— Step 2: Find your money
I hope the first step motivated you to get ready to start over and get going on your 2010 financial action plan. Now the question is: Where to start?
The answer: It’s time to “find your money.”
Every day, I talk to people just like Georgia, whom we met in Step 1. They are worried about the economy and their own financial futures. Not surprisingly, they’re filled with questions. “Is this a good time to invest in real estate?” they ask me. “What do you think about foreclosure properties?” “Should I buy mutual funds or individual stocks?” “What’s the best way to get back all the money I lost in my 401(k)?”
These are all good questions, but for most people they are the WRONG questions to ask first. That’s because for most people—and maybe this includes you—there’s one question that has to be answered BEFORE they can start dealing with all those other issues. And that is this:
Do you know?
Here’s the deal in a nutshell: If you don’t know where your money is—and where your money is going—you can’t start over financially. First you have
to find your money. Then you can make a plan.
You have to face the facts of what you have and don't have
Back in the winter of 2008–09, when the stock market was hitting bottom, a lot of people simply couldn’t bear to watch what was happening to their savings and retirement accounts. So they stopped looking. I guess that’s understandable, but when it comes to money, ignorance is definitely not bliss.
Getting your finances organized—understanding where your money is and where it is going—is the key to starting over. In order to make a financial plan that is based on reality (as opposed to wishful thinking), you need to do two things:
1. Determine what all your assets and obligations are.
2. Figure out where you spend your money, month by month, day by day.
In this step, I’m going to share with you how to do both of those things. First, I’ll show you how to get organized with my painless “Start Over” File Folder System. Then I’ll help you get a handle on your spending by figuring out your Latte Factor. Are you ready? Then let’s get started!
All your bills in a box — the 'start over' file folder system for 2010
Let’s face it—organizing your finances can be a real chore. Every month, you get sent dozens of statements, bills, and other financial documents in the mail and online. It can be overwhelming. The good news is that there’s a way to get organized that’s amazingly easy and relatively painless—a system that allows you to find your bills and important documents quickly and without worry.
I first developed my file folder system back in the 1990s, and it’s one of the top things my readers thank me for. That’s probably because it is one of the few things you can do in less than an hour at home to fix and secure your financial life. Many people—maybe you’re one of them—waste literally hundreds and sometimes thousands of dollars a year paying late fees, interest fees, and penalty fees because they can’t find their bills in a pile of other financial “stuff” and, as a result, miss their payment deadlines.
Of course, times change and our needs change with them. So I have taken the FinishRich File Folder system that I’ve described in my previous books and updated it for the current economic environment. What hasn’t changed is that it is still simple and you can still set it up at home in less than an hour.
Here’s what you do: First, get yourself 15 or so hanging folders and a box of at least 50 file folders to put inside them. Then label the hanging folders as follows:
The Finish Rich file folder system
1. ‘Tax Returns.’ This hanging folder should contain four file folders, one for each of the last three years plus one for the current year. Mark the year on each folder’s tab and put into it all of that year’s important tax documents, such as W-2 forms, 1099s, receipts to support deductions or credits, and (most important) a copy of all the tax returns you filed for that year. Generally speaking, you don’t need to keep tax records for more than three years, although some documents—such as records relating to a home purchase or sale, stock transactions, retirement accounts, and business or rental property—should be kept longer. I keep all my tax documents for at least seven years, but that’s an individual decision.
2. ‘Retirement Accounts.’ All of your retirement account statements go here. You should create a file for each retirement account that you and your partner have. If you have three IRAs and a 401(k) plan, then you should have a separate file for each. The most important documents to file are the quarterly statements. If you have a company retirement account, you should also definitely keep your sign-up package, because it lists the investment options you have—something you should review at least once a year. You don’t need to keep the prospectuses that the mutual-fund companies mail you each quarter.
3. ‘Social Security.’ Keep your most recent Social Security Benefits Statement in this folder. If you haven’t received a statement in the mail in the last 12 months, request one by going online to www.ssa.gov or telephoning the Social Security Administration toll-free at (800) 772–1213.
4. ‘Investment Accounts.’ This folder is for every statement you receive related to any investments you may have (mutual funds, stocks, bonds, etc.) that are not in a retirement account. Prepare a separate file folder for every brokerage account you maintain.
5. ‘Savings and Checking Accounts.’ Keep your monthly bank statements here, with a separate file folder for each account. Generally speaking, you don’t need to keep bank statements for more than a few months—certainly not more than a year. If you get your statement online, print out a copy and stick it in the file.
6. ‘Household Accounts.’ If you own your own home, this hanging folder should contain the following files:
“House Title,” for documents such as title reports and title insurance policies. (If you can’t find this stuff, call your real estate agent or title company.)
“Home Improvements,” for all your receipts for any home-improvement work you do. (Since homeimprovement expenses can be added to the cost basis of your house when you sell it, which means a bigger tax deduction for you, you should keep these receipts for as long as you own your house.)
“Home Mortgage,” for all your mortgage statements. (Which you should check regularly, since mortgage companies often don’t credit you properly.) If you’re a renter, this folder should contain your lease, the receipt for your security deposit, and the receipts or canceled checks for your rental payments.
