The world seems to be spinning at such a rapid pace that the many basics of money are neglected. It is these small lapses of financial common sense that foster a trend of bad habits.

Take out the numbers and look at the fundamentals. With a hint of logical reasoning, our personal finance management skills would become that much more powerful.

1. Buying stock is buying part of a business.

The mentality of investing in the stock market has drifted to a point where people are buying stocks and praying for the share price to go up.

Too often is there a voice saying that stocks are a way to make money while the fact is that it is actually a purchase of part ownership in a company or business. Sure, the desired result for everyone is a profitable return but stocks aren’t lottery tickets. In the end, the business has to do well for the investor to do well.

So, stop asking what is a good stock. Instead, start asking what is a good business that you don’t mind owning. Personal finance experts have recently been trying to drive this point home because many rookie investors omit this reasoning in their investment decisions.

2. Credit card purchases are loans.

We are oblivious to the fact that every time we swipe our credit cards, we are actually borrowing money with the agreement to repay the amount, plus interest. If someone is unable to pay the balance in full, the purchases are bound to cost more than the prices that appear on the receipts.

Credit cards are designed so that we can escape that reality. The form of seemingly simple plastic cards that, when swiped, allows us to buy things we cannot afford reminds me of the granted wishes with the rub of a genie lamp. Unfortunately, a credit card is the magical lamp containing the devil disguised as a genie.

The convenience and accessibility of credit cards exist to keep us spending without this fact ever crossing our minds. If we had to sign a bunch of forms for every time we made a credit card purchase, we’d all be much more reluctant to incur more credit card debt.

3. Banks are out to make money.

Banks are financial institutions that operate for a profit. For them to profit, there has to be a way for them to take money from their customers.

I find it funny for a bank to claim that they have your financial goals in mind. Make a late credit card payment or overdraw your account and see how much they care about helping you reach your goals. When you stop to think about it, the bank’s ultimate goal to draw a profit conflicts with the customers’ ultimate goal of saving money.

4. Founders of get-rich-quick programs aren’t rich, yet.

If you’ve ever been home on a Saturday afternoon, you’ve probably seen one of these paid advertisements on TV touting an ambiguous program on making thousands of dollars with little to no effort in a matter of weeks.

You’d expect the people, who teach you to get rich quick, to be rich as well. Right?

Now ask yourself: “why would someone, who knew the secret to achieve instant wealthy, contemplate sharing this knowledge with someone else?” Would you share these secrets if you were in this position? I sure wouldn’t. And, if I genuinely wanted to share the wealth, I wouldn’t charge you for it.

5. Spending isn’t saving.

An avid shopper may tell you that a sale is a once-in-a-lifetime event that mustn’t be missed. If such an awesome deal was never presented to us, would we have spent the money to buy something at a discount? If we didn’t have a super savings coupon, would we have even walked into the store?

Now, if we hadn’t bought anything, what wasn’t spent was saved. But, if we bought something and spent money, did we really save anything despite getting a discounted price?

We didn’t save – we just spent less, which is technically still considered spending.

I know I missed many other obvious financial concepts that must’ve influenced the way you handle money. Share the logical reasoning behind them so that other readers can benefit from the cold, hard truth!

(Photo credit: banjo d)

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Written by author Jim Randel, The Skinny on Credit Cards was the straight-to-the-point type of book that I had expected. It acted very much like the CliffNotes guides that we used to skip out on reading the entire novel.

Throw in a short storyline and some stick figure illustrations with the bare bone facts on credit cards and Randel presents us with a nice one-hour read to set readers straight.

Here are some things that Randel does nicely:

• Unmasks the disguises of a credit card. He puts it in your face. When you use a credit card, you are making loans and you are borrowing money. It’s design was purposely created to make it easy and mindless.
• Adds a story to make a point. Situational examples provide something that readers can relate to. That helps drive home the point that is trying to be made. When it comes to credit card debt, it becomes an influential way to motivate change.
• Provides updates from the Credit CARD Act. With the new financial regulations in full motion, much of the information in books and on the Internet need to be updated as some information may no longer apply.

