In the US a majority of banks allow access to account transactions via the Open Financial Exchange format (OFX). OFX was developed joinly by Microsoft and Intuit, makers of MS Money and Quickbooks respectively. Because the format is XML based any financial application can access it and a host of other online budgeting applications such as Mint.com use it.

With OFX transaction records can be downloaded to financial software and online applications automatically. It saves a lot of time. It saves a lot of effort. It saves a lot of potential mistakes.

It sounds like a good thing.

I am not so convinced.

Before I go further I would like to point out that I live and bank in Australia. Banks here are not so enlightened as to use OFX. The best that can be done with Australian bank statements is export and import files from their online banking facilities. Am I sour because I cannot wield the automagic of OFX? Yes. Has it made me biased to automagical budgeting altogether? Read on and form your own opinion.

It is more important to know where money goes than where it came from.

My first ever system for budgeting was to watch our bank accounts. I would record a daily snapshot of the balances and go through the transactions line by line. I did not automate this system other than using web banking.

It was a frustrating exercise. I could see the balances going down. I could see where the money was being spent if I paid by credit card or EFTPOS. I could see cash go into our wallets as ATM withdrawls. But it did not tell me what it was being spent on.

The result was that I was left guessing where the money went and what I could change to make our dollar go further. After making the changes there was then no easy way to see if it was effective.

In the second interation of our budgeting system I stopped looking at bank statements and focused on recording every single cent we spent. I was not concerned with which account the money came out of – it could have been a credit card, savings account or cash.

It is more important to know where the money goes than where it came from. You are trying to get a handle on your spending, trying to get it under your earning, and recording the spending as you spend taps directly into that information.

I see three problems with bank statements being your primary budgeting record.

Firstly, it lacks enough detail to tell you where your money goes. It can tell you how much was spent and where if you use a credit card or EFTPOS, but not what was actually purchased. Using cash leaves even less detail in bank statements.

Secondly, bank statements aggregate expenses. A trip to the super market might involve purchases for food, pets, cleaning and any number of other categories being tracked in the budget. To be accurate the one transaction on the bank statement has to be distributed amongst those categories.

Finally, if your budgeting is on autopilot then your spending can be as well. Having to note where every cent goes – collecting receipts, making notes and updating a budget – heightens your awareness of where all the money goes as it is going.