Balancing a Checkbook: Benefits and Risks

I was pleasantly surprised to see that some of my readers are interested in balancing their checkbooks to their bank statements!  I would have guessed that, although I balance my checkbook to the penny every month, there wouldn’t be much interest. In response to this request, I will talk about the following aspects of balancing your checkbook in this post I describe the nitty gritty details of balancing your checkbook in a separate post.

  • How to balance your checkbook for a single month.
  • How to get started if you’ve had your account for a while and have never balanced your checkbook.

Benefits

The primary reason to balance your checkbook is to make sure that you always have an accurate picture of your financial position.  A list of your bank account transactions is often called a checkbook, check register or transaction record. By maintaining such a list, you can keep track of your current account balance to monitor whether you are staying on track with your budget or whether you can afford a particular purchase.  When you balance your checkbook, you are confirming that you have included all transactions and performed all of the calculations correctly.

A secondary reason to balance your checkbook is to ensure that none of the bank, you or any vendors has made a mistake.  Although it has been many years since it has happened, I am aware of a few mistakes with my account. In one case, the bank transferred money from my checking account to my savings account instead of the other way around.  In another case, the bank put the money from a large deposit into someone else’s account. I also had a utility that I paid by automatic transfer take too much out of my account one month. My mother had a deposit she had mailed to a brokerage firm get burned up in a plane crash on its way to the bank.  So, you never know!

Basic Steps

When I think of balancing my checkbook, I envision the key steps as:

  • Compare the deposits and withdrawals on my statement with the ones that were outstanding when I balanced to my statement last month.
  • Compare the deposits and withdrawals on my statement with the ones I entered in my transaction register since I balanced to my statement last month.
  • Adjust the balance on my bank statement for any transactions that are in my checkbook that aren’t on my bank statement.
  • Make sure that the adjusted bank statement balance equals the value in my checkbook, finding any missing transactions or arithmetic mistakes if they aren’t the same.

Six Variations

In practice, I’m aware of at least six different ways you can use your bank statement, in order from riskiest and least effort to lowest risk and most effort.  These approaches are:

  • Ignore the whole thing and assume that whatever the banks says is your current balance is right and up-to-date.
  • Review your bank statement every so often to make sure all of the transactions look accurate.  Trust that the bank balance you see on your phone or online is right and up-to-date.
  • Keep a checkbook without keeping track of your balance.  Use it to compare with your bank statement to make sure all of the transactions on your statement are right.  Or, some bank apps can send you an e-mail or text for every transaction on your account as it happens so you can check them.  In either case, you trust that the balance reported by the bank is right and up-to-date.
  • Keep a checkbook and keep track of your balance.  Use it to compare your transactions to your bank statement.  Do a partial reconciliation with your bank statement, but adjust your checkbook balance to the adjusted bank statement balance (see below) once you get close.
  • Keep a checkbook, keep track of your balance, and balance your checkbook to the penny every month.
  • Keep a checkbook but include not only transactions you have already made, but also record any amounts you know you need to pay at the same time you record your paycheck or other deposit.  Also, calculate your balance and reconcile your checkbook every month.

What Do You Mean – Up-to-Date?

Many people look at the balance reported by the bank at a particular moment and assume that it represents their available funds.  That assumption is closer to being true today than it was 20 years ago, but it is not always a good assumption to make. Your checkbook, if you are diligent about recording transactions immediately, will reflect all of these charges so you will have an up-to-date balance. The factors that cause there to be differences between the balance reported by the bank and your available funds include:

Holds

Banks sometimes put a hold on part or all of certain deposits, especially ones that are large relative to your balance or come from other banks.  That is, the bank will not let you spend the amount that has been put on hold until it “clears.” I have had deposits take up to ten business days to clear, though three business days seems to be more typical.  The total amount of your deposit will show in your balance, but it may not be available. In many cases, I’ve seen the bank report two balances – the total and the available balance. The available balance excludes the portion of any deposits that have been held.  If you see only one balance, make sure you know whether it is the total or the available balance so you don’t overdraw your account.

Check Processing Time

Checks always take at least a bit of time to be reflected in your balance.  If you pay a bill and mail a check, it won’t clear the bank until the payee has received and deposited it.  I find this lag can be as long as ten days. Even if you give a check to a vendor or service provider in person, it can take a few days for it to be deposited.   Until the check has been deposited by the payee and your bank has been notified, the amount of the check will be included as part of the balance reported by your bank.