Overview
The Skinny on Credit Cards is a ideal for anyone in beginning stages of getting or having a credit card and it’s even better for those who are already in a struggle with consumer debt.

Randel tries hard to include strict facts and distinct points (which he does very well) but credit cards just encompass so much that the content may be overwhelming to anyone unfamiliar with the terms. As a personal finance blogger, I was already familiar with about 95% of the content but his story/stick figure format kept me flipping the pages.

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Minimalism is an art that I’ve seem to have slowly adopted unconsciously. It may have contributed towards my carefree, lax attitude toward physical possessions. Some may call it being lazy or apathetic but I prefer the freedom from unnecessary worry and concern over material substance.

All too often do we place an excessive amount of sentimental value on items that are better off if they remained out of our lives. The typical outcome is clutter – the true enemy of a minimalist.

A Minimalist Lifestyle
The minimalistic life consists of days where physical belongings represent the bare minimum. A great way to think of it would be to pretend as if you were traveling around world for eternity. George Clooney’s character (Ryan Bingham) in the movie Up in the Air was always traveling and showed very little emotional attachment to physical things – maybe that’s why he excelled at his job of firing people.

A time when I, and many of you, experienced a minimalistic lifestyle is the time spent away from home in college. I lived on very little – rarely spending more than $50 a week on food and fun. Plus, there was only so much space in our tiny, overpriced dorm rooms. That’s why so many people suggest that we not dismiss the college lifestyle after graduation because we were able to live off very little then, so we can live off very little now.

Another terrifying way to look at it is to put myself in the situation where burglars breaks into my home and leave tremendously pissed off at the slim pickings this target happened to be. A minimalist would be able to withstand material loss calmly (though I’d lose my sense of security).

What Minimalism Offers
It is a zen approach to life. With it, money is secondary to meaningful experiences and peaceful lifestyles. To me the benefits are very enticing.

• Focus on what counts. Minimalism frees the mind of mental clutter and it frees my surroundings of physical clutter. That leads to more focus and concentration on the things with true relevance to my financial well-being. In the end, I am able to spend money and devote time and attention efficiently.
• Clutter prevention. It takes up space. We build a false sense of compassion for it. I sometimes look at a useless object and feel the need to keep it. Why? I don’t know. But, it will be the start to many deja vu’s next year, the year after that, and the many years to come. When I do toss it, I’ll wonder why I was silly enough to hold on to it for so long.
• For the need of less stuff, there comes a need for less spending. The obvious reason for cutting out what we consider to be “necessities” is to save money.
• Find out what real makes me happy. Buying new things does create the happy feeling but it lasts for just a moment. It requires repeated purchases to maintain happiness – a recipe for financial disaster. Instead, money is better off spent on new experiences and learning new things because they create long lasting memories of the happy times.
• Lessen the burden. Society has made many of us into rabid workhorses. The conventional wisdom to wealth accumulation is to boost income. Higher income is definitely an appealing option but minimalism goes against advice to earn more to buy more but it supports the idea that we should learn to live with less.

Small Steps
An immediate conversion into a minimalism would be overwhelming. As a matter of fact, there is no specific point where one person can say “I’m living with the bare essentials”. If I feel I’ve reached that point, then that is the life I’ll try to maintain.

Each person has their own beliefs on what is considered necessary. For me, tech gadgets have gotten me enslaved. In other areas, I can easily purge myself of “stuff”.

(Photo credit: Hoboken Condos)

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This is a guest post by Michael from CreditCardForum.com, a message board and blog for the discussion of credit card deals, as well as a place to talk about the drawbacks that come with the use credit cards. In today’s post, he will be talking about one of those drawbacks.

Last week, Simon wrote about how Citi tried to automatically “upgrade” him to a World MasterCard – a credit card that has no pre-set spending limit. I actually have the Citi Dividend Platinum Select card myself but I am lucky that they haven’t tried to change my card, yet .

