The First Step to Financial Freedom: Balance Your Checkbook!
Author: Brad Howland
First Posted: September, 2001
As a tax preparer, I'm often asked for financial advice. The number one thing I say to people is: balance your checkbook! This is extremely important, as it allows you to track exactly how much money you have at any given time. If you don't have this information, you don't know how much you can spend, and could slide into debt without being aware of it.
It's actually quite a challenge to keep a balanced checkbook. Here are a few strategies that simplify the task:
- Track all the deposits & withdrawals that flow through your account, record them daily, and keep an accurate, running total. This includes the automatic payments or charges that occur "behind your back." The best way to track automatic payments is to have them listed on your calendar. When that car payment comes out on the 14th of the month, record it faithfully in your checkbook.
- Pay all your bills within 24 hours of receiving them, and record the transaction in your checkbook immediately. Never owe money to anybody! I realize this is a difficult step to take, somethin akin to jumping off a cliff into a black hole. But if you follow this practice your financial situation will improve a great deal.
- Reconcile your records every month with the bank, using the account reconciliation worksheet that comes with the bank statement. This is a 3 step process that involves marking off in your records all deposits/withdrawals appearing on the bank statement, entering in your record any deposits/withdrawals not recorded (there should be few of these, if any), and adding to the bank balance the deposits/withdrawals that do not appear on the bank statement. Your balance and the bank balance should agree.
- If they don't agree, the first thing to check is your addition. Do yourself a favor and get a printing calculator. I've got an old Sharp EL-1611H that I picked up for $8 at a garage sale, and it has made my life much, much easier. Let's say that you added up a column of numbers and now suspect a mistake. You don't have to add up the entire column up again, just compare the printed tape to the numbers.
- If everything adds up, then figure out the amount of the error (the difference between your balance and the bank's). If the difference is divisible by 2, then you probably entered a withdrawal as a deposit, or vice versa. If the difference is divisible by 9, then you probably made a transposition or slide error. A transposition error happens when you mix up a number: perhaps you recorded $3241 as $3421. A slide error occurs when you make a mistake with the decimal point: perhaps you recorded $3241 as $32.41.
Now that you know exactly how much money you have, you can make informed decisions about your finances, and stay out of debt!