7. ‘Credit Card DEBT.’ Make sure you capitalize the word “DEBT” so it stands out and bothers you every time you see it. I’m not kidding. In my view, credit card debt is the biggest problem facing American consumers today. In Step 3, I will lay out a detailed lan for how you can pay down your debt as responsibly and quickly as possible. Right now simply create the folders—a separate one for each credit account you have—and keep your monthly statements in them.
8. “DOLP™ Worksheet.” DOLP stands for “Dead On Last Payment.” This is the system for paying down debt that I have taught for nearly a decade. I will explain exactly how it works in Step 3. In the meantime, make a copy of the DOLP worksheet on page 44 and put it in this file. (You can also download the worksheet from www.finishrich.com/DOLP.)
9. ‘Credit Scores.’ This folder is for your most recent credit scores, along with the credit reports on which they are based. See Step 4 for details on what these are and how to get copies.
10. ‘Other Liabilities.’ This is where you keep all your records dealing with debts other than your mortgage and your credit card accounts. These would include college loans, car loans, personal loans, etc. Each debt should have its own file folder, which should contain the loan note and your payment records.
11. ‘Insurance.’ Make separate file folders for each of your insurance policies, including health, life, automobile, homeowner’s or renter’s, disability, long-term care, and so on. Each of these folders should contain the appropriate policy and all the related payment records. If you have any employer provided insurance (e.g., medical coverage), include all the brochures and other informational material you’ve received from your company.
12. ‘Family Will or Trust.’ This should hold a copy of your most recent will or living trust, along with the business card of the attorney who drafted it.
13. ‘Children’s Accounts.’ If you have children, create a folder for all statements and other records pertaining to college savings accounts and any other investments you may have made on their behalf.
14. ‘Latte Factor®.’ Here is where you keep your Latte Factor worksheet. For some of you, this may be the most important folder you create.
Now you are organized financially
You did it. You now have 14 hanging files (13, if you don’t have kids), organized in a box or a file cabinet that represents your entire financial life. You should already be feeling more empowered and more in control over your finances. In fact, you are. In getting your records organized, you have taken a major step toward getting your financial life back on track.
I’m not exaggerating when I say that this one exercise can have a huge impact on your life. Over the years, I have heard from countless readers who told me that simply setting up this filing system totally changed how they handled their finances. It has helped couples get on the same page and stop fighting about money. It has helped people who never had a plan get a plan. Please trust me and do this. You will feel better and it will only take an hour. So go do it now.
As you create your file folder system, you may find that you don’t have any documents to put in some of the folders. Make them anyway. If you don’t have, say, a will or living trust, the empty folder will remind you every time you open the file box or drawer that you still have “homework” to complete for your “Start Over” plan.
If you are missing documents, use the form below to list what is missing and what you need to do to fill in the gaps.
Fill in the “Due Date” so you have a specific goal and time frame to meet. Check off “Completed” when you’re done.
Which records should you keep and which should you ditch?
The reason I made the FinishRich File Folder System so specific is that many of us keep too much information for way too long. (I’m guilty of this myself.) The fact is, except in cases involving fraud, the statute of limitations on income-tax returns is only three years, so the Internal Revenue Service does not expect you to hang on to tax records and receipts for any longer than that. The main exceptions to this are if you’ve underreported your income (in which case you should keep your records for six years) or have claimed a loss from worthless securities (seven years). Obviously, you should keep records documenting the cost basis of your home and all your other taxable investments for as long as you own them. The same goes for the basic documents concerning your retirement accounts and insurance policies, not to mention all loans and mortgages.
But don’t be shy about getting rid of old materials. Here’s a list of items you should consider throwing away (or shredding if the documents contain personal information):
• Outdated warranties
• Outdated instruction manuals
• Outdated wills or trusts (provided you created a new one)
• Canceled insurance policies
• Credit card statements for closed tax years
• Canceled checks for closed tax years
• Old brokerage statements for closed tax years (unless they have cost-basis information you might eventually need)
• Old annual reports from stocks and/or mutual funds
• Old investment newsletters (some people keep these things for years because they paid for them—let them go)
Organize your financial life online
Setting up and maintaining the “Start Over” File Folder System is extremely easy. Nonetheless, all that filing and storing of actual paper documents may strike some people as incredibly old-fashioned. If you’re one of those people, don’t worry. There is an entire new generation of extremely cool websites armed with powerful digital tools to help you track and manage your finances online. As one of these websites puts it, “We download, categorize, and graph all of your finances automatically every day. Know where you’re spending, without spending any effort.”
Is that cool or what?
Many of these sites are FREE. Two of the best are www.mint.com and www.wesabe.com. Both offer personal budgeting tools that allow you to track your cash flow, checking and savings accounts, credit cards, loans, and investments—all in one place. They can also analyze your spending, helping you to identify where you can cut back. Mint.com will even send you email alerts to keep you from getting hit with penalty fees for late payments, going over your credit limit, and dropping below a minimum-balance requirement.