However I have faced this same problem with Bank of America forcing my current card to become a Visa Signature card (which is Visa’s version of the World Mastercard – so no pre-set spending limit as well). But before I tell you that story, let’s discuss the basics about these cards…

Why all the hate for World MasterCard/Visa Signature?
These cards are marketed as a high “premium” tier for the aforementioned card issuers. They offer added benefits like free phone concierge, extra travel insurance, purchase protection, and more. All that without an annual fee! So why all the hate?

Well unfortunately, these cards have on drawback – they do not have a set credit limit. Part of your credit score is based on credit utilization (the percentage of your available credit that is used). You don’t want this number too high. According to many talking heads in the finance world, the general recommendation is to not use more than 30% of your credit limit on an account.

On many accounts from current cardholders, the highest monthly balance on these “no pre-set spending limit cards” are reported to credit bureaus as the credit limit. As you can imagine, this may not be to your benefit because it would hurt your credit score.

You may have had a $20,000 limit on your original account but you could have a reported credit limit of $2,000 if that was your highest monthly balance.

Which would you rather have shown as your credit limit? Obviously the $20,000!

Why was there no opt-out option for my Bank of America credit card?
Back in 2004, I switched my checking account to Bank of America. During the process, they also offered me one of those credit card deals where they give you a free $100 bonus if you also open a credit card. I took the bait.

I’ve used that card periodically over the years and had built up a very nice credit limit on it. Then in May, I got a notice in the mail that my specific type of card was being discontinued in August and would be replaced with a BankAmericard Cash Rewards Visa Signature card. I called up and vehemently made clear I did NOT want my new card to be a Visa Signature, instead I wanted it the tier below (Platinum Plus). The CSR said that was not a problem and confirmed the replacement card coming in August would indeed be a Platinum Plus.

Well it’s now August and I got the card in the mail and guess what… it was a Visa Signature. Furious, I called up customer service as I was sure they must have forgotten to fulfill my request. As it turns out, the CSR in May did opt me out of the Signature version. But guess what happened? They decided to re-evaluate my account again on August 1st and made the decision to issue me a Signature without my approval.

Why the no preset limit cards are going to become more common
After talking with someone I know at the bank, it turns out that even if you opt-out of these “upgrades” they might upgrade you again a few months later, without your consent! So basically, these “opt outs” are only temporary, because when they re-evaluate your account again (possibly every few months) they might just try and do the upgrade again.

The reason these banks love these no pre-set limit cards is because it limits their liability.

If you have $20,000 of available credit that’s a $20,000 liability for the bank. But if you have a no pre-set spending limit card, your purchases are approved (or declined) on a case-by-case basis. So, they no longer have to record your account as that $20,000 liability. Instead, they can just cut off your spending whenever they want.

With the shaky economy we’re in today, you can bet that banks will be utilizing this technique more and more to limit their risk.

If you want a set credit limit, what should you do?
As mentioned, for some people the benefits offered on these cards may be a worthwhile deal (I actually have one myself, the Chase Freedom). However, I wouldn’t recommend having more than one of them due to the credit limit predicament discussed above.

If don’t want them, respond to these notices right away and opt out, but even then, there are situations where it’s not a guarantee (like what happened to me, where my card was discontinued). Also, realize that some issuers may try multiple times a year to upgrade your account – so be diligent and pay attention to all the notices they send you.

Simon’s Note: Some people have been able to transfer their credit card limits to a different card under the same issuer. Because the bank may have a goal to convert a select group of cardholders, moving your account to a different card may be a viable option to keeping your credit limit out of the line-of-fire. You may lose some of the perks of the original card though…

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I love tech gadgets. Don’t you love tech gadgets?

How can you hold an iPhone 4 and not say “it’s one of the best phones I’ve ever seen”? How can you stare at your 1080p HDTV playing Avatar on a Blu-ray disc and not be mesmerized at the amazing detail and clarity?

This is evidence of the innate behavior of the human race to strive towards what has never been done before – to continue inventing new things that makes a chore or task even easier. Tech companies are, and will forever be, in a perpetual competitive race to release the next gadget or software that will revolutionize our lives.

