Budgeting vs Expense Tracking

Another daily habit I have been working for couple of years now is budgeting. Not the expense tracking, but budgeting.

Expense tracking is simply recording all of your spendings: writing down them everyday, going through all your accounts and receipts, etc…

It may sound boring, and you might say: “C’mon, Alex, now I should remember and write down every penny I spent?”. And probably most people don’t do it regularly, or only when times are tough. But this is a good first step to raising awareness about your finances and spendings. You can’t manage what you can’t measure. Knowing the truth about your current situation makes you closer to the financial freedom.

But this is only the first step. The next level is budgeting.

A budget is an actual plan that you make for spending and saving. It helps you to spend smartly, in a relaxed manner, without guilt or shame, and at the same time meet your savings goal.

Expense tracking is ‘post-factum’, a recording of the past. Budgeting is planning for the future. With a budget, you know how much money you have, how much you can afford to spend in each spending category, and how much you need to save for your goals.

First, it was introduced to me by my ex-boss, Max Kraynov, few lifetimes ago. He had a website called “Four Envelopes”, which used an envelope budgeting method for personal finances. This is the most ancient idea in the world of finance: you got money in your hand? Split them evenly and put in four envelopes for each week of the month. Voila! Now you know how much money you can spend this week. You can borrow from next week’s envelope, or you can save your remainder for the future.

I used this method 15 years ago, when I just graduated and moved to Shanghai with a few hundred bucks in my wallet. I had to borrow, plan, and survive. But the physical envelope method helped me to come through those hard times.

Now, in 2023, all our transactions are mostly cash-free and digital. We have a lot of great apps for budgeting and expense tracking. I’ve been using YNAB app for a year now, and it’s pretty awesome. YNAB has four rules, which are easy to follow, and you can even use them with any app, or an Excel file.

The Four Rules

  1. “Give every dollar a job”. Get some money; decide what they should do; assign every dollar you have available to an expense category until there are zero “unemployed” dollars left.
  2. Embrace Your True Expenses. Break large and infrequent expenses into smaller, manageable chunks. Find a big, infrequent expense. Create a target to fund it monthly. When that expense arrives, just pay for it!
  3. Roll with the Punches. If you run out of money in one category but still need (or want!) to make a purchase, just move money from another category to cover it. No shame or guilt needed — it’s your money and you can spend it how you want.
  4. Age Your Money. As your awareness about money grows, you’ll naturally start spending less. Eventually, you’ll be paying bills with money you earned more than thirty days ago. The result is more breathing room in your financial plan.

Happy budgeting!