Budgeting versus Expense Tracking

February 15th, 2009 by Bill | Posted in Budgeting, General

No matter what your passion, if your aim is to help others who are struggling with the same issues you are, one of your toughest challenges will be to convince others to abandon the fruitless practices that you had difficulty abandoning yourself.

For decades, every attempt I made to gain control of my finances started out by tracking my past expenses. Therefore, I was not surprised to discover the Where’s My Money Going? Month series of blog posts on the Finance for a Freelance Life blog which encourages its readers to join in the expense tracking fun.

First, please do not interpret this as an attack on the Finance for a Freelance Life (FfaFL) blog. You will find much helpful information there and I encourage you to check it out. For those of you familiar with Dave Ramsey, I love his concept of free spirits and nerds. Now, this may shock some of you, but bloggers tend to be a pretty nerdy bunch which is probably the genesis of FfaFL’s rather nerdy tendencies of expense tracking. Hey, you don’t think any of us free spirits could even conceive of such a practice, do you?!

The habit that I would like to break among those struggling to gain control of their finances is this notion that expense tracking is somehow linked to budgeting. After decades of blind obedience to that school of thought it occurred to me that trying to control where my money was going by tracking expenses is about as effective as trying to lead a horse by its tail. What I finally learned was that the only thing knowing where my money was going did for me was confirm something that should already have been painfully obvious to me, I’m lousy at managing money!

I knew there had to be a better way and I figured it would likely start with walking around to the other end of the horse and picking up the reins. Why not do the budget first?! Yes, I’m serious. In decades of financial futility it had never occurred to me that the best place to start was with a detailed, financial plan, AKA a budget.

Why does budgeting first work? Because it puts you in control. You know your income. You know your obligations. You decide who gets paid how much and when. Then tracking expenses becomes trivial because you spend what you planned to spend IF you’re disciplined. Tell your money where to go and you’ll never wonder again where it went.

As if the Where’s My Money Going? Month series wasn’t a big enough set-up, this month’s posts include some very insightful reviews of the current generation of expense tracking apps. I’ve tried most of the apps covered in the review, and many more that were not. The bottom line is though that every attempt I made to gain control of my finances by tracking expenses failed no matter how slick the tool was that I was using to track them.

Even though many of these apps has a “budgeting” component, no two seem to share the same concept of what a budget is and most of them should be renamed “spending goal” or “spending target” components.

That is why Dewayne and I created BudgetSketch® to be a laser focused budget creation tool. We built it debt free, just like we hope to be one day, with no fluff, no ads, and no cost. If you’re ready to take control of your financial future, if you’re fed up with wondering where your money is going, AND TIRED OF TRACKING EXPENSES, why not give BudgetSketch® a try?

  • http://mrsmicah.com Mrs. Micah

    I would say that you can't separate tracking spending from budgeting, they form a chicken and egg circle. You could try making a budget and living up to it first, but if you don't have any idea what you're spending on things like groceries then your first few tries at a budget will just be essentially the same as tracking your spending…you'll overspend in some categories and have leftovers in others and learn what's realistic for your life.

    You assume people know their obligations, but I'd argue that many “free spirits” don't. That's why I'm encouraging people to focus on their spending this month instead of their budget.

    If you've been keeping up to date with a budget and molding it to fit your month-to-month needs, then you don't need to do that. But if you've fallen behind, made some major changes, or haven't budgeted in a while, then you may not be aware how much your cable costs or the realistic cost of a month's groceries. You don't have to keep spending what you normally spend, of course, but you can evaluate whether you think the figure is reasonable and decide what to do from there.

    I think once that's done, then you've got the information that you can use to build the budget as you describe and go on to control your money. But until people are sure about their income and general obligations, they can't build a budget that'll reflect their lives. You probably knew your obligations and reasonable spending amounts for each category because you looked at the past data and because you'd tracked your spending before.

    Otherwise you're stuck in constant revision until you find a budget that works for you, which is effectively no different than tracking your spending.

    The online apps aren't very good at all for budgeting, I agree. The only thing they're really good for is letting you see accounts at multiple banks in the same place or taking a general look at what you've been spending.

    Good luck with your software!

  • https://www.budgetsketch.com/ Bill

    Thanks Mrs. Micah!

    Let me try another approach. What, financially, are your obligations? Here are mine. See if they don't align with yours.

    1. Food
    2. Shelter
    3. Transportation (Gas & Insurance – No car payment, Woo hoo!)
    4. A small amount of spending money
    5. Utilities (Phone, Electricity, Water, Waste Collection)
    6. Debt Obligations
    7. Everything else

    Your list may vary to a certain degree but that is fine. It is after all “your” list. Here is my list of financial priorities. It is short.

    1. Get out of debt.
    2. Do not return to debt.
    3. Save for retirement.

    Looking at my lists of obligations and priorities, it is trivial to create a budget. Here's how I do it.

    1. Compute the minimum amount I can spend on obligations 1-5 each month so I can maximize payments to obligation 6.
    2. Think (but don't obsess) about how cool it will be one day to get to obligation 7.
    3. Follow the plan.

    I can easily determine the cost of all of my obligations and if I want to be really nerdy about it I can look at past spending (expense tracking) to see if I am being reasonable but that seems like a lot of wasted effort (to a free spirit) when I can say, “I can buy 2 meals for the entire family every day at Happy Burger for $20 times 15 days equals $300 for food,” or “I drive 15 miles round trip each day for work times 15 days at 20MPG and gas is $2/gal. equals $22.50 for gas.”

    When gas prices go back up, I'll be paying off less debt. It's as simple as that and I did it without tracking a single expense but that doesn't mean there is no room for tracking expenses. How else would I know that I was following my plan? However, the budget came first. It served as a declaration of my financial priorities and leads to financial freedom.