As a result, consumers like you and I are stuck in between their wars in this age of technology. Nowadays, technology is evolving at such a rapid pace that I find it threatening to our financial situations.

Technology’s Death Grip
Stopping to think about the lifestyles we now lead, we can see how much money we are spending just to keep up with the trends.

Your sizable DVD collection has become obsolete as you can now stream high definition movies straight to your television. Yes, you spent hundreds of dollars on the movies, while racking up some substantial debt, and now you have to pay for your monthly Netflix subscription. Don’t even think about rebuilding that collection with Blu-ray discs (start reading again from the top if you are asking “why?”).

Cold hard fact: Most new consumer technologies are actually old. The toys that just became recently available had to undergo a long process of production and development – the idea or concept originated months or even years ago.

Let’s use the recent 3D craze as an example. The movie Avatar ignited a new trend in the film industry to shoot their movies in 3D. Production companies already had the idea of 3D entertainment a couple years before the movies were released. Then, the top players in consumer electronics (e.g. Sony, Samsung, LG) finds that there is high consumer demand for 3D video and begin making 3DTVs. HDTVs just became a norm in my household and here comes a new trendsetting change.

It is an endless game of playing catch-up. Either we spend the money or we get left behind to miss out on a world of new experiences.

If you cut off my broadband Internet connection, I’d go berserk. If there wasn’t a single computer in the house, I’d go mad. My iPhone 3GS was water-damaged and died and I felt like I lost an arm. They’ve become drugs and the fuel to an addiction. I know that I’m one of the millions of consumers who will forever be indebted to technology.

To imagine how life would be without a computer, internet, and a smartphone is terrifying.

We Willfully Adapt
The easy solution is to stick with what we have and what we can afford. Adopting an Amish lifestyle is also an option…

Obviously, this is easier said than done. When enough people integrate these new gadgets into their lives, it becomes a standard. It dictates a progressive change that we feel would be disadvantageous if we did not follow along.

• In the workplace, following the trends keeps employees up to date. The competitive employment environment weeds out the select group that possess the skill sets to adapt new, upcoming technology because such knowledge would be beneficial to the growth of the business and the company.
• In social settings, peer pressure and the need to impress plays a major role in how likely a new technology will survive in the consumer market. In a few years time, the Apple brand went from a fluke to a fad to a cult and now it’s like a religion. There is no doubt that some of us buy things just to say “I have that”.
• From a curiosity standpoint, technology often sparks an interest. How cool is it that we have vacuum robots working while we are away? Sometimes, I feel like buying new electronics just to see them function in my own home.
• From a functionality perspective, if something that makes your life easier is worth paying for, then why not buy it. After all, advancements in technology are meant to make our lives easier.

Unfortunately, the rate of technological growth is always higher than the rate of growth of our bank accounts. The new gadgets we buy today will be old gadgets tomorrow. Our ability to refrain from constant upgrades will determine how much we spend on technology.

(Photo credit: ndrwfgg)

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The power of asking often an unappreciated ability. Oftentimes, the answer is a “no”. But, that one time that you do get a “yes”, it infuses an invigorating emotion like you achieved something that was unlikely.

Recently, my two-year web hosting plan with Lunarpages (supporting Realm of Prosperity) was coming to end. They often have early renewals specials but, of course, I pay them very little attention. Until just a few day before the plan’s expiration, I started looking around for deals.

On Twitter, I tweeted my situation and voiced my consideration for other hosting companies should they offer more affordable price packages. Later in the day, I got a call from Lunarpages – boy, do I love the Internet. So, they know have an open mind and it’s their job to keep me. After all, business 101 teaches that it is cheaper to retain an existing customer than to acquire a new one.

Their renewal notice included a bill for 24 months of web hosting at $6.95 per month (total $166.80). I asked the customer service representative if they could offer better pricing in the event that I purchased a longer plan. I’ve had very little problems with Lunarpages so I do not have the bad experience that would deter me from staying with them. In fact, I’ve referred several people to them.

