Friday, 25 January 2013

Expense tracking v. budgeting

Expense tracking documents the past. While this is a very worthwhile endeavor, and in fact essential to setting a baseline for your financial plan, by itself it’s not going to achieve your goals.  You need a budget.

A budget is quite simply a forward plan for the year of all your income and day-to-day expenses, plus any one-off expenditure related to your goals.  To build my expense budget for the year, I:
  • Review my total expenditure for the prior year in each of the categories I use to track day-to-day expenses
  • Increase the prior year figures where required for non-negotiable items – e.g., council rates, car registration, etc. rise each year without fail
  • Assess all negotiable categories to see if there are opportunities to lower expenditure
  • Allow a bit of leeway for unexpected expenditure – otherwise you’ll always miss your budget targets
  • Divide the totals by 12 to determine a monthly expense target
I then do the same for income.  This is a bit simpler, as I have mainly my salary and various types of investment income.

By doing the above, I can track my actual income, expenditure, and savings against budget.