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Keeping Financial Records

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By John Vineyard

At first I suggest a meeting at my office, but that is quickly overwhelmed by the anguish in the woman's voice at the other end of the line. This is a real cry for help.

Since house calls are basic to a financial adviser's routine, I soon find myself on a wide front porch, twisting the antique brass doorbell of a large Italianate home. Shrouded by ancient hemlocks, it resembles a Charles Addams house that someone has lovingly restored to mint condition.

The 12-foot double doors swing inward. Professor Philomena Jones, a pleasant-faced woman in her 40s, greets me.

I offer a hand. "Hello, I'm ..."

"Yes of course. Come right in." She is a high-energy person, with a black standard poodle swirling about her legs. From our prior conversation, I judge that she is one of the best-organized scholars on campus. Her magisterial work on the New England transcendentalists required cataloguing more than 40,000 documents and nearly 200,000 citations. She is, in fact, one of the most formidable research engines in the entire field of American literary history. But however well she manages her resources, however many professional accolades she wins, however many barriers she breaks, there is a certain time of year when she turns to jelly. That time is the hated wintry season when she begins receiving year-end financial statements and can't put off thinking about taxes any longer.

She ushers me into her high-ceiling Victorian office, presents me with coffee, and begins describing the problem. "Look at this!" she says in a kind of fury, showing me armloads of financial correspondence from the university, from her publisher, from brokerage firms, from her banks and pension plans. There are stacks of cryptic documents marked with such codes as "Form 1099-DIV," "Form 5498," "Realized Gains and Losses," and many more.

I ask her to describe her system of financial record keeping.

That "system" consists basically of a cardboard box and a hole in the wall. Everything that seems to need immediate attention goes into a pigeonhole on the shelf beside her desk; everything else gets tossed into a large cardboard box marked "Kraft Macaroni and Cheese" in the corner where Waldo, the poodle, spends most of his days asleep. Whenever the pile in the pigeonhole looks likes it's about to spill onto the floor, she attacks it grimly, furiously paying bills, signing things, stamping, sealing, and piling. If she can't make sense of something, she tosses it in the macaroni and cheese box, hoping that someday when she sorts through that stack, it will. She stops paying bills whenever she suspects she might be close to overdrawing her checking account or she runs out of checks. Some things lie at the bottom of the pigeonhole for many months before they rise, like ghosts, to the top of the pile and can't be ignored any longer. Once things have been dealt with they go into more cardboard boxes that molder in stacks in the attic forever.

I listen politely, asking a few questions, but there is little need for prompting. The tale of her difficulties with financial record keeping is traumatic indeed. It's beginning to get dark. The shutters rattle in the wind. Waldo snores on, whimpering a little in his sleep. What precipitated her call to me was opening a large envelope from her accountant and finding a 42-page workbook inside that seems to ask for every conceivable bit of financial information that could ever be asked, and a lot more that she has no idea how to find. "I'm supposed to come up with all that information, and then pay them?" she demands. Last year, things got so bad she swore a desperate oath, like Scarlet O'Hara, to organize her financial records so well she'd never go through this again, but here it is once more, that old sick feeling.

"What did you do to get organized last year?" I ask hopefully.

"Everything! I got books from the library with spiffy titles like How to Conquer Clutter I made up all kinds of systems and for a month I had everything under perfect control. But the fact is I hate that stuff and I don't really understand the statements and I don't want to understand them. What am I going to do?"

"You tried too hard. You set yourself up to fail. You have to pick a system that's easy to understand, easy to stick with, even a bit fun."

The look in her eyes is more than a little doubtful.

"Why not make it an adventure, like restoring your house? Get some fancy three-ring binders to store everything that comes in. Go to an art supply shop and invest in the classiest, most expensive gold-tooled leather albums you can find. Lots of them. Have them custom emboss your name on the covers in a beautiful font. Then buy an electric three-hole punch and set aside one afternoon a month for putting things in binders. Dump everything out of the macaroni and cheese box and perform some sort of pagan ceremony while you burn the box. Put everything from that box in a separate binder for each kind of statement, the newest stuff on top. Allow plenty of time and sip your favorite herbal tea while you're working on them. Reserve a prominent space for them on the shelf. Show them off to your friends. And every month after you're caught up, go out and get yourself the gooiest, yummiest chocolate sundae you can find."

"But how do I decide ..."

"Look. Don't get too fancy. Just pay all the bills once a week and keep everything in its own binder."

"How do I know how long to keep things? Can't I ever throw out some of that junk?"

"You have to keep all your tax records for at least three years. To be safe, 6 to 10 years is a good rule. But you don't have to keep everything. If you didn't use it to prepare your return or claim a deduction, don't save it in the first place. Basically you need a record of everything you own as long as you own it. And then at least three more years past the date the tax return was due, because the normal audit threshold is three years after the return was due. After three years, the IRS is unlikely to come back to see your records, unless you underreported income by 25 percent or more. Then they can go back for six years.

"Six years?" she wails.

"Six years."

"But I don't have six complete years of records of anything."

"But you're starting today. And you have to track all your compensation as well as your expenses for at least six years, and in a way that let's you put your fingers on it easily."

"All right. Tell me what else I have to do."

"First, collect all your old tax returns. Buy a fireproof safe and keep it with the documents you used to prepare them down in a corner of the basement, or better still, in another building, in case your house burns down. Be sure they're labeled and bound by year so you can't mix them up. Use binders when you can."

"And what about all those statements and confirmation slips from the broker and my mutual funds? Can I toss them out after three years?"

"Better not. You need them to establish the cost basis of anything you own. So if your 1999 return gets audited, the cost basis of something you sold that year might have to be supported, even if you bought it in 1980. And sometimes there are shareholder lawsuits that require you to prove when you bought or sold the shares in order to collect your share of the settlement. What about those Enron shares your broker got you into?"

"What about them?"

"You'll need all the confirmation slips. You can bet there will be enough shareholder lawsuits against Enron and its henchmen to make Bleak House look like The Little Engine That Could. If you can prove when you owned the shares, you might even get something back in one of the lawsuits."

"Doesn't my broker keep all that?"

"Don't count on it. Besides, your broker could be a defendant in one of the suits."

"My God, where will I keep everything?"

"Hey, you manage 200,000 citations. What's so bad about a few dozen monthly statements? It's a good idea to keep the complete history of your pension accounts too, so you can separate the different types of contributions if you need to. And keep everything about the cost basis of your house as well."

"I certainly don't have all of that."

"There's nothing like today. And by the way, how good are the records for your consulting income, and the royalties on your book, and the expenses you incurred earning them?"

"They're pretty good," she offers.

"Binders," I counsel.

"This is not fun."

"What would Emerson say? Just basic prudence and self-reliance. The problem is you think it should be fun. Why not think of the whole process as a way to preserve your historical identity, or maybe of unifying the practical and spiritual sides of your life?

That seems to do it for Professor Jones. What works for you?