Anyway, I was offered a 36-month plan at the rate of $4.95 per month (total $178.20). That sealed the deal for me. Roughly ten dollars more for an extra year seems worth it to me!

So moral of the story – ASK!

On to some other great talk around the personal finance blogosphere:

• Money CAN Buy Happiness! at Get Rich Slowly. I’m am one to disagree people recite the typical “money cannot buy happiness”. I agree entirely that money opens doors to new experiences. With those experiences, we see more and learn more. Experience and knowledge makes me a happy person. How about you?
• Education and Wealth: You Don’t Need a College Degree, But You Need an Education at Cash Money Life. Coming from a graduating class at a time of rough economic turmoil, we can say that college has done less for us than expected. The piece of paper we call a college diploma only says that we passed our courses and fulfilled certain requirements – it doesn’t say squat about what we learned.
• Please Stop Saying: “I Don’t Make Enough Money To Do That!” at Enemy of Debt. I do believe the sky is the limit when it comes to earning potential. There is always another or a better way to make money. For many living paycheck to paycheck, it is this residual income that offers the new experiences and activities that wouldn’t be available without a little more money.

Yakezie Shoutouts:

• How to Get your Money’s Worth at an All-You-Can-Eat-Buffet at Young and Thrifty. There is probably a dedicated guide to efficient food consumption at an all-you-can-eat buffet but these tips will help a whole bunch. I was at one of these places recently and I can’t help going for a little fried rice when I should be fighting other patrons on the shellfish line.

Recent carnivals in which Realm of Prosperity participated:

• Carnival of Personal Finance #270, the Elvis is Dead Edition at Live Real, Now

(Photo credit: Lachlan Hardy)

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This guest post was provided by Kyle Chezum, a content specialist at Lender411 – a firm that helps homebuyers compare mortgage rates, find local lenders, and locate the best mortgage packages available.

I’m 22 years old – and I’m buying a house. This may come as a surprising feat to some of you. According to a study released by the National Association of Home Builders, the average first-time home buyer is roughly 33 years old. When I buy my house, I will be the exception in that study.

The “Debt-bed”
As part of a company that specializes in matching homebuyers with mortgages, I see deals made around me every day. We’re able to do a stellar job pairing borrowers with lenders but I find myself concernedly hoping that I don’t spend the next 30 to 40 years of my life burdened with a mortgage.

Debt isn’t just a financial impediment – it carries a strong psychological aspect as well. It can brood over you and contribute to your fears of what lies in the future. It can kill passion and excitement.

• If you’re stuck in debt, you’re stuck in a job – you have to keep making those payments every month.
• If you’re stuck in a job, you’re most likely stuck wherever you live – you can’t quite and move across the nation, or relocate to Europe, or drop everything to make a wild attempt at becoming a rockstar.
• If you’re stuck wherever you live, that’s where you’ll wither away. Simple as that.

I know this sounds morbid, but in my opinion, this is what the future looks like under the shadow of debt. “Opinion” is the operative word here. Some people don’t mind debt. Most of the clients we work with each day do not mind it too much, or they wouldn’t be working with us. That’s fine. But I guess I’m kind of a rebel.

A Rigorous Plan
I’m buying a house. But not with a mortgage – not if I can help it. My goal is set on making a 75% down payment on the day that I purchase my home. Sounds impossible?

Here’s how I plan to save for this down payment:

1. I went to my bank a while back and set up a dedicated savings account. I told myself that as soon as any money entered that account, it was never coming back out. This savings account is my house fund.
2. I get two paychecks each month. Of those, the first goes immediately into my savings account. The second is used to pay for rent, utilities, and other significant bills.
3. I start each month with $100 in my checking account – no more than that. I make this $100 last all month. It covers groceries, gas, and other daily expenses.

And that’s it. It works for me. But, everyone has a different situation. I don’t seriously believe that the $100-per-month plan will work for everyone, though if you want to try it, go ahead – I think you’ll be astonished to find what you consider to be necessities.

