I’ve asked you before about how you manage your spending: do you budget it or track it?
It’s a question that everyone can answer differently, but I’ve generally found that it falls along one path: if you’re starting out your financial journey, learning how to better manage your money and haven’t built the good habits needed in your spending, you budget.
If you’ve been budgeting for a while, know where your money is going and have developed the good habits to control your spending, then you’ve likely reached a point where you only need to track.
Starting a Budget
Keeping a budget is a great first step to taking control of your money, and there are a number of easy ways to do it.
Wikipedia’s Personal budget page lists five ways to start a budget:
- Pencil and paper
- Spreadsheet software
- Money-management software
- Money-management websites
- Spending-management software
I’m obviously a fan of using money management Web sites, like Yodlee and Mint, to set up a budget. But if you’re just getting started, head over to Staples or Office Depot and get a pencil and paper budget. It works for everyone, and it’s how I started out budgeting.
Remember, when you set up your budget, make sure every penny has a purpose.
Tracking Instead of Budgeting
When you’ve spent some time budgeting, established your good spending habits, and have automated your fixed expenses, you may be able to start tracking your spending.
Instead of setting up spending goals for specific categories ($100 for entertainment, or $150 for dining out), you can treat all of your non-automated expenses as flux spending.
Your flux spending amount is the amount of money you do not already have earmarked (or can reliably anticipate) for each month.
This includes expenses like:
- Credit cards
- Dining Out
And, most importantly, savings!
In order to find your flux spending amount, use this equation:
Expected Monthly Income minus Total Fixed Costs minus Once-in-a-While fund = Flux Spending Amount
For example, if you have an Expected Monthly Income of $4500, Total Fixed Costs of $2000 and need to set aside $300 for your Once-in-a-While fund, you’d have $2200 for your Flux Spending Amount.
By knowing your flux spending amount, you can simply track your spending under one big umbrella instead of individual categories.
So, Which is Better?
Quite honestly, neither budgeting or tracking your spending is better. It all depends on how comfortable you are that your habits will help you meet your financial goals.
For those of us who need a more firm, rigid process to make sure that our spending is under control, budgeting is crucial. Knowing that you have a set amount of money each month to spend — either in particular categories like dining out or for your entire budget — can force you to stick to your plan.
If you’ve reached the point where your fixed expenses are automated and you can reliably predict your flux spending amount, tracking can do the job. You just have to ensure you have good spending habits.
I’ve reached the tracking stage, and so can you. Get started today with your free download of the first 3 days of Automatic Finances: 17 Days to Your Financial Freedom.