The other day I helped a friend establish a budget. We did what most people do and set up categories that were meaningful to him and filled in either known or estimated monthly amounts. Few were known. Most were estimated. The end result gave him a much clearer view of his financial picture but I also emphasized to him that budgets are a work-in-progress. Some changes one way or another in his life could considerably affect his bottom line (read amount he can save!).

It is the work-in-progress aspect that I believe gets lost if the well-intentioned budgeter does not track actual expenses. I do not expect my friend to track expenses. The whole concept of budgeting is new to him and it would overwhelm his artistic sensibilities to take on this next step too soon. But for the rest of us who already budget conscious, I cannot emphasize enough how important it is to track real expenses against projected (or target) expenses.

Like most financial coaches/planners/advisers, I spend a lot of time talking about budgeting. Naturally, I have one of my own and thought pretty highly of my estimating skills. Then I started actually tracking expenses. So much for my skills! I was absolutely astonished at the actual versus the projected. This doesn’t render a projected budget useless. It just means that it’s a starting point. Here’s what I’ve learned over the past 5 months or so:

  1. I am almost always spending more than I think in the variable categories.
  2. Quarterly or annual payments are accounted for in the target budget but make monthly numbers ugly when they hit.
  3. Tracking can be tedious but gets easier with practice.
  4. It’s HARD to remember to track every expense. Even a high degree of motivation doesn’t necessarily equal 100% compliance.
  5. Confidence in your numbers grows also with practice.

Tracking breathes life into the budget and helps you focus on specific categories. Groceries were our first target as described in this post. This month we are detailing out the individual purchases in the dangerous “miscellaneous household” category to have better insight into what we are spending and how to reduce it. We expect this to go down given our recent warehouse club membership. Or maybe we can’t reduce it further and we just need to adjust the target as Regan discussed in her post yesterday about her budget for eating out.

This is not an exact science. As I mentioned above, some categories have amounts that are estimates of annual expenditures (clothes, medical expenses, etc) divided by 12. I think we will have reached equilibrium in our process when we start seeing some months come in under target and some over but generally trending close to the projected average. My goal is to track for at least one year.

So how about you? Do you track or trust? Some or all expenses? Do you have tricks to share to make it easier? Would love to hear your thoughts.

Photo credit: stock.xchng.