Tips to Manage Paper Financial Records

With tax season well underway, many people are knee-deep in paper financial records (e.g., W-2s and 1099 forms, receipts, etc.). This makes now a perfect time to review strategies to manage and organize “financial paper.” Below are eight tips that I shared at a recent class:

Create a “Financial One-Stop”-  Designate a central storage area for paper financial records (e.g., bank and brokerage statements, insurance policies, credit card statements, copies of legal documents, Social Security correspondence, copies of tax returns, warranties, and health insurance records). The “one-stop” can be desk drawers, a filing cabinet, or a fireproof lock box. 

Sort and Categorize- File documents in categories such as those listed above and use labeled file folders or accordion files to easily retrieve paper records. There are also a variety of home records organizer kits available for sale online (e.g., Amazon) that include a table of contents, pre-printed tabbed page dividers, and/or a plastic tote box.

Shread Sensitive Data- Use a high quality crosscut shredder that cuts paper into small confetti-like pieces to dispose of sensitive documents that are no longer needed. Examples include old bank, brokerage, and credit card statements and tax returns and supporting documents after seven years. Shredding helps to reduce the risk of identity theft.

Go Digital- Consider changing the settings on financial accounts to request digital statements instead of paper ones, with text notifications every time that a document is ready. In addition, use a scanner to create digital copies of important documents and store them in a cloud server, external hard drive, and/or with trusted people.

Set Up a Schedule- Create a document retention schedule for how long to keep certain documents before shredding them. For example, credit card statements and utility bills for one year and income tax records for seven years. Records related to capital assets (e.g., a house, investments, and valuable collectibles) should be held for as long as you own the capital asset plus seven years. 

Prepare Annual Summaries- Make a master list of month-by-month payments for utilities such as water, sewer, electric, oil, and natural gas before discarding monthly paper statements. The list will provide a useful history of past payments and monthly fluctuations due to weather, water usage, etc.

Handle Your Mail Once- Decide immediately whether something that comes in the mail should be filed, acted upon (e.g., making a payment), or discarded (i.e., in a “circular file” wastebasket or with a shredder). Efficiency experts warn about making paper piles that have revisited later.

Communicate, Communicate, Communicate- Make sure that trusted people are aware of your financial record-keeping system and could access records in an emergency, if needed. This includes knowing how to unlock a locked desk drawer or file cabinet and accessing digital records.

This post provides general personal finance or consumer decision-making information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.

Take-Aways From a Buy Now, Pay Later Webinar

Have you recently made a large purchase and been asked if you want to split the payment into several installments? I have when I bought a plane ticket for the 2024 AFCPE Symposium. Buy Now, Pay Later (BNPL) prompts have also popped up for several of my online purchases. 

I recently attended a Next Gen Personal Finance webinar about BNPL. Below are my seven key take-aways:

BNPL Description- BNPL allows consumers to access things that they cannot afford all at once by breaking the full payment into four or more installments. Usually, no interest is charged. Names of leading BNPL lenders include Affirm, Afterpay, Splitit, Paypal, and Klarna. Paypal is the most commonly used BNPL service provider with a 57% market share and Amazon recently partnered with Affirm to roll out customer financing options for purchases of $50 or more.

BNPL Business Model- BNPL is a point-of-sale (POS) loan. Lenders make money from fees paid by merchants that consumers do business with. Merchant fees can be a fixed amount or a percentage of the transaction value. Merchants are willing to pay these fees because the availability of BNPL attracts customers and customers often spend more when they can make installment payments.

BNPL Research Findings- BNPL can encourage overspending. In one study, 59% of BNPL users admitted to using the service to purchase an unnecessary item. In addition, the use of BNPL for “everyday” necessity purchases (gas, groceries, utilities, etc.) rose 434% between 2020 and 2021. The largest demographic group of BNPL users by generation is Millennials, followed by Gen Z, Gen X, and Baby Boomers according to an April 2023 BNPL research report by eMarketer.

BNPL Advantages- BNPL is a convenient way to pay for purchases over time, typically with the click of a mouse when shopping online. There is frequently no interest charged or lower interest rates than credit cards which currently have annual percentage rates around 20%. In addition, a good (670-739) or very good (740-799) credit score is not necessary for BNPL and there is fast approval.

