Get Financially Fit!

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Never spend your money before you have it.
-Thomas Jefferson

To my surprise only a quarter of people who I informally survey, balance their checkbook. For most people, going to the dentist is more fun than balancing their checkbook. Properly maintaining your checkbook is as important to personal finance as a healthy heart is to good health. Keeping your checkbook balanced is foundational for spending less than you make.

Here are five checkbook essentials:
1. Verify all bank statement charges
2. Put every charge in your checkbook
3. Reconcile your checkbook on a regular basis
4. DO NOT rely on the balance from the bank to avoid overdraft charges.
5. Maintain some ‘cushion’ in your account to prevent overdrafts.
Let’s review these points one at a time.

Verify all bank statement charges

First, it is important to verify all bank statement charges. When I informally survey individuals regarding incorrect charges and credits in their checking account, half of the people have experienced checking account errors. The bank is at a significant advantage when it comes to mistakes. You need to identify incorrect transactions within 60 days; in contrast the bank does not have a time limit. If you identify an incorrect charge that happened over 60 days ago, the bank will inform you to contact the merchant who made the erroneous charge.

I wouldn’t believe that the banks take such a passive position except that I have experienced this first hand. My credit union incorrectly entered my account for an automatic withdrawal for another client’s insurance payment. The bank admitted they made the mistake and quickly refunded the last two payments that were within the last 60 days. But then they informed me I had to contact the insurance company for refunds prior to 60 days. Use your 60-day grace period to identify errors!

Put every charge in your checkbook

In order to keep an accurate checkbook balance it’s necessary to log all credits and debits in your checkbook ledger. This means you need to track all transactions including checks, ATM withdrawals, debit charges, automatic withdrawal payments, web payment debits, and deposited monies. The benefits of doing this are (1) you verify all transactions, (2) you see firsthand how you are spending your money, (3) and you know your bank balance. Knowing how you spend your money and knowing your bank account balance enables you to live within your means.

Reconcile your checkbook on a regular basis

One secret to make checkbook balancing simple and rewarding is to balance your checkbook frequently. Balancing a few days of transactions is a breeze - balancing half a month of transactions is arduous. After the initial painful checkbook balancing and reconciling, balance your checkbook daily for the next 60 days. Reward yourself, buy a box of mints and enjoy one every time you balance your checkbook.

Balancing your checkbook daily will only take 5 minutes. You will experience the benefits of both knowing your checking account balance and the satisfaction of being current on your checkbook. You can check for bank balances real time either with web access or telephone banking - gone are the laborious days of reconciling your checkbook register when you receive the monthly bank statement.

Here are some tips to help you with the daily checkbook balancing:
1. Force yourself to enter check, debit, and ATM transactions in your checking account ledger as you make a purchase. Don’t leave the store or restaurant before the transactions is added and the balance is calculated.
2. Deduct bills that occur in the current paycheck cycle. For example, if you are paid monthly, deduct automatic payments such as your mortgage, student loans, and car payments right after you are paid. By subtracting these unavoidable charges early to your checkbook ledger you will reduce the risk of over drafting your account.
3. Establish a weekly time to pay bills. Enter the bills (checks or web payments) at this time. Think, “I haven’t finished the process of paying bills until I have entered the charges into my checkbook register.”
4. You will quickly learn that you have many more transactions than you expected. You can reduce the number of transactions by budgeting a weekly amount for food and entertainment and then making a single ATM withdrawal. Not only will this simplify your checking account, but also you will have a highly visible process to help you live within your means.

DO NOT rely on the balance from the bank. You run the risk of overdraft charges.

I have seen crises where individuals rely on the current bank balance prior to making a charge. In one case a debit transaction hadn’t cleared - shortly there were six overdraft charges at $26 each. Keeping your checkbook balanced daily will put you in full control.

Maintain a ‘cushion’ in your account to prevent overdrafts.

Maintain extra money in your checking account to reduce the risk of an overdraft. The amount of extra money will depend on the amount of money flowing through your checking account - at a minimum though I recommend always maintaining at least $200. Many banks and credit unions provide free overdraft protection to a savings account. This is a good insurance policy in the event you make an honest mistake.

Follow your dreams, Achieve your goals!

What are your success stories and recommendations for checkbook success?