Three Simple Steps to Help You Transition from Expense Tracking to Real Budgeting

pencil-1In yesterday’s budget review I told Chase and Beth they were using YNAB more as an expense tracking tool than a budgeting tool. A few commenters said this resonated with them and asked if I’d write a post about the difference between “expense tracking” and “budgeting”  – the You Need a Budget (YNAB) way.

So, what do YNABers mean when they refer to “expense tracking”? I’ll use an extreme example to explain the concept.

Long before I got my head on straight and started using YNAB for its brilliantly intended purpose, I used it 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 checking 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 an expense tracker (rather than a budgeter) 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.

The ideal would be to transition from expense tracking to real budgeting. Jenifer left this comment on yesterday’s 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 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:

  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 money 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.

  1. 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. Your enthusiasm naturally guides you to frugality, rather than trying to cut spending because you think it’s what you “should do.”

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.

45 Responses to “Three Simple Steps to Help You Transition from Expense Tracking to Real Budgeting”

  1. BWK

    Fantastic article today. This resonates with me. (or me 3 years ago)

  2. Sara

    I’ve been expense tracking as well, rather than budgeting, since I started 3 months ago. But I really had no idea how much I spent on groceries except that it was ‘way in the hundreds’! So now I have some amounts to go by (no credit card debt to foul it up) and will definitely try to change over to real ‘budgeting’.

  3. Julia

    This is great. I have fallen into expense tracking over the past year or so, and this will help me get back on track.

  4. Stanya

    Thanks! This is just what I needed to hear after having a few financial set back (3 in one week).

    • Joni

      Michelle, you might want to re-read the post. I think you’re misinterpreting Mark’s message.

  5. Jessica G

    This is why my fuel, gifts and groceries are cash only. I used to do this and the only way for me to keep those areas on track was to use cash. Can’t go over that way!

  6. Tom Shelton

    Great article! I am on board but my wife is still resistant. Now I have game plan to bring her along so that she doesn’t just think I am nuts and always fussing about how “we” (meaning she) needs to do a better job of controlling our spending in certain categories (like eating out).

  7. Ben

    To borrow a concept from Dave Ramsey, expense tracking is finding out where your money went, and budgeting is telling your money where to go.

    The former is better than nothing, and I used mint.com pretty effectively for this before finding YNAB. In fact the years of historical data helped me set category budgets based on annual averages for things like utilities. But real peace of mind and control only came when we really started budgeting.

  8. John

    Bravo! I have been using Quicken for 12 years before discovering YNAB. *Every* transaction was put into there, and it was great to really know what I was spending, but it was not really control. With the YNAB transition, I find that I really spend less money just from Rule 1. The “fun” I had this last month when a couple of big expense came due, but I had already budgeted for them was a shock and a surprise. Write check, move on! And I virtually have stopped making impulse purchases. Also a shock.

    It’s been hard for me to not continue to update Quicken (12 years!), but after doing both systems for a month, I finally realized that once I really have a budget, what’s happening in Quicken doesn’t matter.

    And a shout out to the reporting functions. While still not perfect (more details! more options!), they allow the same “look back” that all the Quicken work allowed as well. It’s been the hit I need to really step away from Quicken.

    • Renaité

      I know what you mean by “fun” – I get so psyched when those quarterly bills come! I can’t wait to pay them with the money that’s been waiting there.

    • Annalise

      This is my exact situation almost to a tee, with over 16 years as a faithul Quicken user. I tried their budget numerous times, but it just wasn’t helpful. It was a huge leap for me to switch to YNAB, but after a short period of time I cut Quicken off completely. We just finished our first full year on YNAB. I wish I had found it sooner, but better late than never!

  9. Dustin

    Agree. Important distinction. Mint.com is great for expense tracking. Not for budgeting. That process really worked well for us. It’s easy to start just entering each transaction as you spend it, harder to get to the point where you’re checking the category balance and then making the decision. I found that once you’ve been entering each transaction after spending for a while, its a lot easier to get used to checking the category balance.

  10. Kate Ditzler (@kateditzler)

    We’re expense trackers. One of the problems is that a) we don’t have a sense of what we have and what we need, so we’re feeling the way through each month without any sense of what should be budgeted for, and b) the Android YNAB app makes it possible to record an expense without ever seeing how much is left in the account. B) is a little bit of an excuse, but it lets my magical thinking continue instead of confronting the budget as a boundary head-on.

    • Marta

      I want to chime in with Kate about her “B.” I’ve been using YNAB for almost 2 years, but just started using the mobile app in the last few months. I’ve found YNAB enormously helpful, but the app less so and for precisely the reason Kate mentions. I’m glad I can pull up my budget in the store, but it would enforce the budgeting message if when I chose a category it reminded me of what I’d budgeted. As it is, for most transactions I enter the transaction at the store, but don’t look at how it relates to my budget until I sync the transactions. Is this just because I’m still using YNAB3?

    • Cate

      I’m a bit confused by excuse #B – my app shows how much I’ve budgeted for each category. Looking at the Budget (as apposed to Accounts, or Add Transaction) on my phone, I currently see that I have $150 in my grocery category. If I go to a store, and spend $100 and enter it, at the bottom right of my screen, it shows in green how much I have remaining to spend in that category. If I had spent $175, it would show in red “($25.00) remaining”.

      I think the clarity comes from entering from the Budget option as opposed to the Account or Add Transaction options.

  11. Kristi

    Great post. I’ve used YNAB since Jan. Since I’m self employed, and my income wildly fluctuates, I’ve had no choice but to use YNAB to track expenses. I now have 6 months worth to try and create a budget. I’m working on this week by week, and it’s been slow. There is however progress! I would sure love to hear more from other 1099 or self employed with fluctuation income of their strategies. Thank you YBAB!

    • Nicole

      My income fluctuates, but I am not self employed. I found that once I was able to save enough in my buffer to live on for a month and actually start forwarding my paychecks to the next month, that was where the magic came in. I didn’t have to worry about making it to the next check because at the beginning of the month, I had a set amount to work with. While the checks themselves vary, the month is still one lump sum.

      One other thing I do with categories that aren’t predictable (mainly car fuel) is forward them to the first of the next month so I have a total to budget. It’s basically expense tracking just one category but makes the budget cleaner. And I wouldn’t do it for categories that you have more control over. I have put my utilities on equal pay to make them predictable as well.

      • clouwho

        Hi Kristi,
        We have wildly variable monthly net income (from 0 to $18,000 is what I’m seeing for the past 12 months). I have tracked expenses and budgeted (Quicken 15+ years and YNAB 1+ year) and used the data to get a reliable idea of what we needed in each of our categories for rock-bottom living.
        We then saved a three-month buffer (we have had a 3-month period where we didn’t have enough income for basics so this is our minimum buffer amount). We therefore have erratic appearing numbers in our budget (savings 0 for five months and then a $30k deposit, nothing in our home maintenance fund for three months and then $2k the next) on a month-by-month basis, but at the end of the year we meet our goals, remain debt free and keep our minions (dollars) in line.
        We funded in big chunks this past year in order of priority of expenses (insurances, property taxes, savings, giving).
        After a year of doing it this way our checking account has a ridiculous amount of $42k in it because of the three-month buffer and every category fully funded (the big money categories that we pay in lump sum in November/December will eat almost $21k of that. It will be sad to say goodbye to those lovable dollars I’ve grown so fond of, but a huge relief to enter January with everything paid in full). Once you’ve got those big ticket items front-loaded and have whatever buffer you need, you can go to adding a fixed amount monthly to your categories for future spending.
        It requires a fair amount of self-discipline and vision to keep a 3-month buffer from getting used spontaneously/off-budget/unwisely. I am just now getting my husband on board with NEVER looking at our checking account balance and ONLY looking at our budget before spending. He said it still feels wrong to have all that money and be told there isn’t enough for the new tool/gadget he wants. The thing that best helps him to stay on track is looking at the net worth number that grows monthly as we near retirement.
        Best to everyone.

