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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 I also know exactly when payments for bills are withdrawn (always the same day of each month) and generally how much each bill is (i.e. I know my cellphone bill will always be $30.95, my water bill is generally always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.

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    I just wanted to say that if you track spending the way you do, you probably do have a budget. It's just in your subconscious. I think tracking your spending well is probably more important than creating a budget every year / several months. – Stijn de Witt Jun 9 '17 at 21:58
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    Keeping track of your money only helps you understand where it went. Having a budget means planning what you'll do with the money you know you'll have. – Shadur Jun 11 '17 at 14:11
72

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 budgets, where every dollar is allocated to a specific bucket ahead of time. Here's a good write-up on zero-sum budgets: How and Why to Use a Zero-Sum Budget

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    I think the OP's question is a little more subtle than just "this is about the past" and "this is about the future". If you're living comfortably enough and don't really spend money on luxuries, chances are your budget for the next month will be "whatever my spending was on average over the past 6 months", and hence that means there's not much to change unless you drastically change your diet or transportation. And if that budget ends up being wrong, you'll just adjust it accordingly the next month, when you know you're not wasting money. So budgeting ends up being equivalent to tracking. – Mehrdad Jun 9 '17 at 6:39
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    (cont'd) Point being, the way I see it (I'm no financial expert), budgeting can't be about making plans spending; it's about actually constraining spending. If you merely update your plan for the plan to reflect reality rather than sticking with it, then you're not really budgeting, even if it's planning future spending. And you don't even need a plan. If you just look at the past month and say "if I spend $X, it would exceed what I spend last month, so I won't", then it would seem to me to be equivalent to budgeting, despite the lack of a prior plan (it's purely retrospective). Right? – Mehrdad Jun 9 '17 at 6:43
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    @Mehrdad A budget is just a plan, if you budget exactly in line with how you already spend, there'd be no change, but you're still budgeting because you're planning for how you will spend your money. The past is important for planning for the future, so having tracked expenses is still essential. Even your notion of projecting a 6 month average into the future is a form of budgeting. So, in truth, everyone budgets to some extent, but usually in the context of personal finance budgeting means something more formal, a written plan rather than a vague idea of needs. – Hart CO Jun 9 '17 at 15:13
  • @Mehrdad My point about the OP not being hamstrung by lack of a budget is in line with your comment, if they had a specific financial goal (save $1,000/month, for example), then a proper budget would be a good way to realize that goal, but if they don't want to change anything, then lack of a budget isn't really hurting. I also agree with you, if you just adjust your plan constantly then it won't be helpful. It's just like succeeding at any endeavor, you have a goal, you plan towards that goal, and then you follow that plan as best you can. – Hart CO Jun 9 '17 at 15:19
  • You're certainly spending money on luxuries. Do you have the cheapest possible housing situation that lets you keep your job? Do you eat the cheapest possible food that avoids death? Do you pay for transportation? (Walking is free). Most people who are not homeless buy luxuries. It's a question of the appropriate level of luxury for your situation, which things you want to splurge on, which things you want to be cheap about. Budgeting is the act of making deliberate choices in this regard. When you've found a good set of choices, they'll probably be stable month to month. – closeparen Jun 17 '17 at 6:49
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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.

  • Good job pointing out the dual nature of these tools, and showing how just having a budget or just tracking spending doesn't always do enough. You need both. – Cort Ammon - Reinstate Monica Jun 7 '17 at 19:32
  • I'd say you need to track spending first though. Once you get into the habit of doing that, setting goals and planning ahead based on that comes naturally. – Stijn de Witt Jun 9 '17 at 22:00
5

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.

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    "You are simply watching to make sure you don't overdraw, which itself suggests you are living hand to mouth and not saving." One other possible explanation is something I was guilty of in the past: trying to minimise the amount of money in a checking account and maximising the amount moved to a savings or investment account. That kind of min-maxing sounds attractive until you realise that you're spending a lot of effort on optimising what should be a nicely padded buffer account and that a single mistake can wipe out the minuscule interest gains in overdraft fees. – Lilienthal Jun 8 '17 at 14:24
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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?

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