The Difference Between a Budget and Ledger

Shopkeeeper doing his monthly financial planning and bookkeeping
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People often equate a "budget" with a "ledger." While these are related concepts, the two words have different meanings. Your budget should be a blueprint that shapes your future spending decisions, a birds-eye view. A ledger, meanwhile, is up-close-and-personal.

A ledger is an item (either physical or digital) that allows you to document your spending, a data-collection tool that should also be helpful in creating a budget. A budget is a big-picture concept that helps align spending habits with your priorities, goals, and values.

Ledgers Past and Present

Historically, a ledger was a booklet that people would carry in their purse or pocket, in which they would manually write their expense at the point-of-sale. More recently, people gathered receipts and typed them into ledgers on their computer at home. Others used their credit card statement as a rough, automated ledger. Today, people use software programs and websites that automatically read your accounts, collect the data, and function as an automated digital ledger.

Budgets Guide the Future

Studying your existing personal spending patterns, you can pinpoint the areas in your budget where you want to make changes. You may, for example, study your expenses and realize that you want to redirect 5 percent of one spending category, such as clothing, to another category, such as retirement. The following month, you can study your ledger to see how effectively you executed that goal against your budget.

An Example of Budgets and Ledgers Working Together

Let's say Sally records most of her purchases by collecting receipts. She inputs the amount she spent into a spreadsheet at the end of each day. Since she does this daily, she only spends about five minutes per workday (less than half an hour per week) working on this task.

At the end of the month, Sally reviews her spending and sees that she's spending far more money eating at restaurants than she realized. She also wants to take a trip to Italy. Armed with the data from her ledger (the spreadsheet), she creates a budget (a big-picture goal) that guides her to spend less on restaurant meals in favor of building a vacation fund.

Automated Websites

Budgeting websites like Mint.com act as automated ledgers. These websites track and categorize your spending and show your personal expenses in the form of graphs, charts, and other helpful visuals. The data-collection aspect of these websites reflects ledger qualities rather than budget qualities.

These websites also allow you to input your goals for future spending. On Mint.com, for example, you can input that you'd like to save $40,000 for a down payment on a home. There's even a tool that helps you calculate how much money you can reasonably spend on a house, based on your income. You can then select the accounts or categories from which you want to pull your down payment savings. and monitor the progress you make towards this goal.

The goal-tracking aspect of this website reflects true budgeting, which may never be fully automated since it requires a human element of judgment, evaluation, and critical thinking.