Expense Tracking Isn’t Budgeting

A lot of people think tracking expenses is budgeting. It is not. An expense tracker is simply a record of the money you’ve already spent; a budget is an actual plan that you make for spending and saving.

So while an expense tracker may provide valuable insight into where your money is going, a budget can serve the same purpose while also helping you meet your savings goals. Let’s dive in to see if you’re actually budgeting or not.

Watch Hannah explain expense tracking vs. budgeting.

What is Expense Tracking?

Long before I got my head on straight and started using YNAB for its brilliantly-intended purpose, I used it as accounting software to manage my small business’s books. This was expense tracking in its purest form:

On the first of every month, I downloaded the previous month’s transactions from my business bank account and Paypal.

I categorized the transactions, made sure YNAB’s account balances reconciled with my online statements, and then—wait for it—I’d use the amount spent in the category as the budgeted amount.

In other words, I was “budgeting” after I’d already spent. That’s expense tracking.

You might be tracking expenses (rather than budgeting) if:

• You fill in the budgeted amounts for a category at the end of the budgeting period (instead of the beginning).
• You consistently budget the exact same amount to a category, even though you always spend more. (This is how YNABers grow their credit card balances in spite of “budgeting” every month.)
• You rarely (or never)  check your category balances before spending, but you always make sure to enter transactions and reconcile your accounts.

My expense tracking habit wasn’t all bad. My books were clean and current, and when it was time to send a Profit & Loss statement to the accountant in January, it was one quick export out of YNAB. Simple, reactive expense tracking did reduce my stress—a little.

Interested in learning more about how YNAB can help with annual expense reporting?

Why Budgeting is Better

The ideal would be to transition from expense tracking to real budgeting. Jenifer left this comment on a previous post:

When working with budget-resistant people, I introduce the process as “expense tracking.” Once we get a sense of their “lifestyle”—then we create categories for each aspect of their lifestyle and design a budget (that usually matches the actual expenses for a bit).

And then, we identify their goals—debt reduction, buffer, investment/savings. Then we create a budget that doesn’t feel like a sacrifice.

Once they get addicted to debt reduction/buffer/investment-savings, then they tighten up their budget into a more frugal one.

It’s a great comment, and a great plan for taking someone from expense tracker to mindful YNABer.

3 Steps to Quit the Expense Tracker and Start a Budget

Ready to start budgeting for real? Here’s three steps to help you get started:

1. If you’ve been expense tracking for a while, use your spending history to determine comfortable amounts for each category. (Acknowledging, of course, that your total budget can’t exceed your income.)
2. Identify key goals, and force a small space in the budget for each one. In other words, trim a few of your normal categories to free up some cash flow for your goals. My personal preference is to have just one goal at a time in my budget. The only money goal I’m thinking about right now is eliminating debt.
3. Get in the habit of checking the amount remaining in each category prior to spending and let your budget guide your choices.

Allow yourself to get addicted to progress, and let that addiction motivate you to squeeze your daily spending for the benefit of accelerating your goals. This way, your enthusiasm naturally guides you to frugality, rather than trying to cut spending because you think you “should.”

You’ll know you’ve fully transitioned to budgeting (rather than expense tracking) when you use your budget to tell your money what to do—instead of using it to tell you what your money already did.

Ready to ditch spreadsheets and expense tracker apps for a budget that can help you take control of your finances? Try YNAB for free for 34 days.