Scheduled Bill Pay

If you schedule a bill payment directly from your account, some banks and platforms do not be deduct the amount from your balance until the vendor accepts the payment.  For example, if it is the 5th of the month, you schedule a payment for Saturday the 8th and the vendor doesn’t accept the payment until Monday the 10th, your balance will not reflect that payment for the five days after you committed to making the payment.  One exception is an Interact e-transfer which is deducted from your account balance immediately.

Debit Charges

Most debit charges clear almost instantly, but there are situations in which they don’t.  One example is tips. Many vendors process the amount of your bill immediately, but then give you the receipt on which you add the tip and then sign.  In some cases, it can take a day or two before the vendor processes the tips. This situation isn’t as common in places like Canada where the tip is entered directly into the card reader at the same time the transaction is approved.

ATM Fees

Almost all ATM withdrawals are processed instantly, as well, though there is sometimes a small lag if you withdraw money outside your own country or with the fees charged for using another bank’s ATM.

Which Approach is Better for You

The table compares how each of these approaches addresses the two primary risks of not balancing your checkbook – identification of mistakes and an up-to-date view of your balance.

Approach/Level of Effort Error Identification Account Balance Accuracy
Ignore the whole thing None Rely on bank for your current balance.  Ignores any transactions that you have made but haven’t cleared or that need to come out of your current funds
Review statement Will find bigger mistakes and those from locations where you weren’t or vendors you’ve never used Same as above
Keep a checkbook and compare with statement Will find most mistakes, as long as your checkbook is complete Same as above
Keep a checkbook, calculate your balance and compare with statement Same as above As long as you haven’t made any math errors in calculating your adjusted balance, you have an accurate view of your current financial position including transactions that haven’t cleared
Balance your checkbook Same as above with additional confirmation that you have caught all errors from the balancing process You have an accurate view of your current financial position including transactions that haven’t cleared
Include  expenses that need to be covered by this paycheck Same as above You know how much money you have available for discretionary purchases until your next paycheck or other income arrives

If you are on a very tight budget or if you know yourself well enough to know that you are an impulse shopper, the “include expenses that need to be covered by this paycheck” approach is likely best for you from a risk perspective.  If you have a bit of cushion or know you can stay on your budget without going the extra step of anticipating expenses, you are likely safe using the “balance your checkbook” approach. I have always used that approach and still do.

Key Risks

There are two key risks of not knowing your up-to-date bank balance – not having money to pay a critical bill and overdrawing your account. Most importantly, you don’t want to find that you can’t afford to pay your rent, mortgage, utilities or insurance because you didn’t keep track of your bank balance. Almost as importantly, you don’t want to “bounce” any of your transactions. If you have a check, delayed debit card or ATM transaction or electronic payment that demands more funds from your account than your current balance, you can incur a lot of fees. Normally, your bank will charge you a fee for every transaction that arrives when your balance is less than zero. In addition, the store, restaurant of vendor is likely to charge you a pretty hefty fee. I recall one time when my bank made a mistake and thought I had overdrawn my account. Several small checks cleared the bank before I discovered the error. I had a $20 charge from the bank for every one of those charges, plus fees from some of the vendors. The charges were more than the total amount of those checks! (The bank refunded the fees and covered the vendors’ charges, so I ended up not paying anything fortunately.) Many banks offer overdraft protection. If you have that protection, it can save you fees if you do overdraw your account, but you’ll want to consider that a temporary solution and re-pay the bank as quickly as you can.

The more money you have in your checking account, the more you are able to take on the risks of the other approaches.  I know lots of people who have used them for years and haven’t gotten into financial trouble. Unfortunately, I also know some people who have encountered significant financial issues due to a lack of budgeting, keeping track of money or unexpected large expenses.  And, to be clear, even the rich can struggle with budgeting and tracking money, as illustrated by some large lottery winners who splurge their winnings and actors whose earnings have been mismanaged. These situations are awful for them and for the people who care for them.

I get it, though!  Remembering to write your transactions in a record, doing the mental math to keep the balance and balancing your checkbook every month are somewhere between a nuisance and a pain.  So, pick the approach that is going to work best for your willingness to put in the effort and your tolerance for risk.

Acknowledgements

Thanks to my contacts at Security Bank in Helena for helping me understand when different types of transactions will be reflected in your bank balance.

4 Replies to “Balancing a Checkbook: Benefits and Risks”

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