Learn the Difference Between a Budget and Ledger
People often equate a "budget" with a "ledger." While these are related concepts, the two words have different meanings.
Definition of "Ledger"
A ledger is an item (either physical or digital) that allows you to document your spending. A ledger is simply a data-collection instrument; nothing more. A ledger is a tool that's helpful in creating a budget.
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 -- a document that describes each purchase -- as a rough, automated ledger. These days, people use software programs and websites that automatically read your accounts, collect the data, and function as an automated digital ledger.
Definition of a "Budget"
A budget is a big-picture concept that helps people align their spending habits with their priorities, goals, and values. It's a blueprint that shapes your future spending decisions, a birds-eye view. A ledger, meanwhile, is up-close-and-personal.
Having a ledger (having data) can help you create a budget. By studying your existing personal spending patterns, you can pinpoint the areas in which 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.
Putting the Two Together
Let's run through an example of how you can use a ledger to help you budget. 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.
What About 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.
But 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.
You can also monitor the progress you make towards this goal.
The goal-tracking aspect of this website reflects true budgeting. But budgeting can never be fully automated since it requires a human element of judgment, evaluation, and critical thinking.
A budget involves big-picture goal-setting, but a ledger can be a useful tool to help guide that process.