There is no money, only food.

Every dollar we spend turns into food for someone somewhere at some point.

A budget is like a diet in that if you have money (eat), you have a budget (diet). We’ll look at two of the standard definitions for the term diet:

  1. the kinds of food that a person, animal, or community habitually eats
  2. a special course of food to which one restricts oneself, either to lose weight or for medical reasons

The definition says:

  1. First, if you eat food, you have a diet.
  2. Second, if you restrict yourself to a specific course of food—not out of habit—you are practicing a diet.

When we think of the word “budget,” it’s often similar to the second common use of the word diet; we restrict ourselves in some way to accomplish some other goal or satisfy some other need. However, the term budget is an estimate of income and expenditure for a set period. This usage is more in keeping with the first from the word diet.

When it comes to diets and budgets, the question becomes: How mindful and intentional are you in either or both?

If you are not mindful and intentional, it’s pure habit. You eat what you want, when you want, and damn the red lines. For money, you spend what you want, when you want, and damn the red lines.

No judgment. And in either case, there are three primary activities:

  1. tracking,
  2. forecasting, and
  3. reconciling.

In action loop terms, we’re looking at performing, planning, and reviewing and reflecting, respectively.


Section titled Tracking

Tracking, in diet terms, is looking at what we’re eating and when. Further, your body doesn’t care if it’s a carrot or a cupcake; it only cares about calories, macronutrients, and micronutrients.

Tracking, in budget terms, is looking at money coming in and going out of your life. Tracking is bookkeeping.

While you can be as detailed as you want, I find the more we can apply the simplicity principle, the less friction there is to the act of tracking itself.

Whether we’re talking food or money, tracking is there to increase transparency and raise awareness.

I had no idea I ate that much junk food, and I had no idea I spent that much on eating out.

The bookkeeping profession uses a chart of accounts to help simplify things; however, the redundancy of language may make it seem complex, if not complicated. Everything is called an account and, at the highest level, there are four accounts:

  1. income,
  2. expenses,
  3. assets, and
  4. liabilities.

You could use those four alone. However, we typically break those accounts into sub-accounts, which may differ for each person.

Income represents money you receive from a third party. If you work two jobs, for example, you might have a sub-account for each:

  1. income
    • fast food restaurant
    • dog walking

You may decide to group these under more generic, flexible headings:

  1. income
    • W2 employment
    • 1099 employment

Using specific names, as in the first example, can become complicated if your working situation changes; you quit the fast food restaurant and become a server at another restaurant. In the first example, you might need to create a new income account. The more generic heading of W2 employment ties the income to the related agreement and tax documents.

When you receive money, you create a deposit entry. The entry should have at least five pieces of information (the fifth is optional but helpful):

  1. Account (the term category or source works as well): W2 employment, 1099 employment, fast food restaurant, dog walking, and so on.
  2. Amount: How much was received?
  3. Deposit or withdraw (credit or debit): Whether money was received or removed from an account. (The terms credit and debit can get confusing in the professional bookkeeping context, so I use deposit and withdrawal instead.)
  4. Date: The day money was received.
  5. Description (or details): An optional, freeform note to help remember the source of or destination for money. You might put “fast food restaurant” instead of having a separate account in your chart of accounts.

We’re talking bookkeeping though, and this is money coming in from a third party; therefore, there is an account where you make this entry, which is different from the account for the entry.

In this case, the previous entry will go into an asset account; let’s say this person gets paid in cash:

  1. assets
    • cash

So, we open our cash ledger and create the entry as a line item.

Let’s say this person needs to pay rent; that’s a different account in our chart of accounts, specifically an expense account. Expenses are when we give money to a third party, the opposite of income:

  1. expenses
    • rent

This person will pay in cash because that’s how they roll, so we’ll make another entry in the cash ledger. This time it will be a withdrawal, but the same five pieces of information exist:

  1. Account: The rent expense account.
  2. Amount: 500 USD
  3. Deposit or withdrawal: Withdrawal.
  4. Date: First of the month.
  5. Description (or details): My half of the rent.

Liabilities are the opposite of assets and represent money you owe, but have not paid, to third parties.

These are typically loans, revolving or terminal. Revolving loans usually have a limit, and you can borrow money without filling out more paperwork if the balance owed is not greater than or equal to the limit. Terminal loans typically have a term—a specified number of payments or time in which the loan balance needs to reach zero; there is no gap between the amount you can borrow and the balance remaining.

