People often equate a "budget" with a "ledger." While these are related concepts, the two words have different meanings.
A budget is a tool that helps align spending habits with priorities, goals, and values. Your budget should be a blueprint that shapes your spending decisions and provides you with a bird's-eye view of your finances.
A ledger, meanwhile, is up close and personal; its purpose is to track your spending as it happens. It is an item (either physical or digital) that allows you to document your spending. This data-collection tool should also be helpful in creating a budget.
Budgets and ledgers can work together to help you gain insight into your spending, set and adjust financial goals, and plan for the future.
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 down their expenses 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, many people use software programs and websites that read their accounts, collect the data, and function as automated digital ledgers. These programs often act as a combined ledger and budget, collecting data and then synthesizing it for analysis and decision-making.
Budgets Guide the Future
By 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% 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.
A budget is a flexible tool that allows you adjust as needed to accommodate new goals or financial emergencies.
Ledgers vs. Budgets
Ledgers provide the financial data that forms the foundation of a successful budget. Understanding the distinctions between the two tools can help you use them together more effectively.
|Are data collection tools||Are planning tools|
|Focus on the present||Focus on the future|
|Provide financial information for use in a budget||Use financial information from ledgers to guide spending|
An Example of Budgets and Ledgers Working Together
Suppose Sally records most of her purchases by collecting receipts. She inputs the amount she spends 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.
According to a survey from the Certified Financial Planner Board of Standards, Inc., 59% of consumers are not tracking spending—and two out of five say that they've never kept a budget.
Budgeting websites like Mint.com act as automated ledgers. They track and categorize your spending and show your personal expenses in the forms 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 toward your goal. The progress-tracking aspect reflects true budgeting, which may never be fully automated, since it requires the human elements of judgment, evaluation, and critical thinking.
Certified Financial Planner Board of Standards, Inc. "Consumer Views on Personal Cash Flow Planning."