Episode Description:
Checkbooks may not be as common as they used to be, but learning how to balance one is a great basic accounting skill to have. It is also the basics of monitoring your earning and spending to work on budgeting . This episode covers the basics of how to do just that, balance a check book.
Main Topics:
- How a checks used to (and still do) work
- How to balance a checkbook
Additional Resources:
These are just two of MANY worksheets I found while Google searching:
Here are the two lesson plans I mention that walk you through practice:
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Episode (approximate) Transcript:
Last night we sat down to look at our finances. We are curious where the money is currently going since not as much of it is coming in with me staying home. We also recently moved so we have a higher mortgage payment than before and we need to tighten our budget up. The first step is to see where we are spending to see what is and is not necessary. We also have some financial stuff that makes things less straightforward, so we do use computer software that I’m still in the process of understanding. It uses “double entry accounting” practices. I think I understand it enough to use it, but I’m not sure I understand it enough to teach it. Let’s just say I HIGHLY recommend you take a basic accounting class if you get the opportunity. Valuable stuff there even just for personal finance. It does still use the basic idea of balancing a checkbook though too when “reconciling” the accounts. So, I thought I’d do a quick lesson on how to balance a checkbook because it applies to many things and helped me a lot when I was living on one pay check a month. In case you didn’t know, most teachers only get one check a month while most people get paid twice a month or every two weeks.
Checks seem to be dying out. People still receive them, but I think actually having a checkbook and using it is decreasing in popularity. You can easily use a debit card at most places, or just go to an ATM or bank and withdraw cash to use. Paying bills you can now pay through linking your bank account to the bill and they’ll take the money directly from the account for you. So, for those of you who don’t use a checkbook or don’t understand how they work, let me give you some background.
I don’t know about before banks had computers because I didn’t pay attention to what banks did if I was alive for those times. I remember household computers becoming more common so I know banks had them and when I was 12-ish, I got my first checking account and began to pay attention. They had computers. So, here’s how it worked.
You have an account, hopefully with money in it. You write a check to pay for something, say a book from a bookstore. (Yes, people really did wait patiently in line while others wrote checks. It was a thing.) The bookstore takes your check and puts it with their money. You take your book and go about your business. The bookstore would later take your check to the bank and deposit it into their account. The routing and account numbers on the bottom of your check tells the book store bank where to ask for that money from. Your bank says ok, and sends them the money from your account. (It isn’t real bills, but that’s a whole different story, just imagine it is for now.) This process, if done quickly, would take days. In the meantime, you have other shopping to do and bills to pay. So, you’re writing more checks and handing them out. If you were to ask the bank how much money was in your account, they would show the same amount you started with until that money was drafted out, which remember, could take days. Longer if you mailed a check to the electric company or something like that. So, to track how much you have in your account you would keep a checkbook register. Usually a little booklet that fits inside a checkbook holder where you write the date, the check number, who you wrote the check to, how much it was, and what the remaining balance will be in your account after the money comes out. Now you know how much more you have left to spend. Money you deposit, or add into your account would also be recorded here.
Recording what you spend and make in your account is just good practice. This is the basics of tracking how much is coming in and how much is going out. If you bring in more than you spend, you should be building a savings. Spend more than you make, and you’ll run out pretty quick.
Now, what stops you from writing all the checks in the world because it will take days for anyone to figure out you didn’t have the money? Well, the bank would fine you for overdrafting your account. Not only that, but businesses can charge you a fee for making them deal with it all to get their money. And, if you do it enough, you could get into legal trouble and there are consequences to it. It was a big deal when Walmart and other retailers started being able to process your checks much like a credit card and check for money in the bank immediately. This also meant you couldn’t go to the store and buy groceries and then deposit your paycheck the next day and still be ok.
Anyway, at the end of the month the bank would send you a bank statement showing how much you started with, all the transactions (deposits and credits, or checks written, money taken out, that kind of thing) that the bank has processed. You sit down and balance your checkbook.
