Drowning in bank statements, etc.? Here's what you can toss

The easiest way to stay on top of your finances is simply to stay on task. Pay the bills, file your taxes and save regularly and you can achieve almost any goal over time.

But even if you’re organized when it comes to sending the checks out each month, you may find yourself overwhelmed by the sheer volume of paperwork you get back in the mail.

When it comes to financial record-keeping, what should you save and what do you shred?

The reality is that you don’t need many of the documents you receive for tax or legal purposes, says Peter Schmidt, a financial adviser for CUNA Brokerage Services, through Wildfire Credit Union in Saginaw, Mich.

“If you’re talking about bank accounts and bill balances, there really is no real reason to be hanging on to those,” Schmidt says. These mailings update you on balances at a moment in time, he says, but “don’t mean much that far into the future.”

Most documents like these don’t need to kept for more than a year or two — and often, electronic records suffice if you have that option, Schmidt says.

Tax-related financial documents, however, are a much different story than your cable bill. If you get audited, you’ll need all the forms from that tax year to prove your return was accurate.

According to official IRS guidelines, you should keep all your tax documents for at least three years, including W-2s with your income for the tax year and your Form 1098 mortgage interest statement.

In very special cases, such as “a claim for a loss from worthless securities or bad debt deduction,” the IRS recommends you keep tax documents for up to seven years. But after year seven, the only reason not to shred tax documents is if you haven’t filed a return at all, or if you filed a fraudulent return, according to IRS record-keeping guidelines — and those problems are obviously much more serious than a disorganized filing cabinet.

You may be inclined to simply keep things because it’s better to be safe than sorry; however, clutter can sometimes come at a serious cost.

For starters, there’s the risk of identity theft or fraud if sensitive account info falls into the wrong hands. But an even more troubling scenario is that your important documents never find the right hands when they are actually needed, said John Piershale, a wealth adviser at Piershale Financial Group in Crystal Lake, Ill.

“Some documents and records are too important or not convenient to keep only in a file cabinet or even as an electronic record,” Piershale says. “If they’re lost or destroyed, replacing them could be a nightmare.”

Property deeds, wills, passports and powers of attorney are just a few examples of items better kept in a bank safe deposit box or fire-proof safe, Piershale says. After all, just because you can find these documents doesn’t mean your loved ones will easily be able to do the same in an emergency.

Schmidt agrees that you can never be too careful with these crucial documents. After the son of a client frantically called his office years ago looking for a misplaced medical power of attorney, Schmidt says he now keeps color-coded copies of important documents like these in his office for some clients.

And it’s not just about paperwork, Schmidt adds. The process of getting these documents in order can open the door for important conversations about family finances, too.

“We have a family wealth meeting, we have a discussion about (the documents), what it’s for and what happens when Mom and Dad pass away,” Schmidt says. “Those tend to be some difficult times when we lose loved ones, and kind of frantic times … and it helps a lot to be prepared and know what the process is at a time like that.”

What to keep

Tax paperwork, generally for up to seven years

Estate-planning documents

Pension plan documents

What to shred

These are generally available electronically, so feel free to trash:

Bank account statements

Credit card bills

Quarterly investment statements

Utility, cable, phone bills

Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks.