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Life in the Balance

Ok, maybe that is a little melodramatic.  But, I had to catch your interest in the topic of maintaining a check register and balancing the check book.  I know it is a dreaded topic but I will share with you some things that I have done to conquer the procrastination surrounding maintaining a check register and balancing the check book.

I remember when I didn’t maintain a check register and balance the check.  I remember being close to payday and the anguish I felt not knowing if I had enough money in my account to cover lunch.  Then there was the time when I had a bad habit of relying on the balance that is printed on ATM receipts.  I was always very lucky that I didn’t bounce any checks.

My wife, the organized person that she is, was the one who convinced me about the benefits of maintaining the check register and balancing the check book.  That’s sad considering that I have a finance background.  But the problem wasn’t that I didn’t know how; it was I didn’t want to do it.  Procrastination – maybe.  The pain of realizing how little money I had – probably.  But procrastination and pain or fear can be conquered.  Believe me because I did it.

I can think of four reasons why we should maintain a check register and balance the check book:

1. Peace of Mind in having an accurate accounting of our “books”.  If we enter transactions into our check register and balance our check book on a monthly basis and then we should feel very confident in our account balance.  We remove the guessing that occurs when we don’t do both.


2. An accurate accounting of the check register gives us the opportunity to properly plan future expenditures and deposits.  This is especially important if money is tight for us.


3. Banks do make mistakes.  Balancing the check book requires us to review our monthly account statements and such a review may discover mistakes made by our bank.


4. Discover improper use of our checking account by strangers or people we know.  Again, a review of our account statement may uncover strange and possible unauthorized activity in our account.  This is very important today because of the increased use of debit cards and the likelihood that someone can steal your debit card number.

Another term used for balancing the check book is reconciling meaning that we reconcile what the bank is saying is in our account with what we say we have in our account.  The objective of balancing the check book or reconciling is to verify that there are no differences between our check register (written or electronic) and the account statement from the bank.

Maintaining a check register and balancing the check book are not rocket science.  They are a necessary nuisance.  The only way to do both is by developing good habits.  We establish a habit through repetition.

I started off the easy way.  I purchased the latest version of Quicken (which I found easy to learn).  Microsoft has a similar type of software called Money.  This made maintaining a check register and balancing the check book easy.  But I still needed to establish a habit because the software was not going to entirely automate the process for me.

First, I started with entering transactions in the check register.  I made a point of entering any transactions from that day in the check register before I began an internet session (at night and at home) or before I want to bed.  This process shouldn’t take long.

Next is balancing the check book.  On Saturday Mornings, after receiving the checking account statement, I sit down, with a cup of coffee, at the computer and open up Quicken and begin reconciling.  Quicken made the process of balancing the check book easy but the pain of realizing my financial situation is present but only soothed by having peace of mind that I at least know where I stand or have an accurate accounting of my finances. 

For those who are technologically challenged (although I think it is worth it to purchase and learn Quicken or Money) have no fear.  All checking account statements, somewhere on the back pages, have a form to use (if not then you should change banks immediately because that would constitute absolutely horrible customer service) just follow the directions and you are golden.  You will need to perform some basic math such as adding or subtracting but if you have a calculator then it is no big deal.

Einstein’s Contribution to Personal Finance

Albert Einstein was absolutely fascinated with the concept of compound interest.  He has been quoted as saying: “The most powerful force in the universe is compound interest”.  This was coming from a physicist and not a financial guru.  Some Einstein biographers say that he was so captivated with the concept of compound interest that he created a very simple formula called the “Rule of 72.”  I don’t care who created the Rule.  It provides us with a good approximation of future investment savings.  The important point is that the power of compound interest was validated by one of the greatest scientist in history.

What is compound interest?

Some say compound interest is earning interest on interest.  Another way to describe compound interest is that it’s interest earned on principal plus interest that was earned earlier.  Here is a simple example:

Let’s assume you have a savings account that earns compounded interest annually at 10% (which is unrealistic but it makes for a good example).  A $100 is deposited in the saving account that earns 10%, the depositor will be credited with $110 at the end of the first year.  Then at the end of the second year the account is credited with $121.  That extra $1 was earned from the $10 of interest earned from the first year

Interest can be compounded annually, quarterly, half-yearly or daily.  There is a simple formula to calculate compound interest but I am not going to bore you with it.  But it is important to understand that compound interest calculation is very different than a simple interest calculation because a simple interest calculation does not compute interest earned on the interest earned from the previous year (or interest on interest). 

I don’t know if compound interest is the “most powerful force in the universe” but I do know it is pretty powerful and is something that we should take advantage of as investors.  One way to harness the power of compound interest is by starting a savings plan early (hint: younger people) and also having a consistent savings plan such as saving or investing $100 per month.  Just take a look at the power by using this calculator.

Rule of 72

The rule is as follows:

72 divided by interest rate earned = Number of periods it takes to double the money.

Here is an example:

If you are earning 6% (compounding annually) on a savings account.  Divide 72 by 6 which equals 12, which means that it would take 12 years to double your money.

It works backwards too: say you want to double your money in 12 years and you want to know what interest rate you need to earn. Divide 72 by 12 years to get 6%.  Amazing?

There are some limitations on the Rule of 72: 1) it is an approximation - kind of like a “back-of-the-envelope” calculation; 2) it works very well with annual compounding but if you have daily compounding, such is the case with many savings accounts, you have to remember to adjust interest rate earned by 365 days; 3) it assumes that the interest rate earned is constant or stays the same which is not the case with most investments; and 3) it does not work well with higher interest rates (ex. greater than 10%) because it is not as accurate.

Some finance professionals say that the Rule of 72 is obsolete because of financial calculators.  I would argue that it is not obsolete if it can still show the power of compound interest to someone who is not familiar with the concept.  I thank Albert Einstein for recognizing the power of compound interest.

Buffett and Gates Know Their Number.  Do You Know Yours?

Warren Buffett and Bill Gates know their net worth (“their number”) just by reading magazines.  But we should know our own net worth or how much we “are worth.”  It is not just for rich people to know.

Any financial plan begins with knowing our net worth because it establishes a starting point.  Knowing our net worth helps us to understand where we need to make improvements in our financial situation or how bad things really are.  Warning: calculating our net worth does require some basic math and very basic accounting (don’t worry attached is a worksheet that can help).

What is net worth?
Net worth is simply our total assets minus our total liabilities.

Total Assets - Total Liabilities = Net Worth

The equation is the easy part.  The calculation is challenging.

What is a “good number”?
Let’s just say we don’t want a negative net worth which means we have more liabilities than assets.  Negative net worth is bad.  The median household net worth, in 2002 (most recent Census Bureau numbers), was $58,905.  This is low.  Today, the median household net worth number is probably lower because of falling home values and volatile stock market.

Calculating our net worth can be an eye opening experience.  An experience we should have considering our current economic situation.  It will take some time to pull together account statements and doing an accounting of the assets and liabilities but it will be time well spent.  This calculation should be reviewed on an annual basis or after a life changing event.

Here is a link to a Net Worth Calculation Worksheet (via Google Docs): Click Here.  We hope this worksheet is helpful.  Good luck.

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