Budgeting by the year may give a more accurate picture


A recent study published in the Journal of Consumer Research shows that consumers who budget by the year do a better job than those who budget by the month. The researchers had a small group of college students prepare budgets; some by the year, some on a monthly basis.

The students journaled their actual spending over the next year, and the results were interesting. Those who budgeted for the whole year did far better at predicting their actual spending than those who budgeted by the month. Those with monthly budgets prepared for far lower expenses than they actually incurred.

In my heavily budgeted days, I actually did both yearly and monthly budgeting. I started with last year's expenses from my Quicken software, and used that to develop a new budget for the year. Then I would break out the yearly expenses by month, being careful to not just do a simple average (dividing the yearly expenses by 12). Since certain expenses like health insurance and auto insurance are paid quarterly or twice a year, I slotted those payments into the correct months to make sure I was financially prepared for those bigger payments.