only be combined with the contents of another trust

account having the exact same account title. Or, for example, a Roth IRA account can only be combined with another Roth IRA account having the same account owner.

– After streamlining brokerage accounts, a typical couple may have one trust or joint account, two IRA accounts (one each) and two Roth IRA accounts (one each). As with the 401(k) rollovers above, consolidating brokerage accounts makes it easier to properly manage your investments.

– Rethink bad investments

Review Credit Cards & Reports

• Make a list of all credit cards

– Sort by interest rate and annual fees

– Choose 2 or 3 cards that you want to keep

– Transfer balances to these cards and shred the others

• Make a decision if you want to keep those cards open or close them by customer request (review pros and cons)

– Make a plan to pay credit cards debt in full and on time each month

• Get your free credit report:

– http://www.annualfreecreditreport.com/

– Experian, TransUnion, Equifax

Review Insurance

• Health, Life, Disability Insurance & Coverage– Review Beneficiary designations, review your life situation– Consider family situation, age, gender, retirement plans

• Car Insurance– Start with State Standard and build your comfort zone coverage

• Home/Renter Insurance– Start with lending institution standard and build your comfort

zone coverage

Review Retirement

• 401K plan & various employment retirement plans

– Review beneficiary designations • Roth IRA• Traditional IRA• Consider Tax saving and Tax implication

Strategies for Success

• Purge, merge and back up

– A good filing system (paper or electronic) is crucial

• Save information for tax purposes and for long run financial need (mortgage, loans, etc.)

• Designate a drawer or cabinet for all paper financial records

• Designate a space on a computer drive for electronic information – back up computer system

• Sort by date, most current on top

– Clean out your wallet and purse

• Review what you are carrying in your wallet and purse

• Make copies of your cards (front & back) and keep in a safe deposit box

• Protect against identity theft

– Revisit your Budget and rework as necessary!

Financial Inventory List

Budgeting List

Contact Information

Questions & Comments

Thank you!

Dr. Daad Rizk

The Pennsylvania State University

MoneyCounts: A Financial Literacy Series

301 Outreach Building

University Park, PA 16802

dar39@psu.edu

1-(814)-863-0214