The following tips are more broadly applicable:

• Budget. If you don’t have a budget, make one. There are a number of simple tools online that allow you to do this. One of the best is Mint.com. Take a few months and just keep track of your expenses – nothing more. See where your money goes. There are probably a few things you can cut out.
• Don’t use credit as income. Avoid credit cards, payday advances, auto loans, and any other short-term debt, if you can. It will always cost you more to use a credit card than it will to use cash. Avoid other extraneous debt.
• Drive a clunker. Forget about buying a brand new car. Get something older, something that runs well but doesn’t have the high price tag associated with that “new car smell”. A mid-90s Toyota sedan, for example, still has tens years of life in it and, depending on the exact car, will only run you a few thousand dollars.
• Don’t do the “luxury vacation” thing. Please don’t. Don’t go on a cruise or on a week-long adventure in Costa Rica. These kinds of trips are beyond expensive. Go on vacation every year when your home is paid off and you’re living debt free. Skip it for now, and those day will be here that much sooner.
• Start saving right now. This is the most important part. You’ll never be ready to save money – just do it.

Say It, Do It
Ultimately, your financial goals and life dreams will serve as driving propellants. Again, if you don’t mind debt, that’s fine. In order to be more financially effective in life, some of you will leverage your assets to some extent. I get that.

What bothers me most, though, is the psychological side. I don’t like debt. Plain and simple. Every month, when I deposit that paycheck into my savings, I tell myself, “I’m buying a house”. Because that’s what I’m doing.

I’m buying a house. Right here, right now – bit by bit. It’s a philosophy, in a way. A constant lifestyle. Movie tickets, dinners out and weekends at Disney World fade into the background. These things aren’t important yet. For now, I’ll work on buying that house.

Simon’s Note: Kyle’s plan is one of apparent extremes. I understand the reluctance to take on debt since interest charges are quite scary. He is doing what he feels is the correct path for him. What he can do may seem impossible to replicate but it isn’t to say that it is unachievable. This is one way to approach a goal. To each their own.

(Photo credit: bendeming)

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The personal finance blogosphere is starting up a storm as of late. Sam from Financial Samurai led the charge 7 months ago with the Yakezie challenge to improve Alexa website ranking. Now he’s taking a huge leap forward.

The Benefits
Many benefits come from a higher Alexa website rank. Yes, any website owner should be working towards increasing their sites popularity. That is an understandable goal because the more traffic a site gets, it also:

• appeals to more advertisers
• increases ad revenue
• leads to more perks
• spreads community recognition
• means straight up bragging rights

The Challenge
The goal was for all participants to reach the top 200,000 on Alexa within a 6-month period. Those already in the top 200,000 will shoot for the top 100,000. And those already the top 100,000 will go for the top 50,000.

The challenge offers a collaborative effort by all participants to promote each other so that we can all reach our goals together. While obtaining a high Alexa rank is the primary goal, the Yakezie challenge also cultivates new relationships between bloggers in order to build a strong network of insightful online friends.

The advent of the brand new Yakezie website has drawn my interest in participating in this challenge. Sure, the money is a great bonus. But, I’ve been writing here on Realm of Prosperity for over 3 years with little expectation of much monetary gain – so I look forward to growth in readership and recognition over an extra buck.

Per the popular advice, do what you love doing and the money will follow.

A Long Journey Ahead
Currently, Realm of Prosperity has an Alexa rank of 1,115,170. The goal is to break 200,000 by February 18, 2011.

I will report on the progress when 6 months has passed. Until then, I’ll be contributing to the wrath of the Yakezie network.

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Two months ago, I received a letter from Citi saying that they were going to “upgrade’ my Citi Dividend Platinum Select card to a Citi Dividend World Mastercard.

My primary concern was that the new card would have no pre-set spending limit – meaning it would have a negative effect on my credit score.

Now, I admit I slipped up when I accidentally tossed out the notification letter. I was supposed to call up Citi to let them know that I refused to receive this unrewarding upgrade. Anyway, they’ve sent out another letter alerting cardholders that the new card would arrive within 14 days. Without hesitation, I was on the phone with a Citi customer representative.

