Budgeting Vs. Tracking Your Spending Vs. Cash Flow Forecasting

The term budgeting is often used loosely to refer to different types of money management approaches. It’s important to understand what budgeting is and what it isn’t in order to understand the difference between Kualto and other personal finance tools like Mint or YNAB.

I found this great article written by Matt Becker over at Mom and Dad Money, that does a great job of explaining the difference between budgeting and expense tracking.

…in its purest sense keeping a budget means that you set hard limits on your spending. As an example, if your monthly grocery budget is $500, then you don’t allow yourself to spend more than $500 on groceries in any given month.

My problem with budgeting is that it’s not a flexible approach. It’s not realistic because there are always unexpected things that happen that cause us to go over our limits and “break” our budget. Then we feel guilty about not sticking to the plan.

On the other hand…

Tracking your spending is a much looser way of keeping your spending in line. You will still likely fill out a budget that defines your desired spending levels across the various categories. But your month-to-month spending is not strictly limited by those budgeted amounts. Even if your budgeted grocery amount is $500, you might let yourself spend $600 one month. There is no hard cap.

Matt’s point is that going over your groceries budget this month may be OK if you were under budget last month. This is a bigger picture approach to managing your finances. He says in addition to using Mint for budgeting purposes, he also uses a spreadsheet to keep track of his average spending for each category.

The spreadsheet shows me our average spending in each budgeted category over the last 3, 6 and 12 months. This allows us to evaluate our long-term behavior against our goals and make sure we’re staying on track.

Now if tracking your spending is a bigger picture approach, Cash Flow Forecasting is the biggest picture approach out of all of them! Kualto’s personal finance forecasting is similar to the spending tracking approach in that while you set desired spending limits on your categories, there is no hard cap at the category level.

What you do instead is watch your account balance and make sure that based on your estimates, your balance will never go negative, because isn’t this what really matters?

With Kualto you can play around and see what the future consequences of your decisions will be, before you make those decisions.

If you spend an extra $200 this month on restaurants how will that affect you 3 months from now? Could you afford to pay an extra $100 a month on your car loan for the next 6 months so you can pay it off sooner? What’s the maximum amount of money you can save per month without your account going negative?

These are the questions that traditional budgeting and simple expense tracking won’t help you answer.

You can try Kualto for free for 30 days. Start by entering your repeating bills and your income, and navigate forward to see what your account balance will look like months or even years down the road. Play around with different scenarios and see the impact that each decision could have on your future.