The difference between tracking and budgeting
Over the past five years, the number of fintech (financial technology) companies in Canada has ballooned. Among these fintech companies are ones that promise to help you track your finances and ones that promise to help you budget. If you’re new to the personal finance world, you might not understand the difference between the two terms, or even realize that they aren’t synonymous. Don’t worry. Read on to learn the difference between tracking and budgeting.
Tracking
Websites like mint.com are great for money tracking. The website connects with your bank account and credit cards to follow your money – it keeps track of what comes into your account and what goes out. This data is collected and presented to you in an easy to understand format that can include graphs. You can then use the information for whatever purpose you want, including budgeting.
Tracking is the first step towards creating a budget. You should track your money for at least three months before making a budget to get an accurate picture of what your income and expenses are. A money tracking app or website makes tracking easier because the data is accurately collected and easy to access.
Budgeting
Budgeting is tracking 2.0. Once you’ve tracked your income and expenses for three months, you will have a snapshot of your financial life. While tracking, you might notice that you’ve been spending more than you earn, or that you spent $100 on coffee in a single month. By itself, this information isn’t worth too much. However, by putting this data into a budget, you’re able to use your tracking data to manage your money.
A budget is a comparative tool. In one section, you’ll detail what you hope to spend on categories like “housing,” “transportation,” “food,” etc. The total of these amounts must add up to less than your expected income. Elsewhere, you’ll continue tracking your spending to fill in your budget with what you’ve actually spent.
Tracking your income and expenses ahead of time makes writing a budget easier. Without tracking your money, you probably have no idea how much to budget for food. By budgeting $200 per month when you’ve been spending $600 historically, you could be setting yourself up for budget failure.
At the end of the month, you’ll compare the budget goal figures with reality and adjust if needed. Like tracking, budgeting is a tool to gather information. A budget’s comparative information tells you in which categories you are over-spending to help you narrow down where you can cut back.