Is keeping track of your money and having a budget the same thing?

Question

I check my bank account every single day, just out of habit in case there's fraudulent activity. As a result, I always know generally how much I have in my accounts (i.e. if I have $140.25, I'll make a mental note that I have $120 just so I don't overspend.) I also know exactly when payments for bills are withdrawn (always the same day of each month) and generally how much each bill is (i.e. I know my cellphone bill will always be $30.95, my water bill is generally always $10.99, etc. However, recently I have been doing a lot of reading on financial planning and almost everything I read mentions having a budget. Is there a difference between keeping track of your money vs having a budget?

If it matters, I have no outstanding debt, never paid a penny on interest for my credit cards, have an emergency fund, contributing to retirement accounts, etc.

Answer 1

A budget is a plan for spending money in the future. Tracking spending is only looking at what happened in the past.

Many people only track their spending, a proper budget can be key to achieving financial goals. You might earn enough and not spend frivolously enough that you aren't hamstrung by lack of a budget, but if you have specific financial goals, odds are you'll be more successful at achieving them by budgeting rather than only tracking spending.

I'm a fan of zero-sum/zero-based budgets, where every dollar is allocated to a specific bucket ahead of time. Here's a good write-up on zero-based budgets: Zero-Based Budgeting: What It Is and How to Use It

Answer 2

The two are closely related. A budget is a detailed plan for how to spend. Expense tracking is a tool to analyze your previous spending performance.

Creating a plan for how to spend your money without any record of your previous spending--is an empty promise to yourself that you will never follow up on. Did I stay within my budget? Doesn't matter, I didn't track the spending anyway. Even if you do plan to track your performance, if you have not previously done so, you won't have a good basis for how much to expect in each category.

Most people have a general idea of how much they have spent and many budgets are formed based on that general intuition, but they are often surprised when they track how every penny is spent and look at the totals from month to month and over years. By actually seeing how much has been spent it's easier to pick the big financial drains and target them for reduction, if your desire is more savings, for example.

I know people who keep a close eye on what they spend each month, but they don't allocate money in categories for the next month. They don't perform as well on reducing spending, but they often don't care. They feel like they make enough and they save enough, so why worry?

I also know people who create an unrealistic budget each month because they haven't done a good job tracking their previous spending. They know what the monthly bills are, but they don't account well for variable or cyclical expenses like repairs, Christmas, etc.

Both tools are essential for maximizing your own personal finance.

Answer 3

What you are doing is neither one. You are simply watching to make sure you don't overdraw, which itself suggests you might be living hand to mouth and not saving. Keeping track of your money and budgeting are useful tools which help people get on top of their money. Which tends to have the effect of allowing you to save.

How much did you spend on groceries last month? Eating out? Gas? If you were "keeping track of your money", you could say immediately what you spent, and whether that is above or below average, and why.

How much do you plan to spend in the next 3 months on gas, groceries, eating out? If you knew the answer to that question, then you would have a "budget".

And if those months go by, and your budget proves to have been accurate, or educates you as to what went wrong so you can learn and fix it... then your budget is a functioning document that is helping you master your money.

Certainly the more powerful of the two is the "keeping track", or accounting of what has happened to you so far. It's important that you keep track of every penny without letting stuff "slip through the cracks". Here you can use proper accounting techniques and maybe accounting software, just like businesses do where they reconcile their accounting against their bank statements and wallet cash.

I shortcut that a little. I buy gift cards for McDonalds, Panera, Starbucks, etc. and buy my meals with those. That way, I only have one transaction to log, $40 - McDonalds gift card instead of a dozen little meals. It works perfectly fine since I know all that money went to fast food. A little more dangerous is that I treat wallet cash the same way, logging say two monthly entries of $100 to cash rather than 50 little transactions of left $1 tip at restaurant. This only works because cash is a tiny part of my overall expenditures - not worth accounting. If it added up to a significant part, I'd want accounting on that.

Answer 4

A budget is a predetermined plan for spending allocated funds to a fixed set of categories according to a schedule.

If by, "Keeping track of your money" you mean you are only recording your spending to see on what it is being spent and when, then the answer is no. A budget has constraints on three things:

1. Schedule
2. Amount
3. Category

Schedule: The mortgage has to be paid at the 1st of the month with a 2 day grace period.

Amount: The mortgage payment is 1500.00

Category: The mortgage.

Tracking your money would be as follows: 10/5/2016: $25 for a video game. 10/5/2016: $129.99 for two automobile tires. 10/6/2016: $35.25 for luncheon. I didn't like him! Why did I blow this money? 10/7/2016: nothing spent...yoohoo! 10/8/2016: Payday, heck yeah! I'm financially solvent YET AGAIN! How do I do it?!

See the difference?