  12. Brindy Adams

    I guess this is where I take “rolling with the punches” too far. As the month goes on & I spend more in misc. (stuff that doesn’t really have a category), restaurants, clothing, etc., I adjust and move money around. Then at the end of the month I adjust more until my green number is gone, but then I end up going over every. single. month… sometimes by the hundreds. We don’t have credit card debt, but I can’t keep up with staying inside our monthly income. I’d love to save more and have limits…It’s so hard! So right now I am $100 over budget, that means I need to find the money in groceries or another category and not go over anymore for the rest of the month, right? I’m definitely awesome at expense tracking!!

    • mark

      Hi Brindy – Unfortunately that sounds more like punching yourself in the face than rolling with the punches. :-) But hey, you’ve identified the issue, and awareness has a way of magically modifying behavior. Hang in there!

  13. Patty Macfarlane

    I have been using YNAB for about 3 years now. We were deeply in debt when I started. And now I’m happy to report that we have a one month buffer!! Yay!!
    When I first purchased YNAB, my husband was skeptical because he hated the “budget” word. He thought I was going to turn into the green budget monster and “force” him to stop spending money again. I felt like a monster too :(
    I was an excellent “expense tracker” and knew the envelope budget concept from reading “Rich on any Income” many years ago. Unfortunately, cash in envelopes just wasn’t feasible in our electronic era. When the envelope became empty, he could just whip out his debit or credit card. “Tracking” the spending was no problem – but it only served to frustrate both of us. I had been searching for an electronic envelope system for years!! So, when I found YNAB I was overjoyed :) I understood the concept readily but wondered if someone so deep in debt could ever make this work. But I kept at it and tightened up the spending categories when and wherever I could. Each week, I would evaluate and reassess my categories until I felt I had a handle on how to give a job to every dollar. I became master of the money – not my husbands spending!
    The way I got my husband “on board” was to create a category called “GnG Fun Fund”. It was just what my sweetheart needed. I actually started hearing him say things like “let’s not buy this or that – let’s put that money into the fun fund”!! Yet, amazingly, he is now suggesting to put the “leftovers” into our Pre-YNAB credit card debt category!! This makes me love him so much!! (Be still my heart!)
    We are not out of debt yet, but we are living within our means and have a goal for being debt free by 2015. I KNOW we will make it by then – maybe sooner with my husband’s new outlook and excitement over seeing the balances decrease.
    Thank you so much for creating this marvelous program!! It has brought peace into our marriage and I am feeling so secure and happy now that we are in control of our money rather than at it’s mercy :)

    • mark

      Great, great, great story. Thanks for sharing, and congrats on your unity and your success.

  14. Kenneth

    Great article, Mark!
    I’m good with numbers, and look at my YNAB budget favorites several times a day. Just from memory I know I have about $620 left in Stores, Other for September, and $200 in gas, and $53 in restaurants. These are good numbers. One key word in your article is “comfortable” regarding setting your budget amounts. Not too tight that you are in danger of always going over. Not too loose that you’re impeding your progress towards your real goals. The amounts I have left are still “comfortable” for me, no sense of I’ve spent too much too soon. That’s a good feeling. The two goal numbers for the month are $2,500 to pre-YNAB HECL debt, and $400 to Savings. These numbers do not appear to be in danger this month, unless something quite unexpected comes up. Therefore, I am budgeting, not tracking..

  15. Beth

    When I started with YNAB in March we were making our bills but I had no idea where the money was going. I used YNAB for about 3 months as an expense tracker, and then armed with that knowledge I started fresh with a real budget. Between my husband and me, we receive a paycheck every Friday, so I have us operating with a 1 week buffer instead of a one month buffer until all the credit card debt is gone. It takes a little more time to do the budget every week instead of every month, but it keeps us focused on our goals. Next up – getting my husband to check the budget instead of checking with me!