    In the end, we may have to agree to disagree but to my way of thinking budgeting is a proactive plan and expense tracking is simply a progress report. For decades, all I had was a dismal progress report. Only after I created my first plan (budget) did I begin to see results.

    All my best to you and all your readers with your financial goals however you find best to achieve them!

  • http://mrsmicah.com Mrs. Micah

    But my point is that if you haven't tracked your spending at all, then you don't know what you pay on average for heating/water or how much a month's groceries cost in your area. Going through the tracking helps people be mindful of their habits, but even if you wanted to create a budget without doing that you'd have to look at historical data.

    I couldn't assume, for example, that living in DC and being married I'd spend the same amount on groceries as I did when I lived in Central PA and was single. You could pull numbers from thin air, but it wouldn't be very helpful for the first month.

    And that leaves out the benefits of observing what specifically you've been spending on so you know where you make the cuts if you need to cut back. Again, you could do it after making a budget, but the experimentation would again essentially be just tracking your money and using a framework.

  • Dewayne

    Hello Mrs. Micah! Certainly a tracking mechanism plays a part in personal financial management. For instance, I use BudgetSketch to set my intentional plan each month of how I will spend my money. My wife and I do our best to stick with our plan all throughout the month. When my wife receives our bank statements, which obviously shows our past performance, she then uses what I call a tracking tool, in our case QuickBooks, to in essence “track” how well we are adhering to our budget. If tracking expenses is the cart, certainly our budget plan is the horse. We use expense “tracking” as a means of validation of whether we are following our budget or not.

    If we were to manage, let’s say our food budget, each month simply by tracking what we spent in previous months, we will get a very good idea of what we spent and how that impacted our cash flows. If I find I am spending on average $1000 a month on groceries, how do I know if this is acceptable? If I set an intentional budget goal of $700 per month, and force myself to adhere to this goal, I just may find out a few things. I may realize that $700 a month is just not enough to feed my family, or I may find that I am wasting $300 buying foods we don’t need, or I send too much on name brand products and can save by buying generic products. Budgeting forces me to evaluate how I am spending. In the latter case, I can take this a step further and allocate the $300 I found in my food budget to paying off debt. Would I have really found that $300 a month if I was just tracking what I spent each month?

    I completely agree with you that expense tracking is necessary, but it only works effectively as a validation tool for a good budget plan. Using both together is the key!

    Thank you so much for your comments. This is all about helping ourselves and our communities find ways to better our financial situations, which I believe greatly strengthens our families.

    Thanks again!!

  • dewayne

    Hello Mrs. Micah! Certainly a tracking mechanism plays a part in personal financial management. For instance, I use BudgetSketch to set my intentional plan each month of how I will spend my money. My wife and I do our best to stick with our plan all throughout the month. When my wife receives our bank statements, which obviously shows our past performance, she then uses what I call a tracking tool, in our case QuickBooks, to in essence “track” how well we are adhering to our budget. If tracking expenses is the cart, certainly our budget plan is the horse. We use expense “tracking” as a means of validation of whether we are following our budget or not.

    If we were to manage, let's say our food budget, each month simply by tracking what we spent in previous months, we will get a very good idea of what we spent and how that impacted our cash flows. If I find I am spending on average $1000 a month on groceries, how do I know if this is acceptable? If I set an intentional budget goal of $700 per month, and force myself to adhere to this goal, I just may find out a few things. I may realize that $700 a month is just not enough to feed my family, or I may find that I am wasting $300 buying foods we don't need, or I send too much on name brand products and can save by buying generic products. Budgeting forces me to evaluate how I am spending. In the latter case, I can take this a step further and allocate the $300 I found in my food budget to paying off debt. Would I have really found that $300 a month if I was just tracking what I spent each month?

    I completely agree with you that expense tracking is necessary, but it only works effectively as a validation tool for a good budget plan. Using both together is the key!

    Thank you so much for your comments. This is all about helping ourselves and our communities find ways to better our financial situations, which I believe greatly strengthens our families.

    Thanks again!!

  • http://www.budgetsketch.com/ Dewayne

    Hello Mrs. Micah! Certainly a tracking mechanism plays a part in personal financial management. For instance, I use BudgetSketch to set my intentional plan each month of how I will spend my money. My wife and I do our best to stick with our plan all throughout the month. When my wife receives our bank statements, which obviously shows our past performance, she then uses what I call a tracking tool, in our case QuickBooks, to in essence “track” how well we are adhering to our budget. If tracking expenses is the cart, certainly our budget plan is the horse. We use expense “tracking” as a means of validation of whether we are following our budget or not.

    If we were to manage, let's say our food budget, each month simply by tracking what we spent in previous months, we will get a very good idea of what we spent and how that impacted our cash flows. If I find I am spending on average $1000 a month on groceries, how do I know if this is acceptable? If I set an intentional budget goal of $700 per month, and force myself to adhere to this goal, I just may find out a few things. I may realize that $700 a month is just not enough to feed my family, or I may find that I am wasting $300 buying foods we don't need, or I send too much on name brand products and can save by buying generic products. Budgeting forces me to evaluate how I am spending. In the latter case, I can take this a step further and allocate the $300 I found in my food budget to paying off debt. Would I have really found that $300 a month if I was just tracking what I spent each month?

    I completely agree with you that expense tracking is necessary, but it only works effectively as a validation tool for a good budget plan. Using both together is the key!

    Thank you so much for your comments. This is all about helping ourselves and our communities find ways to better our financial situations, which I believe greatly strengthens our families.

    Thanks again!!

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