In an age of online banking and smartphone apps, many consumers no longer bother to balance or reconcile their checking accounts. But there are still some good reasons to go through these seemingly outmoded exercises.
To understand why that’s the case, it’s helpful to define two terms that might be unfamiliar to consumers who don’t use paper checks or cash withdrawals or a check register to record their transactions.
Balancing. Balancing a checking account shows how much money is available. To balance an account, add all your deposits to the beginning balance for an account’s statement period and subtract from the subtotal checks you’ve written, ATM and debit card transactions, cash withdrawals and bank fees. This will determine the ending balance on a given date. A current balance can be calculated at any time.
Reconciling. Reconciling a checking account compares the bank’s records to the account holder’s check register to discover errors or unauthorized activity. Your check register should contain a running total of all the transactions.
To reconcile an account, add all of the deposits the bank has not yet credited to the bank’s balance and subtract all the payments, withdrawals and bank fees the bank has not yet cleared from the subtotal to confirm that the bank’s records match the check register. Accounts typically are reconciled on a monthly basis.
In the old days, these tasks required paper, a pencil and some mathematical calculations. Today, an account can be balanced and reconciled much more easily with computer software or a banking app on a smartphone.
Still, plenty of people don’t take the time to balance or reconcile their account because they’re busy with other priorities or they simply don’t know what a check register is or how to use it, says Tracy St. John, founder of Financial Avenues LLC, a fee-only financial planning firm in Kansas City, Mo.
So why bother doing these exercises?
Traditionally, balancing was crucial to keep track of checks that had been written but could take a week or longer to be processed through the banking system, while reconciling was important to check that the bank had not made any errors, such as double-posting a check so the amount was withdrawn twice for the same payment.
Both of those purposes are now archaic because technology has speeded up check processing, and bank errors are rare.
Still, consumers can derive other benefits from balancing and reconciling — or at least reviewing — all the transactions that flow through a checking account, says Frank Boucher, owner of Boucher Financial Planning Services in Reston, Va.
“Because we have the electronic means, we don’t feel compelled to balance our checkbook. But by not looking at what you’re doing on a monthly basis, you’re not keeping a good track of what’s going on with your finances,” Boucher says. “To me, there is as much value in that as in making sure the arithmetic is right.”
St. John offers two real-life examples.
She says one client of hers wrote a check to purchase gymnastics lessons for her child after having confirmed she had enough funds in her account, but also after having forgotten she already had written and neglected to record another check for another purpose. The extra spending exhausted funds that had been earmarked for the child’s gymnastics tuition, an account that later went to collections.
Another of St. John’s clients had been taking cash advances from his credit card to support his excessive spending habits. When St. John reviewed his bank statement, she found that he’d spent more than $200 on music, apps and other digital media during one four-month period, an expenditure that wasn’t a necessity or priority, given his financial situation.
In both instances, St. John suggested that paying attention to the checking account statement and balance would have helped those people manage their money better.
Fraud and fees
Other reasons to go through the exercise of balancing, reconciling and reviewing an account are to spot financial management mistakes and fraudulent activity, says Alan Moore, a Certified Financial Planner professional with Serenity Financial Consulting LLC in Milwaukee.
Look for unfamiliar transactions, forgotten expenditures, recurring deductions for unwanted products or services, and bank fees. Moore says most people aren’t naturally wired to want to examine their spending habits. The hunt might be painful, but it’s worth the effort.
Moore points to bank fees as an example of an expense that might well go unnoticed without close examination of a checking account.
“People will pull $20 out of an ATM and get hit with a $3 fee. A lot of banks report that as a $23 withdrawal, so that fee can get kind of hidden,” he says. “Spend this much every time you take cash out, and it can add up.”