Balancing your checkbook. Not America’s favorite pastime, but a very essential activity.
Those who will read this probably find it a daunting, almost intimidating task.
Solution: Learn and Understand
People make the mistake of not figuring out how much money they have or how much they spend. Strange enough however is that most people know exactly how much they make… by the hour, day, week and year… before or after tax. It’s amazing. But for some reason people easily lose track of how much is spent.
Unfortunately, most people (especially younger people who may be just starting out) don’t bother using a checkbook at all. Maybe they don’t know how… or they think they don’t have the time to bother… or they think that as long as they have a general idea of how much is in the bank, they’re ok. But this mentality leads to other problems, like overdrafts, the possibility of being overcharged, or even the bank making a mistake. By maintaining a ledger of your own, you can find these errors and save yourself money by knowing the balance in your account at all times.
Thus, the best way to avoid making this mistake yourself is to know what you have…
Keep in mind, balancing a checkbook implies that you have been using one to start with. Please see How to Use a Checkbook to learn how to fill in your checkbook correctly.
So how do you balance your checkbook? The best way to explain is via an example…
In this example, let’s assume that you balance your checkbook once a month (probably when you get your bank statement in the mail).
Gather the following:
You will also need your checkbook ledger, your bank statement, a calculator and a pencil.
There is no straight-forward by-the-books way to do this. So I will explain it as I know it. To start off, you will want to put everything (pay stubs, receipts, bills paid, voided checks and ATM receipts) in chronological order. This is according to when something was paid for or a check was deposited into your account.
Look at your checkbook. Make sure all of your payments, purchases and deposits were written down in your checkbook.
Next, check your bank statement. Does the balance on the statement match the amount you show in your checkbook? If it does, that’s great. Your life just got easier. But you should still make sure that the amounts are right, because there still could be a mistake.
However, chances are that they won’t match. There could be checks outstanding (they haven’t cleared at the bank yet) or maybe there was an obscure ATM fee that you didn’t account for (happens to me all the time).
So now you need to figure out why they don’t match. And before you get overwhelmed, try to keep it simple.
1. Compare the transactions on your bank statement to your checkbook and make sure the amounts of each transaction match.
As you go through, you may find that they are not in the same order. Simple answer is: you’ve recorded the date when something was paid (like the date on a check you wrote to pay a bill), while the bank shows the date when the check cleared. So to avoid getting confused, check off each respective amount in the checkbook and on the bank statement (hint: there’s a check-mark column in your checkbook for this purpose) to show that each was accounted for.
If you come across amounts that don’t match, refer back to the receipts you have to find the correct amount. Correct any mistake in your checkbook and carry the difference down to the balance. Also, it’s possible that the bank made a mistake or you have been overcharged by a merchant (both would appear on your bank statement), so make note of any amount discrepancies and call the bank right away if you feel you’ve been wrongly charged.
2. Reconcile your checkbook and calculate the new balance.
People make mistakes. We buy things and forget to write them down. We also forget things like automatic payments or ATM fees. So you will probably find that there were one or two (maybe more) transactions that were not in your checkbook. Simply record the transactions and recalculate the balance.
3. Reconcile the bank statement and calculate the new balance.
You will find that there are a few transactions (payments or deposits, interest charges or fees) that appear in your checkbook, but not on your bank statement. The reason is because the bank statements are often printed a week or so before you get them in the mail. By then, you could’ve had a payday and went on a shopping spree… or there could be a check that you wrote two days ago that may not have cleared.
So to reconcile the bank balance (not the one in your checkbook), you must write these additional transactions on your bank statement. Simply add any deposits (like a paycheck) that do not appear on the statement. And finally subtract any outstanding checks or other purchases/ withdrawals that do not appear on the statement.
4. Confirm that your new checkbook balance and the new bank statement balance match.
The new totals should agree with the balance in your checkbook. If done correctly, your checkbook should have all the past and future transactions accounted for, and thus have the true balance of your bank account.
Unfortunately, there is a chance that even after the adjustments, the balances won’t match. And this is why people get frustrated and give up trying to balance their checkbook altogether. But don’t give up! You’re better than that!
Here are some simple tips to help you find the mistake:
If all else fails, you could go to the extreme. I had a friend that gave up, closed his account and opened a new one to start with a clean slate! I wouldn’t suggest this route, especially when you have outstanding checks or a direct deposit set up… but it’s an option, nonetheless.
Good luck!
~K
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