  16. Jay

    Love this last thought: ‘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.’ And that, my friends, is the prize!

  17. Brenna

    I’m working on the transition from tracking to budgeting, but I REALLY need to figure out how to get my husband on board. He tells me to just tell him what to do, and I do, and then he does something completely different. We have this great circular argument. He says he wants to pay off the house in 10 years. I say, no problem, here’s the budget. He says but I don’t want to live by a budget. I say fine, then we won’t pay off the house in 10 years. Then we start again. I really want to be more aggressive on the budgeting side, but it’s a work in progress.

    • mark

      I wonder if he’d be more disciplined about a nearer-term, funner* goal. I don’t think most of us leap out of bed in the morning shouting “And that’s how I’m going to pay off my house in 10 years!!”

      What about saving for a vacation, motorized toy, big screen TV? Something that allows him to only have to wait six or twelve months for the payoff. It seems like others have found it easier to get their spouse excited when they appealed to less-delayed gratification. The short-term prize might help him get into the budgeting habit, which you then use to pay off the house.

      *Yes, I know funner isn’t a word. It seemed appropriate. :)

  18. maiyaamar

    Thanks for addressing this, Mark. I’ve been wanting to get some help with becoming more of a budgeter and less of an expense tracker. I seem to be a bit of both because I start out with a budget each month based on what I spent previously, and then Rule three takes over and I start adjusting categories so that I end up with an expense record and my most of my original budget amounts are gone with the wind!

    I think this is because I hate to see any red numbers in my category balance column and once I start tweaking the budgeted numbers, (and this happens a lot towards the end of the month) I lose track of what my goals were at the beginning of the month. Is this what other people’s end of the month looks like too? I’m not sure if I’m missing something but would love to hear about other’s feelings about red category balances compared to adjusting the budgeted amounts.

    At least I’m not spending more than I earn anymore (thank you YNAB!) and have eliminated debt, but I’d love to have more money left over in the balances for my Rainy Day savings categories which are pretty low right now. My saving grace is that I’ve set up an automatic transfer when my paycheck hits the bank that moves a small amount into an off budget Prudent Reserve account for emergencies. I don’t miss what I don’t see come into the budget.

    • Dean

      I do exactly the same as you. The red seems to me as if you are doing it all wrong. Like at school, a red cross indicates a wrong answer.

      I know YNAB doesn’t work that way, but its more reassuring to me knowing there’s no red in there. I know when the next pay day comes the red gets eliminated, but your income also gets reduced. That to me is a bit worrying because I think “What if I don’t have enough income in the first instance to cover me this month and I’m paying myself back already?”

  19. Micro

    I don’t really physically adjust the budget amounts in Mint. I just mentally make note of the available money in different categories. I probably should physically mark it down to get a better record of what happened when.

  20. Reita

    Love, love, love, love, love this article! I’ve been using YNAB for about 3 or 4 years now not making any progress or paying off any debt, in fact I seemed to dig myself deeper in debt and didn’t know how/why that was happening. I spent a day last week really diving into the blog, forums and classes and it dawned on me that this is exactly how I was using YNAB and not knowing it. I wasn’t aware that I was expense tracking instead of budgeting. I have been officially budgeting for about a week now and I have to say it’s so much easier, stress free and just makes total sense! I’m budgeting for both business and personal expenses but now I feel like I’ve wasted sooooo much time controlling my money.

  21. rowancraft

    You’ve captured, in a blog post, why we switched from Quicken to YNAB. We had a budget (in Excel) while using Quicken, but we couldn’t track to it easily, so we didn’t. And we didn’t make goals, either.

  22. Anners

    A quick tip for folks who are making a transition to budgeting: The first few months are hard!

