Studies show that approximately 40% of American families would not have the cash available to cover an unexpected $400 expense. Yet, ask a large group of people whether they can balance their checking and/or credit card statements to ensure the expected transactions match the financial institution's processed transactions and you are likely to receive a lot of blank stares. In the "old days", people either paid in cash or wrote checks. Once the check had been written, the check was logged into a pocket sized register where the number, date, payee, and amount of the payment were recorded. The payment amount was deducted from the running balance within the register. Deposits were also recorded, the amount added to the running balance within the register. Each month, the account holder would take their bank statement and compare each line on the statement to their register to ensure all entries matched. Any entries in the register that had not yet cleared the bank were maintained or researched by contacting the payee and inquiring about their timeline for depositing the check provided. Any entries on the statement that had not been logged into the register prompted the account holder to either update their records to include this forgotten payment, hopefully before the money had been spent on something else, or contact the bank if an unauthorized withdrawal had occurred in order to resolve any bank errors or fraud finding. This process was referred to as "balancing" your accounts.
Today, few people record their spending in a way that would allow them to perform such a balancing act. They simply swipe or tap to pay and trust that everything will process quickly and accurately. This has the potential to create a financial catastrophe if you haven't saved enough to create an emergency fund cushion that can absorb the shock of the occasional forgotten transaction or bank error.
To protect yourself, there are step you can take to minimize your risk.
Use cash whenever possible - using cash for purchases completely eliminates the lag time between the purchase and your bank's withdraw of funds. Cash isn't the most convenient payment method and the risk of losing cash requires you to be extra mindful of how it is handled. But it does ensure your purchase won't overdraw your account.
Implement a sustainable system for tracking purchases - refer back to Lesson 6 regarding how to determine which system is right for you, test a couple out, then commit to one that you can consistently enter your deposits/purchases into and maintain. Entering your deposits and purchases should be part of your daily routine.
Learn to balance your accounts - watch videos or read material about how to balance your accounts
Routinely (at least monthly, more frequently if desired) compare the transactions you have entered into your system against those of your bank/credit union/credit card institution - make sure that your records agree with theirs. If you have forgotten to enter transactions, or entered them incorrectly, update your system so you are making decisions based on accurate information. If you find errors made by the financial institution, contact them immediately so the issue can be resolved before they create bigger problems.
Actively tracking your money not only helps you identify potentially serious issues, but it also makes you more aware of your spending habits. That awareness is the first step towards adjusting your behaviors if you desire to save more and be better prepared for those unexpected expenses along with other financial goals you wish to achieve.