Step 2 of Effective Money Management: Reconcile

Now that you've completed the first step by creating your income statement and balance sheet, you should have a better understanding of your current financial situation. The next step towards effective money management is to reconcile your financial statements. In this blog post, we will explain what reconciliation is, why it's important, and how to do it.

What is Reconciliation?

Reconciliation is the process of comparing your financial records to external sources, such as bank statements, credit card statements, or receipts, to ensure accuracy and completeness. Reconciliation can help you identify errors, discrepancies, or omissions in your records and take corrective action to avoid costly mistakes. Reconciliation can also help you detect fraudulent activity or unauthorized transactions on your accounts.

Why is Reconciliation Important?

Reconciliation is important for several reasons:

• Accuracy: Reconciliation ensures that your financial records are accurate and complete. This can help you avoid errors, discrepancies, or omissions in your records that could lead to costly mistakes. For example when my wife and I started this process we quickly realized that we were failing to record transactions from one of our credit cards.  This omission lead us to believe that we were being better money managers than we actually were.

• Fraud Detection: Reconciliation can help you detect fraudulent activity or unauthorized transactions on your accounts. By comparing your financial records to external sources, you can identify any transactions that are not authorized or that you don't recognize.

• Budgeting: Reconciliation can help you track your spending and budget more effectively. By comparing your financial records to external sources, you can identify areas where you may be overspending or where you can cut back on expenses.

How to Reconcile Your Financial Statements

Reconciling your financial statements is a straightforward process. Here's how to do it:

1. Gather your financial records: Collect all your financial records, such as bank statements, credit card statements, and receipts.

2. Compare your records: Compare your financial records to your income statement and balance sheet. Check for any discrepancies or omissions.

3. Make corrections: If you find any errors or discrepancies, make corrections to your financial records.

4. Adjust your budget: Use the information from your reconciliation to adjust your budget as needed. Identify areas where you may be overspending or where you can cut back on expenses.

5. Repeat the process: Reconcile your financial statements on a regular basis, such as monthly or quarterly, to ensure accuracy and completeness.

"Keep in mind that when reconciling your financial statements, it's important to include any interest charged by your credit card companies as an expense on your income statement, and add it to the balance of your card recorded on your balance sheet." 

In conclusion, reconciliation is an important step towards effective money management. By comparing your financial records to external sources, you can ensure accuracy and completeness, detect fraudulent activity, and budget more effectively. Take the time to reconcile your financial statements on a regular basis to avoid costly mistakes and achieve your financial goals.