You may think the balance you get at the ATM is the most up-to-date representation of your available funds, but that’s not always the case. You should be careful not to assume it is, or you risk an overdraft on your account.
Banks operate on a system of holds while money is transferred from your account to other places. When you use your debit card to purchase something at a store or pay for a dinner out, that money doesn't change hands immediately, but it's still going to come out of your account.
Additionally, your deposits may not be immediately available to you, since your bank has to wait for the funds to actually leave the other party’s financial institution and clear your account. This is why it’s important to keep a running balance of your account at all times.
Understand How Deposits Are Credited
When you make a deposit, the bank gives you a credit for the deposit. But, in reality, the check is sent to a regional clearing house and must clear there before your bank actually receives the money. If the check is from out of state, it may need to be sent to another clearing house before the funds are settled, and could take even longer to get to your bank.
This is why when you deposit a large check from out of state, the bank may put a hold on it until funds are collected. This protects you from spending the money before you actually get it. That way, if the check were to bounce for some reason, you wouldn't owe the bank money. There are some ways to avoid a hold, such as requesting an ACH transfer or a cashier's check, but these tactics don’t always work.
Checks Do Not Clear Your Account Immediately
Similarly, checks do not clear your account the moment that you write them and send them off in the mail. Once the person or company receives your check, they must deposit it in their bank and then wait for the money to be transferred from your account to theirs.
Checks usually take the longest to clear, and checks you write may remain outstanding for a month or longer. This is why it’s important to keep complete records of the checks you issue—the payee, date, and the amounts—so you don’t forget about a check that hasn't cleared yet.
Debits and Deductions Might Not Show Up Right Away
Similarly, debits and deductions don’t always immediately show up in your account. Sometimes, when you use your debit card at some places, a hold for a small amount is placed on your account. This hold, which is usually a few dollars, will drop off your account in a few days, then the actual charge will show up.
It also depends on the business where you used your debit card. The merchant that accepted your card has to send in its transactions in order for the debits to be transferred to them. Although most merchants do this on a daily basis, some small businesses may take longer.
When this happens, the hold may drop off before the amount is deducted from your account, and your bank account balance would say that you have more than you do. If you do not keep track of your actual transactions, you can end up overdrawing your account.
Tracking Your Actual Balance
For all of these reasons, you should keep a running balance of your bank account, and not implicitly trust the balance you get at the ATM. To keep a running balance, you simply record your transactions as you go, then you add and subtract them from your balance in order to get the amount that you really have.
You can do this the old-fashioned way via pen and paper or spreadsheet, or many banks now offer real-time apps, such as PNC Bank’s Virtual Wallet, which shows a more up-to-date view of your account.
Try calculating your actual bank account balance at the end of each day, every few days, or each week. And remember, if you don’t keep a running balance, you may end up overdrawing your account and owing fees to both your bank and merchants.
If you're having trouble tracking your check and debit transactions, consider switching primarily to cash for your budget. With most of your transactions done in cash, you will not need to worry about your bank account on a daily basis. Still, it’s a good idea to keep a running balance of your available funds to account for things such as automatic bill payments and checks written to establishments or for bills that cant be paid in cash.
Once you begin tracking your bank balance, you will not only avoid overdrawing your account, but you'll be better able to monitor your spending and stick to your budget.
Updated by Rachel Morgan Cautero.