Better to Budget by Year Versus by Month

Here's an interesting piece from the New York Times. It says that it's better to budget by the year than by the month. The highlights:

In one study, 87 college students predicted their food and entertainment spending for either the next year or the next month, and then kept weeklong diaries recording such expenses. When their predictions were compared with the actual expenses, as extrapolated from the diaries, the one-month predictors were laughably off. Those who estimated expenses for a year were closer to the mark.

Other studies described in the paper suggested that short-term budgeters tend to be overconfident. Long-term predictors expect to miss the mark, so they pad their estimates, which ends up making them more accurate.

My budgeting transitioned over time from the following:

1. I would budget by the year, then update my results monthly.

2. I would budget by the year, then update my results quarterly.

3. I would budget by the year, then update my results semi-annually.

4. I would budget by the year, then update my results yearly.

5. Now I don't budget at all.

As a reminder, this was over a 15-year period, so I didn't give up budgeting lightly. I still track my spending via Quicken, but I just don't have an "official" budget that I follow/update regularly.

Comments

[No Debt Plan]

Is there a problem in doing a mix of both? Budget for the year, then break it down by month?

We just budget by month. I suppose we could have a yearly budget, too, but it just seems like more work. :)

[Meg]

I think the reason for the study's results is that when people budget monthly they tend to leave out seasonal expenses such as vacations and Christmas shopping.

I used to think I don't shop much, until Mint revealed that I spent an average of $400 a month - I just managed to do that in 1-2 un-budgeted for shopping trips.

However items like gas spending and dining out are better predicted on a month to month basis, or else you're just wildly guessing.

I think a person should budget monthly, but make sure to pad savings for those seasonal expenses you know will come. If I budget $400 a month for shopping and then don't shop, I'll just spend that money elsewhere. Instead I don't budget for sporadic expenses - I just make sure and save plenty so I have the money there when the expenses arise.

[Rod]

I've started doing a real budget 3 months ago. From the beginning budgeted for a year. Like "Meg" said, people forget about vacations and Christmas. They also forget about other holidays.

These house is the host for Thanksgiving party. There is also Valentines night out. Birthday parties, Mothers day, and Fathers day. By them self these are not a big deal until you put them together. For me it totals up to $1800.00 dollars a year.

Do not forget about anniversaries, car taxes, grade/high school tuition, animal shots, and real state tax if you do not have an escrow.

All these adds up fast, if your not ready.