Let’s look at a complete flow of money; distributions. The chart of accounts looks like this:

  1. income
    • W2 employment
  2. expenses
    • rent
    • groceries
  3. assets
    • checking at ABC credit union
  4. liabilities
    • credit card at XYZ credit union

This person gets paid and creates a deposit entry in their checking asset account. They make a withdrawal entry to pay rent in their checking asset account. They create a withdrawal entry for groceries in their credit card liabilities account. They create two entries for making the payment to their credit card.

Here is where double-entry bookkeeping comes into play.

The first entry is a withdrawal from their checking asset account, a negative number. The second entry is a deposit to their credit card liability account, a positive number. If we add the amounts for these two entries together, they should equal zero.

Asset and liability accounts maintain running balances; income and expense accounts (typically) do not—unless you are doing strict, hardcore double-entry bookkeeping (because your income is an expense for someone else, we usually don’t track it unless we’re running our own business). To get your financial net worth, add the balances for all asset accounts and subtract the total balances of your liability accounts; what’s left is your financial net worth.

That’s tracking.

It’s one of the core habits for anything you want to do or accomplish in life, which is why we see it repeated in almost all professions.

Cash back rewards on credit cards

Section titled Cash back rewards on credit cards

Some credit cards (liability accounts) have reward programs. For bookkeeping purposes, there are two we want to track:

  1. bonus incentives and
  2. cashback from use.

Typically both of these are represented as points. These points can be converted into something else, like cash. If you convert points to money, create an entry in the ledger for the account in which it was deposited.

Bonus incentives are received just for opening a card and are considered bonuses above and beyond any other rewards. When used for cash, the cash is tracked as income and may have associated tax liabilities. Generally speaking, you won’t need to worry about tax liability unless the amount is over a certain threshold and if you receive a Form 1099-MISC from the card issuer (see Investopedia article).

Cash-back reward points from using the card are seen as rebates or refunds on purchases (refunds on expenses).

I’ve seen a couple of ways to track and account for cash rewards from using the card.

First, the cash is tracked as non-taxable income when you convert the points to cash deposited in an asset account. Second, the money is tracked as a refund against another expense; some reward programs let you do this in the reward software—choosing a transaction to bring to zero by converting points, for example. The third is a hybrid of the first two in that cash is deposited to an asset account; however, it’s categorized as a refund on the ledger of an expense account.

So, in the first scenario, you acquire reward points, convert them to cash, and have that cash deposited into a checking asset account. The entry goes on the checking ledger and is categorized as non-taxable income.

In the second scenario, you sign in (or call) the reward program and select one or more purchases you’ve made using the card and have the points converted to cash and put toward the card’s balance.

For the third scenario, let’s say you pay rent somewhere, and you have a roommate. You pay the total rent, and your roommate reimburses you for their half. You’d have a withdrawal entry in one of your asset accounts for the entire rent amount. When you receive the money from your roommate, you deposit that money (usually to the same account you withdrew from) and mark that entry as a refund against your rent expense. So, instead of looking like you received extra money for something else (income), this reduces the total amount you paid toward rent. The same thing applies to credit card points converted to cash; the credit card issuer is like your roommate in the rent scenario.

The benefit of the first approach is that everything is separated. You see your expenses as their actual total amounts, and you see the cash you received from the credit card as the exact total amount.

The second approach has the benefit of it all happening within the credit card itself. Your statement will show the purchase and a rebate entry, so if someone wants to audit your books, they don’t have to go far to reconcile what happened there.

The benefit of the third approach is you can help offset other expenses; the trick is not to use it to hide things, which would reduce transparency and awareness. For example, if I use the third approach, I might use the cash back as refunds against my “miscellaneous” expense account. The miscellaneous expense account is for expenses I’m not actively tracking, and by putting refunds against that category, the other categories I do want to track stay visible and display their actual totals.

Refunds and rebates versus income

Section titled Refunds and rebates versus income

If you give money to someone, that’s an expense (or a gift); you don’t expect any repayment. If you loan money to someone, that’s an asset—potentially strange but true; you might have expected that to be a liability.

