Storing financial files digitally

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When it comes to storing important financial documents, a tattered shoebox just won’t cut it anymore.

These days, Americans are expected to save supporting documentation. Tax receipts, W-2s and credit card statements should all be kept for as long as seven years.

Failure to keep proper records may land you in hot water with the IRS. In fact, the IRS has even cracked down on charitable donations, often calling on donors to produce bank records or written receipts.

“Charitable contributions are a whole new ballgame now. You really have to be able to supply supporting documentation,” says Robert J. DiQuollo, a senior financial adviser with Brinton Eaton Wealth Advisors in Madison, N.J.

Storing records digitally can also keep records from getting lost — or falling into the hands of identity thieves.

Fortunately, there is no shortage of high-tech storage devices promising to help Americans turn their dog-eared bank statements into well-protected PDFs, Web-based files and CD-Rs.

But not all tools are created equal. Factors such as cost, capacity and ease of use differ significantly among today’s storage options.

Here are some pros and cons of the most popular storage devices.

Digital safety
Five popular digital storage devices help keep financial documents safe.
5 digital storage devices
  1. Web-based storage services.
  2. USB flash drives.
  3. External hard drives.
  4. CD-Rs and CD-RWs.
  5. Network-attached storage hard drives.

1. Web-based storage services

Online storage services aren’t just for multimillion-dollar corporations anymore. These days, there are plenty of services promising to help the average American store, backup, organize, access and share financial files and folders.

Backblaze, Xdrive, Carbonite and NovaStor. These services allow users to back up all of their computer files, including everything from electronic tax records to documents that have been scanned onto a hard drive. The cost is as little as $5 per month. Some services will even let you store a few gigabytes worth of files for free — more than enough to hold some important documents.

Even financial institute Wells Fargo has jumped in the game with vSafe, a service that can store any file format, from Word documents to video files, for a modest monthly fee.

“All of these online services are, in fact, digital, virtual safe-deposit boxes for your important documents,” says Greg Schulz, president of the Stillwater, Minn.-based consulting firm StorageIO Group and author of “The Green and Virtual Data Center.”

While these Web-based services eliminate the threat of hard-drive crashes, virus attacks and natural disasters, there are shortcomings. For starters, as with any Web-based service, don’t be surprised if you encounter the occasional connectivity hiccup. Also, don’t expect it to be lightning fast, says Thomas Jablonski, president of Nemo’s Computer Service Inc. in West Palm Beach, Fla.

Privacy is another concern surrounding online storage services. After all, data traversing a public network such as the Internet is exposed to all kinds of vulnerabilities, from ill-intentioned intruders to information that accidentally ends up lost in transit.

“There are security concerns regarding how an online storage service provider moves your information from one place to the next,” Schulz says. “That’s why it needs to be encrypted, secure and protected.”

A modest amount of homework, however, can ensure that the online service you select meets your space and security needs. After an initial backup, many services only back up those files that have been added or changed, making subsequent backups significantly faster.

When shopping around, ask about how many gigabytes of storage you’ll receive and how many times a month you’re permitted to access the service. Also, ask if there are any additional costs for uploading multimedia files — a key question for taxpayers planning on storing photos of possessions they’ve donated to charity.

Schulz also recommends asking about security precautions taken to protect your data. Find out whether data is password-protected or data-encrypted. If technical jargon such as “SSL encryption” sends your mind spinning, Schulz recommends going with “a known entity.”

“Would you park your most important documents with an unknown entity just because it has space for rent?” he asks. “Probably not.”

However, remember that even the biggest names in the industry can wind up gobbled by a hungry competitor.

“These online storage service companies can be bought and sold,” says Dennis O’Brien, president of Coastal Financial Advisors in Farmingdale, N.J. “And you don’t really know what’s going to happen to your data once a provider has been sold or merged with another.”

For this reason, experts recommend asking a potential provider about the fate of your data in such an event.