    I’m in month four and I finally feel I have a grasp on how much I actually need in each category each month–and what categories I need.

    That first month was so, so frustrating because I needed to change my habits to adhere to the budget. And changing habits is hard!

    There is hope: It gets easier!!!

  23. Robert

    I kind of feel like I’m expense tracking in some categories, but my wife and I definitely have goals. Am I expense tracking or not?

    Basically our goal is a house. We put all of our left over money after budgeting the other categories into our House savings category.

    A couple of categories (Restaurants comes to mind) we simply put enough in there to make sure we don’t overspend. I don’t really make any effort to reduce this (mostly because I’m a picky eater). Other categories truly are expense tracking and can’t be reduced (bills). There are categories we can adjust on… such as clothes, electronics, etc. I can decide not to upgrade my phone to get more money into the House savings category.

    How are we doing? As we budget we are always mindful of our goal. If, at the end of our budgeting pass, we are not satisfied with the money left over to put into our house savings category, we’ll go back and review everything and find where we can reduce money in categories to free up more for the house.

  24. Leigh

    I’m in my first month with YNAB so very new to this topic, but I can tell I’m an expense tracker at this point. Also transitioning from Mint doesn’t help that problem.

    Do you see harm in shuffling money around from the more “discretionary” categories going forward, to prevent being over budget? Like, moving money from clothing to restaurants or takeout, given that the overall amount spent on those categories stays at a level that helps us reach our goals?

    • mark

      Hi Leigh –

      Shifting money from one discretionary category to cover overspending in another discretionary category is living YNAB Rule 3 perfectly (rolling with the punches). Welcome to YNAB! Make sure you take advantage of the free live classes!

  25. Tony

    I guess I’m one of those hardened expense trackers. I guess I just like to keep things simple. I just track (categorized) expenses in a spreadsheet – in real time. I can see if any particular category is looking “dodgy” (e.g. overspending on Amazon books). Using a single debit card makes this easier. I’ve been doing it for so long I just have a “feel” for how my finances are. I automate as much as possible – for example 50% of Net automatically goes to savings each month. I have buffer on standby.

  26. Andrea Parinsndrea

    Hi Mark, Great site. I’m specifically interested in this article when you say your personal preference is to have only one goal. Makes sense. But what is your advice if my one goal is to eliminate debt but I’d also like to strive for living off last month’s income. In your opinion, is it counterproductive to be taking money away from my debt snowball and putting toward the rollover savings? Thank you!

  27. hannah toussaint (@hannahtoussain1)

    I’m not very good at budgeting and tend to lose track of my spending. And for sure I have never practiced expense tracking and if i have i surely don’t remember. This article is enlightening about the difference between the two. It’s really about time I learn budgeting and apparently expense tracking may be a good start before I move on to budgeting or should i go on directly to budgeting. interesting article

  28. Carry

    This is a timely post. I’ve been thinking a lot about the concept of expense tracking recently, and using it as an excuse for *not* entering transactions into YNAB for the last six months.

    I should explain that I used YNAB as a budgeting tool quite successfully for many years when we were living on one income, then when we were living on one income *and* I went to grad school. Back then, we really had to budget!

    Now, though, we’re in an interesting place: we have no debt (except our mortgage, which I’m not convinced that we need to pay off in advance), we have a buffer, we have more than a year’s worth of living expenses saved, we’re saving the maximum tax-deferred amount for retirement each year in our 401(k)s and IRAs, and we’re still spending less than we earn each month. We even endured the financial cost of a major surgery this year without sweating it. I’m not saying this to toot my horn, just to explain that all the reasons people typically give for budgeting just don’t exist for us.

    So, can anyone make the case for budgeting in this situation? How would/could YNAB be more than an expense tracking tool in my situation?

  29. willknitforbeer

    this post finally allows me to understand the process of starting over and why i don’t need the previous transactions. I’ve been expense tracking and never realized it.

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