BNPL Disadvantages- Unlike credit cards, there are no rewards, points, or cash back earned on purchases. In addition, payments can be hard to track and payments may continue even if an item is returned. Missing or late payments can result in late fees and may damage a borrower's credit score.

BNPL vs. Layaway Plans- With both BNPL and decades-old layaway plans, the first installment payment is due at checkout with a series of payments that follow at designated time intervals. The big difference is that BNPL users receive the product right away while layaway users typically have to wait until the final payment is made. Not surprisingly, BNPL is far more attractive to shoppers.

BNPL and Credit Scores- Depending on the loan provider, a BNPL loan can increase, decrease, or have no impact on a borrower’s credit score. It is an important factor to consider when using this service. Like late payments on loans and credit cards, a missed BNPL payment can be noted on your credit report for up to seven years. Overuse of BNPL can result in more debt than users can afford.

This post provides general personal finance or consumer decision-making information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.

Answers for a Twitter (X) Chat About Long-Term Care

I periodically participate as a panelist in Twitter (X) chats to answer questions about personal finance topics. Below are seven questions that I answered recently during a #creditchat about long-term care: 

What is long-term care planning, and why is it important for financial security as we age? 

Long-term care (LTC) planning is planning for a time in our life when we may no longer be able to perform activities of daily living (ADLs) such as eating, bathing, dressing, using the toilet, walking, and getting in and out of a bed or a chair (transferring). Without a LTC plan, people can deplete their financial resources paying for LTC services in later life.

At what age should people start considering long-term care planning, and why is it beneficial? 

Certainly by your 50s, you should develop a LTC plan although some people could need LTC services earlier (Think: Christopher Reeve’s severe injury). Early planning is useful for peace of mind. In addition, LTC insurance premiums are cheaper in your 50s or early 60s vs. later life.

How can long-term care planning help reduce the financial burden on family members? 

Unfortunately, some people expect their children to be their LTC plan and never discuss this expectation with them. Caregiving is a major financial and emotional burden. Caregivers often lose income, retirement savings, and even jobs to care for a family member. This burden often falls on women, many who can least afford to lose jobs, income or Social Security work credits.

What types of services are typically covered under long-term care insurance? 

It depends on the specifics of the policy contract so you need to review it carefully. LTC policies typically cover skilled nursing home care, assisted living, home health care, adult care, and respite care. Policies typically pay daily amounts for services up to policy limits (e.g., 3 years).

What are differences between LTC insurance, Medicare, and Medicaid in covering LTC needs?

LTC insurance is an insurance company contract; Medicare and Medicaid are government health care programs. Medicare does not cover non-medical LTC (custodial care services) unless medical care is needed. Very specific rules apply. Medicaid does cover LTC services for people with limited income and assets. Guidelines for Medicaid assistance vary among states.

Where can people go for advice about long-term care planning and its potential costs?

A licensed insurance broker, a certified financial planner®, and a local State Health Insurance Assistance Program (SHIP) office with trained volunteer insurance counselors are good resources. For info about how to find SHIP programs in every state, see https://www.shiphelp.org/. 

What are some common misconceptions about long-term care planning?

People think they won’t need LTC services. In reality, 70% of people turning 65 will need some type of care. Also, people think they have to buy LTC insurance but there are other options (e.g., self-insurance and a continuing care retirement community). The important thing is to make a plan!

This post provides general personal finance or consumer decision-making information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.

Strategies to Achieve Financial Peace of Mind

I recently attended an estate planning class called “How to Achieve Financial Peace of Mind.” Below are ten key take-aways that stood out to me from this presentation:

Plan For the Future- Prepare legal documents that specify how your estate (i.e., property, savings and investments, and other assets) will be managed when you die and how your health care and financial decisions will be made if you are incapacitated. Documents to prepare with assistance from an attorney include a will, durable power of attorney for finances, and a living will. Be sure to share copies of these documents with the people named as your personal representatives.

Create a “When I Die File”- Assemble in one place documents that someone (e.g., spouse, family, executor, attorney) would need in the event of your death or incapacity. These documents can be in digital and/or paper form. Items to include are a current net worth statement, list of people to contact, list of who gets your untitled property, list of automatic bill payments, and a draft obituary.