2. USB flash drives

Typically weighing less than two ounces and about the size of a thumb, a USB flash drive packs a powerful punch when it comes to storing important documents.

With storage capacities ranging from as small as 512 megabytes to 128 gigabytes, these portable devices easily slide into the USB port of any desktop or laptop computer. Users can store, swap and share documents, music, video clips and pictures.

Much like a standard hard drive, you can save material on USB flash drives again and again for indefinite usage. Many offer protection in the form of a secure password. What’s more, because USB flash drives do not contain any internal moving parts, they are known for their durability.

“It’s very convenient,” Jablonski says. “You just plug it in and move all your documents over.”

With prices starting at around $10, it’s no wonder USB flash drives have taken the personal storage world by storm.

Still, there are drawbacks that can offset the benefits of price and portability.

“More flash drives are lost and stolen with important information on them than anybody knows or cares to admit,” says Schulz. “Flash drives are great, but they are probably your biggest point of vulnerability.”

Jablonski agrees the drives are easily lost, and says that they might not be the best method for long-term storage.

“They’re considered permanent storage, but flash drives have a shelf life,” he says. “One day it could completely fail on you, and that’s the big disadvantage.”

In the end, only you can predict how likely it is you’ll misplace a USB flash drive. If you’re the type to find your car keys underneath the bed and your cell phone wedged between car seats, you might want to consider a larger-sized storage option.

3. External hard drives

For those more concerned with storage capacity than size, an external hard drive can prove to be the perfect answer.

An external hard drive is a piece of equipment that sits outside of a computer case in its own enclosure. The device rests on a surface nearby a desktop or laptop computer and is connected via a high-speed interface cable, which enables the transfer of data.

Many of these devices allow for one-touch backup, and some come with a whopping one terabyte of storage space.

But buyer beware: As with any external storage device, external hard drives run the risk of being stolen or damaged.

4. CD-Rs and CD-RWs

Just when you thought it was time to toss those circular discs in the trash, Schulz says there’s still room for CD-Rs and CD-RWs in today’s crowded personal storage market.

Sure, they look awfully antiquated next to pocket-sized USB flash drives and external hard drives. But they still serve an important storage role, particularly as backup storage, according to Schulz.

“If something is important enough to put into a digital safe-deposit box, you should have two copies,” Schulz says.

For example, he says, if your Web-based online storage service is currently experiencing downtime, a CD-R can serve as an ideal “point-in-time picture of all your important files.”

CD-R/RWs typically deliver upward of 80 minutes of audio and/or data storage space in a 1.2-mm thick disc. These recordable discs are cheap and easy to purchase from any office supply store.

However, a major drawback of CD-R/RWs is their lack of capacity, says Jablonski.

“DVDs are probably a lot better, or even the new Blu-rays,” says Jablonski.

He’s also not entirely convinced CD-R/RWs will stay functional over the long term.

“Essentially they haven’t been around long enough to know whether if you put them in your attic for a long time, they’re going to keep working,” Jablonski says.

CD-R/RWs are vulnerable to getting lost, broken or scratched. Nevertheless, as a secondary source of backup, you won’t find a faster or easier alternative.

5. Network-attached storage hard drives

One format that may offer the capacity of an external hard drive with the convenience of networking is a network-attached storage hard drive, Jablonski says.

Big-name vendors such as Cisco, Linksys and Iomega offer these self-contained units known as “NAS drives.” When connected to a desktop or laptop computer, NAS drives offer file-based data storage for an entire network.

NAS drives are perfect for sharing storage across multiple devices on a home network and typically offer up to one terabyte of backup capacity.

But, Jablonski cautions, just as with any hard drive, a NAS drive can still fail. He recommends finding a unit that can hold more than one hard drive to provide that holy grail of data security: redundancy, meaning you’ll have at least one good copy of your files should one of the drives fail.

Bankrate reporter Claes Bell contributed to this report.