Let’s say I give you 10 USD and don’t expect anything in return. The entry might be a withdrawal from my cash asset account and categorized as “gifts given” or something, an expense. Let’s say you give me 10 USD; the entry might be a deposit to my cash asset account and categorized as “gifts received” or something; income. Alternatively, I could mark your gift to me as a refund of a prior expense instead of income.

The point here goes back to the bookkeeping training I did and something the mentor discussed, which is the idea of bookkeeping being to tell the story of your money in a way anyone should be able to read.

Entries and methods should be consistent and describe intent in the simplest terms.


Section titled Forecasting

Forecasting is what many folks envision when they think about a budget. I’m going to “give” myself this money to spend on this type of thing. The envelope method and fund accounting come to mind.

Back to the food thing.

Financial forecasting is like meal planning, and it can be as constrained or loose as you want it to be.

With the envelope method, fund accounting and zero-based budgeting, you get money, and you distribute a certain amount to each envelope or fund. Revisit each potential future expense, and if approved, allocate cash to that envelope or fund. If you want to cut back on your spending on gas, you reduce the distribution to the gas fund. These approaches tend to tighten the guardrails.

The opposite end of this could be considered the anti-budget. With the anti-budget, you figure out how much you want to save; it could be a dollar amount or a percentage. When money comes in, you pull the saving amount out immediately and spend the rest as usual.

A synthesis of these is achieved by tracking. Tracking shows me how far I am from the guideline I’ve set for myself. Then, I can focus on changing one thing and not worrying about the rest.

For example, I may notice the amount I spend eating out is higher than how much I spend on regular groceries. The guideline I’ve set for myself is to spend less on dining out than on groceries. So, over the following weeks or months, I might decide to cut back on how much I’m eating out.

I’m changing my budget after having data about my current budget; back to food.

Unless you are in an emergency, chances are you could spend the next three months tracking your food intake and activity levels; without changing a thing. Chances are, once you have that first month’s worth of data, you can say, “You know what, I’d like to do this more and that less.”

Same thing with money.

You can look at your past bank statements or start today. Track everything and then take a look. If you could only change one thing, what would it be?

As of this writing for me, I’m living the dining out and grocery problem.

In 2021 eating out was my second highest expense and was almost double what I spent on groceries. When I saw that, I didn’t say, “I’m going to stop eating out forever,” that’s equivalent to a crash diet. Instead, I picked one thing, a challenge to myself; spend less on eating out than I do on groceries without changing my fundamental diet or reducing my quality of life.

As of this writing, groceries and eating out are about neck-and-neck, and I’m spending the rest of my money any way I want.

Great value doesn’t require grand gestures.

If I get the urge to eat out, I pull up my accounts and look at the pie chart; is dining out higher than groceries? If it is, I may or may not decide to eat out. If it’s lower, then I still may or may not decide to eat out.

This is your world. You make the rules. You set the expectations.


Section titled Reconciling

Reconciling is looking at tracking versus forecasting and seeing if the two are aligned. This is where the power of automated tracking and financial institutions instead of cash shows up.

When you use a credit card, checks, debit card, and similar payment methods, your financial institution creates entries for you. Then they send you a statement, usually monthly, quarterly, or annually.

You look at your ledgers covering the same period as the statement and compare the ending balances on a given date. If they match, chances are you’re reconciled, meaning what you tracked is what your accountability partner (your financial institution) tracked—cross-checked and verified. If the ending balances differ, you may want to go through entry-for-entry and see who is incorrect.

You can also do a review, which is similar to reconciliation, only you’re not using the statement. Instead, you’re looking at the transactions at your financial institution, looking at your ledger for the account, and confirming individual entries. This way, if something is off, you notice it earlier than when you get the statement.

Expense accounts (categories)

Section titled Expense accounts (categories)

Where I see people getting overwhelmed with bookkeeping is over-management and categorization. And, most software manufacturers aren’t helping; but the software manufacturers think they’re being helpful—but it can quickly turn into analysis paralysis.

When I opened my first accounting software around 2000, I was like, “This puts me one step closer to being an adult!” I bought the software with my own money. I installed it on a computer I purchased with money I earned.

I was heading up the adulting escalator and skipping steps along the way.

I added my accounts and synced the transactions. Then I started going through entries to categorize things. I clicked the list of expense categories, and there were about three dozen. I’m sitting there trying to distinguish between gas for the car versus automobile maintenance versus auto insurance.

I quickly bailed on that software.

