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


In 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.