Budget by the year for better results


The Journal of Consumer Research recently released a study which looked into the accuracy of budgeting for different periods of time. They found that consumers budget better when tasked with planning for a year rather than on a monthly schedule. For the study they used college students and had them predict their spending over a month or year and then tracked the real world results. The study showed that long term budgeters were more accurate in estimating expenditures, almost 25% better on average. This accuracy was attributed to the subjects taking unknowns into account better when dealing with a longer period of time.

These findings weren't too surprising to me, I have tried to budget before on a monthly basis and usually fall off the wagon around the third month when a random expense turns up. The last time I did a real month to month budget I didn't have an emergency fund of any kind which can really do a number on your monthly plans. My guess is that the college students who took part in this study also didn't have an emergency fund, well an emergency fund that wasn't tied to six packs and Doritos anyway.

Given that the inaccuracy of monthly budgeting is often attributed to unforeseen expenses the usefulness of a monthly budget may hang on whether or not you have an emergency fund. My wife and I need to start a budget pretty soon and I am planning on doing a best of both world's approach. I want to institute a monthly budget and a budget for the year. In order to accomplish this I hope to include a portion to go towards our emergency fund and other savings, rather than allotting the leftover to video games and scrap booking.

Readers, have you had better luck with either short or long term budgeting? What are your favorite budget tips or methods of staying on track?