Understanding the Difference Between Expense Tracking and Budgeting
Many people often confuse expense tracking with budgeting, but these are two distinct practices. Expense tracking serves as a diagnostic tool to understand where your money goes, while budgeting is the planning phase that gives direction to your finances.
The Significance of Expense Tracking
Expense tracking is a fundamental practice as it lays the groundwork for identifying your spending patterns and effectively adhering to a budget. According to the Banco de México’s 2023 Household Financial Competence Survey, only 43.6% of households reported maintaining such control. Although the National Financial Health Survey (ENSAFI) by Mexico’s National Institute of Statistics and Geography indicates that 53.2% of the population claims to control their expenses, only 32.8% successfully adheres to a budget.
The fact that more than half of those who attempt to control their expenses or create a budget fail to stick to it suggests a lack of awareness about their spending patterns, as they haven’t conducted an initial expense tracking exercise.
Finding the Right Fit: The Challenge
Personal finance, as the name suggests, is highly individualistic. Beyond adhering to a standard savings percentage, the challenge lies in finding what suits your lifestyle best and ensuring it’s simple enough to maintain.
According to Bank of America’s blog, “Best Financial Habits,” the first step towards creating an effective budget should be evaluating your net income or salary.
Your “net salary” refers to the amount deposited into your bank account after taxes each pay period.
For independent workers, temporary employees, contractors, or self-employed individuals, income can be variable. Therefore, it’s crucial to maintain a detailed record of contracts and payments.
The Next Step: Expense Tracking
Once you understand your available resources, the next step is to know where they go, as per financial institution advice.
“Tracking and categorizing your expenses can help you determine where you’re spending the most money and where you could potentially save. The more details you gather, the better. For several weeks, record all your daily expenses. Use whatever method is most useful to you: an app, a smartphone, a spreadsheet, an online template, or even pen and paper,” the advice goes.
Bank statements and credit card bills are a good starting point as they break down your expenses and often group transactions into broad categories like utilities and entertainment.
Subsequently, it’s recommended to group fixed expenses. These are regular monthly bills like rent or mortgage, utilities, and car payments.
Next come variable expenses, those that aren’t constant but you know will occur, like school tuition fees, insurance payments, taxes, or even entertainment. This is an area where you might find opportunities to cut costs.
Expense tracking offers a snapshot of your current situation, but when drafting a budget, it should be continually adjusted, especially with future goals and saving as a “future fixed expense” in mind.
If your initial expense tracking reveals you’re spending more than you earn, it’s time to take action to save, focus on your goals, and establish emergency funds.
The National Commission for the Protection and Defense of Users of Financial Services (CONDUSEF) offers a “Personal and Family Budget Planner” that you can use. It starts with expense tracking and progresses to budgeting.
We are days away from the start of the National Week for Financial Education (SNEF), where these topics and more will be discussed in national talks. Don’t miss these opportunities to bring more financial knowledge into your life.
Key Questions and Answers
- What is the difference between expense tracking and budgeting? Expense tracking is about understanding where your money goes, while budgeting is planning how to allocate your finances.
- Why is expense tracking important? It helps identify spending patterns and ensures effective budget adherence.
- What should I evaluate before creating a budget? Evaluate your net income or salary.
- What are fixed expenses? These are regular monthly bills like rent, utilities, and car payments.
- What are variable expenses? These are non-constant expenses you know will occur, like school fees or entertainment.
- What should I do if my expenses exceed my income? It’s time to save, focus on your goals, and establish emergency funds.
