I always make sure that projected income or current savings is greater than projected expenses, and I always leave extra cash (or places the plan can be cut) for the inevitable splurges or underestimating. I generally only worry about overspending the amounts if money is really tight (the year I lived off of $5k comes to mind.) For things that I’m trying to not spend too much on (eating at school) I use a simple trick. Don’t try to remember how much you budgeted and how much you’ve spent. Remember about how much you can spend each time, and how often you’re allowed to. For example, I can eat once a week for a ‘nice’ meal, or two cheap meals at school. I can remember when I went out and where for a week, but all month? Forget it.

Also, it would make sense to me that a monthly estimation would show a higher variance — esp. in a category such as entertainment — because the ebb and flow of entertainment is probably pretty steep month to month.

I see a budget more as a roadmap and an awareness tool to make sure that spending is in line with your goals. Doing it monthly (or even more frequently as necessary) helps reinforce goals.

Hm, college students can’t accurately estimate how much they spend on a monthly basis but can accurately estimate what they spend in a year? That sounds a bit weird to me but what do I know?

I’ve never been much of a budgeter but for the past 5 months I’ve been using the You Need a Budget software. I downloaded the trial version to evaluate it for my mom’s use.

Two benefits I’ve noticed as a result of using the software: 1) I have a much clearer picture of how much I spend each month and exactly where it’s going; and 2) I’ve gotten a lot more disciplined/aware of the monthly cost of items that we don’t pay every month — auto insurance, for example.

There have been a couple of really big surprises — like the amount I spend on clothes for my son. And the total cost of my kids’ activities and equipment.

For me, the key to budgeting now is to not be fooled by the months where I don’t spend much on clothes or activities or household goods or computer equipment because when those expenses do come up, they’re large and they hurt.

In another 6 months or so I’ll have enough historical info to show a fairly accurate averaged monthly budget for non-monthly categories. In the meantime, I’ve tried to make realistic guesses. Based on those guesses, I budget set amounts for each category. When I don’t spend the full budgeted amount, I let that unspent balance continue to build in my budget because I know that eventually I’ll spend a chunk of change in that category — but this time the money will “fit” into the budget.

YNAB is a “live” budget — it’s flexible and responsive and even though I tried it out for my mom, I bought it for myself. It’s proven to be a great tool for working with my teens and helping them to see where our money goes and how much we spend on them.

From the introduction of the article:

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.

Now, any one person’s experience may not match this study; in fact, they only surveyed college students. Maybe college students for whatever reason are better at predicting yearly numbers than monthly. But for whatever reason, this study disproves that budgeting monthly is always better than budgeting yearly.

Thanks for the long comment, it’s an interesting discussion.

Anything other than that is helpful guesswork at best, gross misjudgment resulting in unhappiness at worst. You simply can’t foresee expenses accurately enough a year in advance to budget for them. Your clothes budget for April has to be higher when, in March, your girlfriend’s dog eats your Kenneth Cole shoes or a pen finds its way into the washer and ruins your work shirts. Or, your utilities expenses increase when your girlfriend quits her second job as a waitress.

I think that yearly budgeting has its place as a quick way of seeing if you are living grossly beyond your means, or as a way to see if you can afford a new car, or in my case to see whether I can afford the societally-important crystalline lattice of pure carbon this year or next. But as a means of budgeting for clothing, groceries, entertainment, travel…good luck. People are notoriously bad at estimating as numbers get larger (”The war costs half a trillion dollars” is roughly equivalent to most people as “The war costs a bazillion jillion dollars”) and when somebody is going to guess how many thousands of dollars they will spend on groceries in 2009, I think you are asking for trouble. I could guess pretty accurately that I spend $60/week on groceries, but without working backwards, I would be unlikely to guess that I spend $3100/year.

My method: flexible monthly budgeting based on previous months’ spending, with numbers becoming more precise based on their predictability. I know exactly how much I will spend on BART, rent, and Netflix; I know pretty precisely how much I will spend on utilities, lunch, and my cell phone; Groceries and alcohol vary but stay within a range.

Sorry for the long comment. Thanks for the interesting article.