Budgeting vs Expense Tracking: Why Recording Expenses Is Not Enough

From Expense Tracking to a Working Budget

You have probably read many articles telling you to track your expenses. Perhaps you were persuaded, downloaded an app and started recording everything. Then what happened? Often, nothing followed.

I frequently see people unable to keep the habit going. Consistency is a major part of successful financial management. Even if you can track expenses consistently, that is only the first half. The more important second half is managing cash flow and setting a budget.

Why are you tracking expenses?

To know how much you spend. Once you know, what comes next? Sometimes, nothing.

Tracking expenses is useful, but its purpose matters more. Doing something blindly makes it difficult to continue, and the effort is wasted. A goal gives you the motivation to keep going.

The purpose of tracking is to manage cash flow. It shows which category has gone over its limit, so that you can set a standard — the budget for each kind of expense. Every country and company prepares a budget for the same reason.

Do you need to track expenses every day?

If you are diligent, you can. But once you have built a budget, you do not necessarily need to record everything every day. Review it regularly and make sure spending stays within the budget. Adjust it whenever extra expenses arise.

This is especially important after a major change. If your starting salary or income rises, you can adjust the amount invested each month. If you get a pet, you have a new expense to include.

What is the purpose of a budget?

A budget stops you from spending without limits. Manage yourself like a company, with you as your own CEO.

At the start of the month, allocate a budget to every department. These departments include all spending categories, and investing is one of them. Every department can spend only within its budget. Once the allocation is used up, there is no more.

Whether this "company" improves or declines depends on how you manage it as CEO. Successful people first learn to manage themselves. If you can manage yourself well, you are better able to manage other things.

How can you gamify the process?

Human beings can be lazy, so an external push can help. You can gamify financial management by designing levels for yourself and including rewards after you pass them.

Adding a sense of play can make it easier to work towards your financial goals.

Example

As soon as your salary comes in each month, divide it according to the budget. Suppose your food budget is RM600 a month, or RM20 a day on average. You can withdraw the amount in cash or keep it in an e-wallet. The main purpose is to separate it from the other budget categories.

However you choose to eat and drink, once the RM600 is gone, it is gone. You cannot take from another category because every amount has already been allocated. This forces you to exercise discipline.

If you stay on target for a full year, you can give yourself a planned reward. If a year feels too long, divide the reward into monthly milestones.

Think of yourself as the CEO. When the KPI is achieved, you earn a bonus. This teaches you to reward yourself only after reaching the target, instead of giving yourself something without first doing the work.

Imagine a company whose CEO freely used company money for random spending. Would that company — in this case, you — have a future?

Stop tracking expenses without a purpose. Always start with why.