Tame Your Financial Clutter

Fess up: Where do you hide your pile of shame? I'm talking about the money-related detritus -- those gobs of receipts, bank records, investing statements, warranties, and whatnots -- that you're stashing in closets, drawers, and basements for (OK, I'll admit it) years.

With the number of decluttering books in the "Get Organized" aisle at the bookstore, there's no shortage of advice on controlling the torrent of items that stack up every day. So let's heed the advice of the organizational pros and apply their counsel to our financial clutter.

For this exercise, I'm using the five steps that author Julie Morgenstern outlines in her popular organization book, Organizing From the Inside Out. Let's give it a go.

Step 1: Sort

Take stock of your financial file cabinet. For a super-fast sort, set a timer for 15 minutes, and in that time, make three piles of papers:

1. What you own (house, car, snazzy electronics).
2. What you owe (credit cards, student loans, mortgage, monthly bills).
3. What you save (bank accounts, retirement savings, gold doubloons).

Extra credit if you set up a tracking system -- using either an oldfangled pencil and paper; a more newfangled system such as Mint.com, Quicken (or Quickenonline.com), or Money; or whatever system you'll actually refer to in the future.

Step 2: Purge

Get rid of extraneous stuff. This means everything from 10-year-old phone bills to redundant accounts and services. But make sure it's extraneous -- see the "Related Links" for more guidance on which financial statements to trash and which to treasure, for your and Uncle Sam's records.

Nothing cuts down clutter more than getting fewer account statements in the mail. But even if the accounts are digital, you still have to deal with them. For example, consider consolidating your old 401(k) accounts into a single, self-directed IRA. If you're married, assess the costs and convenience of any separate accounts you have. If you can, couple up and save some cash! Cover your cars on one policy, and see whether you get a price break on homeowner's insurance or renter's insurance with the same company.

Taking the time to simplify your financial life now will score you hours and hours of free time to waste in front of the TV in the future.

Step 3: Assign a home

In household organization, the items you use frequently are stored at the front of the closet. (No, on the floor near the closet doesn't count.) Stuff you use less often goes into the attic -- or mysteriously disappears while you're out shopping and reappears later at a neighbor's garage sale.

The same principle applies to organizing financial records. Short-term financial obligations -- monthly bills, or savings for a vacation or a new pool -- should sit in the forefront of your mind and your filing cabinet. Paperwork for accounts accessed less frequently -- your emergency savings account, retirement savings, or the kids' college fund -- can be filed in the second drawer, as can things like warranties and receipts for large purchases.

Put the most recent statements in the front of the folder, and put a tab on any folder that contains items you'll need to access when it comes time to file your taxes.

This third step will probably be the most time-consuming, but take it from a procrastinator -- once it's done, it's eerily, immensely satisfying.

Step 4: Containerize

Now that you've gotten rid of your extraneous accounts and assessed what needs regular attention, it's time to find the best place to "store" the money you don't need to get to frequently. (I recognize that in the decluttering lexicon, "containerize" refers to actual containers, but bear with me while I stretch this analogy as far as I can.)

The goal for your long-term savings is to make it grow. If you have five years or longer, and depending on your risk tolerance, there's no better place for growth than the stock market. Let your employer lend a hand. Your work retirement plan -- your 401(k) or 03(b) -- is the perfect place to start, particularly if your boss offers to match any portion of your contribution.

An IRA is another vessel for long-term savings tasks, and all you need to get started is a discount brokerage account. Give your future self a raise starting today by maxing out both of these important accounts.

Your short-term savings -- what you plan to spend within about five years on a new roof, new car, or a major vacation -- should be put in a money market account, CD, or even short-term bonds. Your peace-of-mind money -- for medical emergencies, car-repair emergencies, or pink-slip emergencies -- should be easily, though not too easily, accessible. For this purpose, consider a high-yield savings account -- often a money market account -- with check-writing privileges.

Step 5: Equalize

When you've tamed the paper beast and achieved a chipper state of financial being, work a little bit every day to exercise your newly centered, hyperorganized status. You can simplify your system through automation. Online banking and bill paying allows you to automate your monthly money management. This isn't an excuse to stop reviewing bills, though, unless you enjoy nasty surprises like new fees, changed due dates, and negative opt-out services added to your tab.

Your payroll department makes regular retirement savings a snap by automating your contributions from every paycheck. You set up the same system for yourself by designating monthly amounts to be ported into your IRA and other savings accounts.

Finally, when the bills, bank statements, receipts, and garage sale proceeds come in, review Steps 1 through 4 and lather, rinse, repeat.

With the help of this five-step system, Fool.com columnist Dayana Yochim has finally corralled her financial clutter into two file boxes (and a shoebox of overflow).