Fund Your Trusts- Retitle personal assets held in your name (e.g., bank accounts and securities) into the name of your trust if you decide to create one. It is critical that trusts be funded to be of value and it is a common error when they are not. Expect that doing this will take some time and paperwork. 

Reconsider Trusts- Consider other ways to distribute property to others and avoid probate without using a trust. Interestingly, the program speaker noted that “trusts are oversold” and recommended using payable on death (POD) designations for bank products (e.g., savings accounts and certificates of deposit) and transfer on death (TOD) designations for investment accounts to transfer property.

Lend Money Carefully- Prepare a promissory note if you lend money to others. It should be signed and dated by both you and the borrower with specifics about the loan agreement including the amount borrowed, the loan timeline (e.g., two years), and penalties for late payments.

Leave a Paper Trail- Tell trusted loved ones about your “When I Die File” and where it is located as well as the location of other important papers (e.g., in a desk, dresser drawer, or file cabinet) and the original and copies of the legal documents described above. For added security, consider a waterproof and fireproof safe (be sure to tell trusted loved ones the combination).

Talk With loved Ones- Communicate with loved ones about the content of your advance directive documents. For example, your desire to not have your life prolonged via a feeding tube or other artificial means. By understanding your wishes, they will be able to be better spokespeople for you if and when the time comes that they need to advocate for your wishes.

Prepare a Digital Assets Inventory- Make a list of the username and password for digital accounts including access to your cell phone and laptop and online accounts. Like the “When I Die File,” be sure to share this list with trusted loved ones. 

Make Your Own Final Arrangements- Prepare a letter of last instruction that includes your wishes for burial or cremation, a funeral or memorial service, special prayers and songs, charitable bequests in your name, and other important (to you) details. Place it in your “When I Die File.”

Review and Revise- Review your estate plans annually or when any major life event occurs such as the death of a personal representative or beneficiary. 

This post provides general personal finance or consumer decision-making information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.

Answers to a Reporter’s Questions About Savings Bonds

I am frequently contacted by reporters to answer questions about personal finance topics. Below are three questions that I answered recently about U.S. savings bonds:

What happens to savings bonds if the original owner is deceased?

It depends on how the bonds are titled (this will be shown on the front face of the bond). If there is a named beneficiary, a bond will go directly to the beneficiary and is not part of the probate estate. If there is a surviving co-owner, that person becomes the sole owner of the bond. If there is no beneficiary or co-owner, savings bonds become an asset of the deceased bond owner’s estate, which will be settled via the terms of a deceased person’s will or state intestacy laws if there was no will. Note that there is no stepped-up basis on inherited savings bonds as there is with stock.

What should someone do if they have lost paper savings bonds?

The government has a six-page form for this: FS Form 1048 issued by the Bureau of the Fiscal Service. However, to complete the form, you must provide the issue date, face amount, and serial number of the bond. Therefore, it is imperative that you create a list with this information and keep it with your financial records. I personally use the savings bond inventory tool on the Treasury Direct website to create and update my bond inventory. Other people scan their bonds for a digital record or make a paper copy with a copier. FS Form 1048 also requires a signature guarantee by a financial institution such as a local bank. Wait to sign the form in the bank officer’s presence. 

I honestly do not know what happens if people do not have the necessary information required to complete FS Form 1048. I told the reporter to recommend that her readers contact the Bureau of the Fiscal Service, Forms Management Officer, Parkersburg, WV 26106-1328 and to provide whatever information and/or documentation they do have about the missing bonds. Questions on FS Form 1048 include: who had the bonds last and why? and when were the bonds last seen?

When you cash savings bonds in at bank, does the bank take out withholding for income taxes?

No, which is why people need to do proactive tax planning for tax years when they cash in paper savings bonds at a bank. As a reminder, savings bonds reach full maturity and stop accruing interest 30 years from their purchase. Some ways to “handle” the tax liability include over withholding on income from a paycheck, pension, or Social Security or making quarterly estimated tax payments to the IRS using Form 1040-ES. In addition, if people own multiple savings bonds that were purchased in the same year (e.g., 2001), they might consider cashing them in over several years to minimize the tax bite instead of cashing in all of the bonds in the same tax year. I am doing this myself, personally.