Tuesday, April 12, 2011

Record-keeping Tips

Some people hate record-keeping and others love it, but here’s a dirty little secret: there is no right way or wrong way. Just pick or create the one that suits you best. Here are some popular ones:

1. Shoebox
2. File folder
3. Multiple file folders
4. Expanding file box
5. Ring binder
6. Software program
7. Physical ledger
8. Hybrid

For some of you, record-keeping will consist of throwing receipts in a shoebox. This is perfectly acceptable as long as it doesn’t drive you (or your spouse) crazy. Just don’t attempt to deliver that shoebox to a volunteer tax preparer. And don’t expect that a paid accountant will sort the contents of your shoebox for free. Or in April. Still, if everything is in one place, you have won more than half the battle of record-keeping. Really.

One step up from the shoebox method is the file folder. Same principle: it’s all in one place. Maybe you bothered to sort the items inside the folder into categories; maybe you didn’t. If sorting is not your thing, pay someone else to do it. Again, a tax professional will be pleased to find all your records in one folder, even if jumbled up.

Then there’s the multiple folder method, or the expanding file box method. Of the two, the file box method is best, because it keeps the records in one place. (Notice a theme here?) Multiple file folders have a way of wandering off and becoming invisible just when you need them.

I recently met someone who kept tax records in a three-ring binder. The binder was impressive but incomplete; she had failed to gather all the documents relating to her taxes. One of my co-volunteers complimented her on her record-keeping method, but I was not so inclined. The time she had spent getting the binder, punching the holes, and placing the papers inside would have been better used finding her pertinent documents. The binder made this person look organized, but that was an illusion.

Then there’s the “entering it into a software program” method. Unfortunately, many people I know have been suckered into thinking this is easier than just sorting the actual physical receipts. They usually confess (with surprise) to being behind on entering the data. They have a pile of papers next to their computer, and other piles elsewhere. They are convinced that this is the easiest method, but somehow, they’re never caught up. Record-keeping methods only work if you follow through and use them.

Some people keep ledgers. My mother recorded every single household expense. Reading her old ledgers is like reading the story of my family’s life, since every purchase is entered down to a candy bar. Most of us aren’t that careful. I used to keep a kind of ledger but nowhere near as complete. Mine consisted of two photocopied pages per month with each possible business expense being given a column. After a while I realized that most of the columns were empty most of the year. When I did have entries for them, there wasn’t enough space for the details. Travel was the problem. I didn’t travel often on business, but when I did, of course there were numerous tax deductible events during each trip. My one box per day per category record didn’t work for those. On the plus side, I could see at a glance exactly what my most frequent business expenses were, and adding them up was a mere matter of totaling each column.

I now do a combination method. I keep four file folders, labeled Bills, Tax Deductible, Banking, and Medical. Receipts are tossed into these files as I get them. Every few months, I sort the two biggest and messiest folders, Bills and Tax Deductible. (I never sort the Medical or Banking folders unless there’s a problem requiring research.) Sorting the contents of the folders takes maybe half an hour if I’m really stretching it out. Some other day I enter the items from the Tax Deductible folder into a computer spreadsheet. This takes another half an hour or so, depending on whether I have pre-sorted each category of expense and done it by date. If not, more time is consumed, but not much. This hybrid method works for me. I can be messy with my receipts when that’s my mood. And I can be precise with them when I’m feeling like handling details. I also let the computer do the addition.

Consider whether your current method of record-keeping is a good fit. Are you always losing papers, or behind on entering data, or finding that you have no place to put some category of receipt? These problems can be solved by choosing or creating the right record-keeping method. Just make sure you get a large enough shoebox.

1 comment:

El Vox said...

Mountains of paperwork is one of my pet peeves and something I hate to do, but nobody is going to do it for me, so... It's best to learn how and what to do. Each year around tax time, if not before, I start arranging bills, and such into clumps alphabetically. After I have my taxes done, I put everything in a large brown grocery bag, and label it with the year. That goes into a saving box. So far, so good--fingers crossed. :)