I have come across numerous DA members who have never reconciled their income and spending with their bank account. So coming into DA, even though they have a spending plan and a tool for tracking their income and spending, they are vague about the accuracy of their tracking.
Note: The term “transaction” is used to describe any spending or income that occurs in your bank account. Each of these are examples of transactions:
- Spending $125 at the grocery store with a check
- An automatic debit of $1,000 to your mortgage company
- Your paycheck, which is deposited into your checking account
Unless you reconcile your tracking of actual spending and income with transactions in your bank account, there is room for a huge amount of error and vagueness.
Here are just a few examples of what might happen:
- You accidentally entered a transaction twice into your tracking tool without realizing it.
- A vendor incorrectly charged you (this happened to someone I know, where the debit slip said $22 and they charged him $220).
- You forgot to enter a transaction altogether in your tracking tool.
- There is an unknown charge in your checking account.
Lack of clarity about any of the above could cause you to overdraw your checking account. If the point of DA is not to debt and the path to staying out of debt includes clarity, then you can see how vital it is that you overcome your fear and learn how to reconcile your tracking with your bank account.
In today’s post, I am going to go over concepts. In my next post, I am going to show you exactly how to reconcile. Once you start doing this on a regular basis, it will take you only a few minutes to stay reconciled.
How Often Should You Reconcile with Your Bank Account?
I do this weekly and definitely at the start of the month to close out all transactions for the previous month.
Three Important Concepts
If you understand these three concepts, reconciling will make sense.
This is the balance reflected in your tracking tool. It includes all transactions you have entered into your tool, including income, checks, and debit card transactions.
Aside from the errors I described above, there are other valid reasons why this amount may not be the same balance as your checking account reflects. One big reason would be for items that have not “cleared” your checking account.
For instance, let’s say you wrote a check to someone for $100 this morning and put it in the mail. You entered it into your spending plan tool so it is reflected in the working balance. But there is no way that this check has “cleared” in your bank account, so that transaction would not yet be reflected. It would say you have $100 more than you actually have, right?
If you lived by what the balance in your checking account is, then you could definitely overdraw by $100 if you forgot about that check!
This leads me to the concept of uncleared transactions. That total, in the image, shows how much money has not yet been accounted for in my bank, but which I know I have spent.
Note that since I don’t reconcile daily, many of those items will be cleared as soon as I reconcile my YNAB with my bank account.
In YNAB, when you clear a transaction, you click on the C button on the far right side, which will turn bright green, denoting it is cleared. You can see both cleared (bright green) and uncleared transactions (gray) in the image below. (Click on the image to enlarge it.)
This balance reflects ONLY transactions (income, checks, debits, etc.) that have shown up in my bank account as of the last time I reconciled.
In the case of YNAB, it is the total of all transactions where the green button has been pressed by me.
IMPORTANT! The cleared balance should be exactly the same as the balance reflected in your checking account when you last reconciled!
If there is a discrepancy, then you will need to do some detective work to figure out what happened (remember, at the beginning of this post, I gave you a few reasons why this might occur).
Note: If you don’t use YNAB, you can set up your own system to show which items have cleared. A check mark on a printout is perfectly fine. And if the balances match, you know all is well.
I hope this post has provided some clarification about the concept of reconciling. In my next post, I will walk you step-by-step through the process.