It was overwhelming. I couldn’t handle it. Every once in a while, I’d get a wild hair to try again, and each time I ran away. Twenty years later, I said, “All right, I’m going to do this, but I’m going to do it on my terms.”

Just because the examples are there doesn’t mean I have to use them unless they help me; you can do the same.

Even if I did use all the categories provided out of the box, the information I’d glean wouldn’t be helpful.

The highest percentage would be rent or mortgage. The next would most likely be groceries. Meanwhile, the total cost of ownership for my car would be hidden because of the smaller categories such as fuel, insurance, repairs, oil changes; individually, they’re not much, but collectively they might add up to or surpass my rent or mortgage.

So, here’s what I say: start broad, then narrow down.

If you want, delete all the pre-created categories and create one called miscellaneous expenses. The information gleaned from having one expense account won’t be helpful because “miscellaneous” will be 100 percent of your budget.

Instead, let’s create a bucket smaller than miscellaneous but discerns the total cost of ownership for something.

For the average person, housing is their number one expense; don’t break it down, though. If a transaction is required for the smooth operation of your house, use the housing expense account.

How often will you need to use the “replace air filter” category or the “replace water heater” category? Probably not often. Further, if you go to a store and buy batteries for the smoke detectors and air filters, chances are you’re not going to split the entry between the two; if you want to create separate categories, go for it, but it can become a bit tedious and may obfuscate the story of your money.

Home internet service. Home streaming service. Instead of separate categories, just put it all under housing.

Then pick a threshold for that account (or fund).

Of your net income, what percentage of expenses should be for housing?

Every financial professional I listen to says a reasonable range for housing is 25 to 35 percent.

If things start breaking beyond those bounds, look at your expenses. Maybe creating some sub-categories would be helpful to get a feel for a specific cost. Housing subscriptions, for example, where all subscription services go—internet, cable, streaming services, and so on. This way, you can see that specific thing and decide if you will try and target it for a change. Once you make the changes, you can always stop using the housing-subscriptions expense account and put all those back under the more generic housing expense account.

When you buy a plunger or similar thing related to maintaining the house in good, working condition, put it under the housing category. Using the housing category helps avoid being penny-wise and pound-foolish; if you buy a 5 USD coffee once a month, cutting that out of your expenses isn’t going to have the same impact as cutting 200 USD per month from your housing expenses.

Going back to the diet analogy, I started with a calorie category. Then I started breaking it down by transactions; junk versus whole foods. I found out most of my caloric intake was from junk and probably contributed more to my lack of physical fitness than lack of activity; I walked everywhere and stood at my desk, so most of my day, I was participating in at least medium to high levels of activity.

Expense accounts (needs versus wants)

Section titled Expense accounts (needs versus wants)

For each expense account in the chart of accounts, it might be helpful to add details. These details are notes about the account itself, not entries for the account.

  1. A description of the account can help bookkeepers and tax professionals understand what you mean when you say “primary checking.”
  2. A target percent and range (could also be a dollar amount) establishes a guideline and guardrails for the account: What percentage of your expenses should come from this expense?
  3. Whether the expense is a need or want.

In the book Get Good with Money: ten simple steps to become financially whole, Tiffany Aliche identifies different labels or buckets. I think Frank Vasquez uses the term KLO. Conceptually we can break it down like this:

  1. Need: Necessary to maintain quality of life, and the amount doesn’t fluctuate much, if at all; rent and mortgages typically fall into this category.
  2. Utility: Same as need, only the price fluctuates based on usage; electricity, for example.
  3. Want (or convenience): Similar to need and utility and could be cut without hurting the quality of life; most snacks.

Let’s say money’s getting tight. You can look at your expense accounts and quickly see whether you were within the guardrails you set for yourself; maybe I went wild for a bit and didn’t realize it, so I’ll change my behavior. If you were, maybe it’s time to look at those guardrails, specifically around conveniences and utilities; perhaps I’ll change the allocation for electricity and keep the apartment warmer in the summer and cooler in the winter, for example.

If things still feel like they’d be too tight, I might even reexamine the need categories.

For a decade, I thought I needed a car and an apartment. Then my car became my apartment for a year; an apartment was no longer a need. I went car-free a year later; a car was no longer a need. As of this writing, I’ve been car-free for a decade, and my new guideline is more either but not both; I will have rent or a car, but likely not both.