Last summer, as a part of my quest to get rid of clutter, I began to move toward paperless personal finance. I had planned to share my system only once I’d perfected it, but yesterday Daniel e-mailed to ask for a glimpse of its current state.

To go paperless, you might need a scanner (or some other way to convert your documents to digital files). I also recommend using a shredder to dispose of paperwork. (A shredder is one of the best defenses against identity theft.) Here’s how my current paperless personal finance system works after nine months of trial-and-error.

Handling income
Having your employer electronically deposit your paycheck for you is the first step in going paperless. This wasn’t an option for me at the box factory. Now, however, I have each of my sources of blog income automatically deposited to my business checking account. This reduces the risk of mail and identity theft, and saves me the hassle of running to the bank.

This business account adds a layer of complexity to my finances, but because I’ve automated everything, it’s not too bothersome. Most of my income sits in business checking for months on end. I make quarterly estimated tax payments from this account (a process that is not automated), and retain some of the rest for other business expenses (read: more taxes at the end of the year). Once per month, I transfer a “paycheck” to my personal checking account at the local credit union. This amount is roughly equal to my former income at the box factory.

Juggling accounts
Most of my “paycheck” remains in checking, from which it is automatically transferred to various monthly bills. (The only bill I still pay by check is the mortgage. The mortgage company wants $11 for an electronic transfer. I’d rather pay 42 cents for a stamp.) The rest of my money is divided among three savings accounts:

  • My ING Direct emergency fund
  • My Mini Cooper account (at the credit union)
  • My vacation fund (at the credit union)

I don’t like having my accounts spread around, if only among two banks. Based on suggestions from GRS readers, I plan to move all my savings to subaccounts at ING Direct, but keep my checking account at the credit union. (I will document this process for an upcoming entry.) Besides, ING Direct pays 3.00% interest; my credit union is currently paying 0.35%!

Paying bills
Except for the mortgage, I’ve set up electronic statements and payments for all my bills. Every month, I receive an e-mail notice from each company that my statement is ready. I verify that the bill is correct. If I were to find an error (none so far), I would cancel the scheduled electronic payment and contact the company to correct the problem.

Most of my bills are set to be paid automatically. I’m wary of my credit card company, however, so I process that by hand every month. I simply log in to the bank’s web site, verify the totals, and then initiate a payment.

Processing paperwork
Using this system means I deal with a lot less paper than I used to, but I still receive certain bills and statements by mail because the companies don’t offer any other option. Plus I accumulate the normal receipts through day-to-day living.

I keep most receipts only until I’m sure the bank or credit card has processed the transaction correctly. (Others — for an appliance, for example — I keep on file.)

When I receive any other paper item, such as a bank statement, I immediately scan it and convert it to PDF. Based on reader recommendation, I use the Fujitsu ScanSnap S510M document scanner (Windows version). This is not a frugal option, but it’s damn efficient. The ScanSnap looks and feels like an inkjet printer, but it scans paper quickly and accurately, automatically converting the documents to PDF. (You may be better off using your existing scanner, if you have one.)

After scanning, I shred the original document. I name the PDF something sensible (“200805 – Mortgage.pdf”, for example), and then save it to a pre-set folder. This part of the system is key, actually. Without care, a digital filing system can become just as cluttered as a paper system. It took me several months, but I’ve created a naming convention that works for me.

My hard drive is backed up daily, so I’m not worried about data loss due to computer failure. I would like to create off-site backups, however, so I intend to look at Shoeboxed, a free online tool for receipt storage.

Reconciling statements
Every weekend, I reconcile my accounts. I use Quicken to download data from my banks and my credit card company. I verify that the information is correct, and then think about upcoming expenses. If I believe I can afford to, I transfer money from my personal checking account to one or more of my savings accounts. (I hope to move another big chunk to my emergency fund in the next week!)

I still suspect that one day I will move to a web-based tool like Wesabe or Mint or Quicken Online, but for now I’m happy with Quicken.

My impressions
Looking at this system, it’s clear that I’ve come a long way in the past year. I’m moving closer to the paperless personal finance system I described in August. Instead of retaining a shoebox full of paper every six weeks, I’m now filing just a few pages. After using these techniques for the past few months, I’m very happy with them. They’ve helped me to reduce clutter and save time.

My system isn’t perfect, though. I need to move all my savings accounts to ING Direct. Since registering a couple of business names last winter, the junk mail has picked up again — I need to put a stop to that. And I need to find out if there’s a way to pay my mortgage electronically without paying $11 per month.

Have you moved to a paperless personal finance system? Have you taken steps to automate your finances? How do you keep things organized? How do you manage all of the files and PDFs? Are you worried about data loss?

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