Essentially you make sure that your record keeping matches their record keeping. AND, that you haven’t already spent the money the bank says you still have in your account. There could have been that electric bill that hasn’t been drafted, but you did spend it.
Here is where I have to dig back in my brain to remember how to do this because our software takes the numbers and does this for us. But I used to do it every month, especially when I got paid once a month and used the idea of the zero-based budgeting technique. I added all of that month’s known expenses to my checkbook register at the beginning of the month and pre-planned for that money to already be spent. Then when I balanced my checkbook I would confirm that the amounts were the same and all of the bills had actually been drafted.
My bank used to print a worksheet on the back of my bank statement that was useful to balance an account out. A quick google search for a checkbook balancing worksheet resulted in quite a few options and I’ve linked some in the show notes for you! More on that later… I even found simple lesson plans with worksheets so you can use made up numbers and practice. Lots of banks provide the worksheets for free and you can print them out. Or, just use a notebook or even just paper. Writing it down is preferred so you can track what you’ve done.
Ok, Step one is to go through all the transactions you have written down and what the bank has processed and printed on your statement. I say on your statement because current banking technology means more have probably been processed and you can view them, but for this you’re only worried about what is on the actual statement. Having access to all the transactions so easily and quickly is a relatively new thing. So, match up the transactions on the statement to your checkbook register. Checkbook registers typically have a little box where you can check things off as you go. I also liked to make a checkmark next to the transaction on my account statement to make sure I check them all. Transactions are listed in the order the bank processed them, not necessarily the order you did them in so it gets a little interesting. You should also check the amounts you have written with what the bank has. Saving receipts to look back on the exact amount is the smartest move, but I will admit I’m not the best at that part.
Once all the transactions on your statement have been found in your records you look back at what the bank has not processed yet. Step 2 is adding up all the deposits or credits made to your account that the statement doesn’t show yet. I like to write them all down because the calculator and I never seem to agree right away and I typically have to add them up a few times. But, find how much you have added to your account since the statement or that the statement doesn’t show. Add this amount to what the bank says should be in your account or the “statement ending balance.”
Step 3 is all the money you have spent that is not showing up on the statement. Any what are called “outstanding” debits or checks or just money spent that the bank hasn’t processed yet. This is usually a lot more transactions than the deposits. Add those all up and subtract it from the amount you had a moment ago. This number should match what your records show is your final balance.
So a quick summary is you take the final balance from the bank statement, add all the things you’ve added that the bank hasn’t dealt with yet, subtract everything you’ve spent that the bank hasn’t processed yet, and that number should be your number. If it is not, you have to go back and check everything again. Did I mention using pencil is a good idea for those check marks? I would write the month of the statement instead of a checkmark too. Sometimes when you have bills that are always the same amount it can get confusing which ones are from which statement.
Now, why would you still want to do all this when you can see your account information in almost real time? Well, if you’re living paycheck to paycheck you can start tracking your stuff closely and working on budgeting. Or like I did, lived one paycheck ahead and I could plan everything out for the month and then go back, check it against the statement, shove leftovers into savings, and repeat it all again. Even if you’re living comfortably, it is a great way to monitor your spending and transactions. Watch your spending so you don’t over spend but also watch the transactions for anything YOU didn’t do. Not paying attention to each individual transaction could allow someone to get into your account and slowly take money. Or you could still be paying for something you no longer use. That’s money that could be going somewhere else.
Alright. So I hope you have learned something from this episode and as I mentioned briefly, I’ll post show notes with some links to things on my website. That’s right. I have a website. I’m cool like that. It is a work in progress but it is buzzgoesb.com and there are links to some of the checkbook balancing worksheets that I found by quickly googling. I also include the link to two different practice activities for balancing a checkbook. As I get going there will be more and more things posted there so be sure to check back later. Also, don’t forget to follow me on Instagram @buzzgoesb and when I get 100 followers I’ll start up the TikTok. After the website is finished I plan to maybe post more to the socials. Oh, and subscribe to the podcast! If you set it up to automatically download you won’t miss an episode. I’ve got a couple interviews in the works so you won’t want to miss out on those.