With the advent of online banking, balancing one’s checkbook has become a thing of the past. Those who grew up in the Internet age have little to no clue what a check even looks like.
For the most part, Generation Y has used debit cards and credit cards throughout most of their adult lives and probably saw their parents make the transition from checks to cards as they got older. There are only a few religious checkbook balancers left out there.
So, why is checkbook balancing a thing of the past?
Well, there are a few reasons. As Lewis Mandell, a professor of finance and managerial economics at the State University of New York at Buffalo, stated: “Some people don’t need to balance their checkbooks. If they have sufficient assets and overdraft protection, there’s no real need to worry about balancing their checkbook.”
In our day when every second is precious, some would consider checkbook balancing a waste of time. To further compound the problem, Mandell says that “Today’s technology makes it so difficult to balance a checkbook. Before debit cards, and direct deposits, checkbook records consisted primarily of deposits, cash withdrawals and checks.”
With so many moving parts and so many transactions, some people contend that balancing a checkbook requires a dedicated individual who saves every receipt and has a good amount of free time.
Let’s be honest. Without balancing your checkbook, you are running the risk that the bank has incorrectly debited (or credited) your checking account or that you have overdrawn your account by writing a check (or setting up an EFT or swiping your card) for which you don’t have sufficient funds. True, it does take some time and effort, but here are a few reasons why balancing your checkbook is financially wise:
- Checkbook balancing is a method of verification – It ensures your records match those of the bank. Humans are known to make errors. Although more tedious in the electronic age, it is still important to make sure you are recording your finances properly.
- Banks can make mistakes too – Although we consider a bank to be highly automated and error free, they can make mistakes. Balancing your checkbook is a good way to identify bank errors. If there is a mistake you typically have only 60 days to inform the bank of the error. If you are able to prove the mistake, the bank will take action and correct it.
- An overdrawn account can lead to bounced check fees – Especially if you do not have overdraft protection. Bounced check fees are often times $25 or higher per check.
- Online Banking is not as real time as you think – Although online accounts will show you the minute a transaction occurs, your bank doesn’t know when you have written a check until it is presented for clearance, nor does the bank include gratuities in the initial amount deducted. For example, if you go to dinner, it is likely that you will see the actual amount of the meal come out of your account, as this is what has been authorized. The full amount, including tip, will not show up until the transaction clears. This can result in people believing they have more money available than is actually the case.
Sadly, how to balance a checkbook is not taught in school, so unless you have witnessed it at home, it’s not likely to be habitual. To ensure you have a handle on your finances, here’s a quick run-down of how to balance your checkbook:
Step 1: Record the initial balance of your account in your checkbook register.
Step 2: Make deductions and additions as appropriate in your checkbook register any time money comes out of your account (such as when you use your debit or credit card to make a purchase, when you write a check, or when an amount is automatically deducted from your account).
Also, add any deposits, refunds, and direct deposits. To complete Step 2, you will have to keep all receipts and be aware of what amounts are deducted or deposited (automatically or manually) to your account down to the penny.
Step 3: Once you receive your bank statement, reconcile the bank statement with your checkbook register. This is done by comparing the two and checking off the amounts that match one another (the checkbook register provides you with a “checkmark” column to do this).
If there are differences in the amounts, get to the bottom of it. It’s possible that it is bank error or human error. Additionally, the bank will often credit your account with interest or deduct a monthly fee that you might not have included in your checkbook register.
Step 4: Add up the total deposits shown on your checkbook register but not shown on the bank account statement. Do the same with withdrawals.
Step 5: Take the balance provided on your bank statement, add the deposits totaled in Step 4 and deduct the withdrawals totaled in Step 4. The resulting amount should match what you have in your checkbook. If it doesn’t, something is off.
Be certain to use a calculator for the work mentioned above. Sure, this is bound to take a little time, but in the long run it could save you a lot of hassle and aggravation. No matter how much money you have, it is always important to know how you are spending it.
Published or updated April 4, 2013.