The Buzz Around the Changes
From a little research around the web, many Citi cardholders were finding out that their cards are on the list of those being upgraded. Many have been unsuccessful in opting out of this upgrade. Many have had to get a little rowdy (with persistence) to opt out. And, many have had no problems getting just what they wanted. They believe that it all depends on your luck in connecting to the right customer representative.

But, one thing is for sure:

You can opt out – no matter what they say.

If you didn’t receive prior notice of the upgrade and received the new card in the mail, you can ask them to reinstate your old card along with the old terms and conditions. Several card users were put in this position and were able to get their old cards back (even after activation of the new card).

My Opt-Out Call
For those who are in the same situation I was, I hope this will help you when you make your call:

1. I dialed 1(866)775-0556 and asked for customer representative (had to fight the automated answering system a little).
2. First, I had to verify my identity with the answer to a security question.
3. When asked “How can I help you today?”, my answer was “I received a letter in the mail saying that my card was be upgraded. I’d like to opt out of this upgrade because I like my card as it is.”
4. The customer rep. tells me they’ll process my request. It took around 30 seconds.
5. After I asked for proof of confirmation, the rep. offered her employee ID.
6. Of course, I declined the usual “special offer” pitch for a balance transfer at low rate.
7. Finally, I thanked her and went on my way.

The entire call took only 5 minutes.

I expected at least some resistance but it was nice to not have to escalate my voice past my typically amiable tone. One point for Citi on this one!

(Photo credit: hoyasmeg)

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As I go through my occasional routine to file my important mail and documents, I realized that the most space-consuming files were my tax documents.

Since I am relatively new to the real world, I only have four years of tax returns. I was still in college so my tax situations weren’t too complicated – easy enough for me to file on my own with TurboTax. Still, I can’t wait to dispose of them to rid myself of clutter.

Advice From the IRS
Common sense tells me that I should hold on to my tax returns as long as possible – ideally, forever. Sure, the IRS has a “period of limitations” that would allow me to purge what I consider to be paper waste but the advancement of technology makes storage of financial paperwork such a breeze.

The period of limitations is basically the time frame in which filers can makes changed on tax returns to claim a credit or refund, or that the IRS can come knocking for additional tax.

Just because the IRS says they won’t hunt me down after I have cleared the period of limitations, it doesn’t mean you won’t need them for non-tax purposes. Thanks to a solid backup system, I can have multiple digital copies of my tax documents within minutes. I don’t believe someone can have too many records. Plus, digital scans reduces the clutter.

According to the IRS, apply the following rules for your records:

• If you filed a fraudulent return, keep your records forever.
• If you did not file a return, keep your records forever.
• If you do not disclose income that should have been reported and it comprises more than 25% of the gross income on your tax return, keep records for 6 years.
• If the above three situation do not apply to you and you own addition tax, keep records for 3 years.
• If you file a claim for a credit or refund after you fill your return, keep records for 3 years from the date you filed your original return or 2 years from the date you paid the tax (whichever is later).
• If you file a claim for a loss from worthless securities or bad debt deduction, keep records for 7 years.
• All employment tax records should be kept for at least 4 years after the date that the tax becomes due or is paid (whichever is later).

Important Note: Be aware that a tax return is created by the information provided in tax documents (e.g. W-2, 1099s, paycheck stubs, receipts, statements, and etc.). An audit by the IRS would require verification of these tax documents that rendered a suspicious tax return. Therefore, it seems logical that tax documents are more important than tax returns.

The Fate of My Tax Paperwork
The IRS suggestions seem somewhat tedious and mind-numbing. So, my simple solution is to:

1. Keep tax returns and tax documents for 7 years.
2. Make digital copies of all tax returns and documents and (try to) keep them forever.
3. Destroy original paper tax returns and tax documents after 7 years.

Honestly, with the help of a scanner, there’s no reason we can’t keep copies of any paperwork in a combination of flash drives and external drives.

(Photo credit: GenBug)

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