As featured in The Wall Street Journal, Money Magazine, and more!
     

If Monthly Budgets Don’t Excite You, Try This

This article was written by in Planning. 6 comments.


I have never been a fan of a monthly budget. In early 2002, when I admitted I was spending more than I was earning, I forced myself to enact categorical limits for my expenses. It helped for a short time, but it wasn’t long before I found myself with a new spending philosophy and more income. The system of budgeting eventually became less imperative. I was in the habit of controlling my spending, and the shackles of a budget were not for me.

Also, my budget was frequently off. In a category like clothing, for which I may have budgeted $25 a month for new clothes, I may be significantly over the limit one month while under the limit for several following months.

The “envelope” budgeting system lets you carry over the unused surplus in one category to be used later. If I spend only $10 in clothing in April, the remaining $15 can be added to my available funds in May. For me, if I were to budget, this flexibility would be one of the most important aspects. Also, I would require the flexibility to adjust my budget whether life changes require an increase in spending or if my observed patterns are different than I expected.

But what good is a budget in terms of motivation for real change if you know you can adjust it to fit your desires as you progress?

People generally don’t budget well when projecting monthly expenses. There is a tendency to underestimate true expenses, particularly when actual historical data aren’t used as the basis. A budget in this form creates expectations which, if not met, could lead to lowered motivation. A budget abandoned after the first few months is a wasted exercise.

A recent study concluded that a budget based on yearly expenses will be a better spending plan. People tend to overestimate their expenses when they consider the entire year ahead. Actual spending will have a better chance of falling within the budget, and this success could motivate further budgeting.

By looking at your expenses over an entire year, you give the bumps a chance to smooth.

If you are bored or frustrated by typical budgeting, particularly the way budgeting is designed in software like Quicken and Money, try looking at the larger picture rather than focusing on fluctuating monthly expenses.

The Year of Magical Budgeting [New York Times]

Published or updated April 9, 2008. If you enjoyed this article, subscribe to the RSS feed or receive daily emails. Follow @ConsumerismComm on Twitter and visit our Facebook page for more updates.

Email Email Print Print
avatar
Points: ♦127,373
Rank: Platinum
About the author

Luke Landes, also known as Flexo, is the founder of Consumerism Commentary. He has been blogging and writing for the internet since 1995 and has been building online communities since 1991. Find out more about him and follow Luke Landes on Twitter. View all articles by .

{ 6 comments… read them below or add one }

avatar Brian

I am going to be controversial and say that yearly budgets are almost useless for daily or weekly expenditures. Sure, there are monthly or larger expenses where a year-long “budget” makes sense. I’m saving for an engagement ring, so obviously I need to do the simple arithmetic (Cost of ring / months until I want it = how much I need to save per month). My rent is $1250 each month, every month, so I can safely assume that my take-home pay available for expenses is SalaryAfterTax-(12*1250).

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.

Reply to this comment

avatar Luke Landes ♦127,373 (Platinum)

Brian: What’s interesting about the study is that it shows that people are more accurate when estimating their repeating expenses when forecasting an annual number rather than a monthly number — the opposite of what common sense might dictate. So while you say “people are notoriously bad at estimating as numbers get larger,” that’s exactly what this study disproved (in terms of one’s own expenses).

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.

Reply to this comment

avatar Frankie

Looking at my expenses for the past several months.
My spending on gas for Nov-Jan falls in the range of 55-62 per month. This, however, has gone up to $110 in Feb and $104 for March. I don’t recall I was driving crazily for Feb and March. Maybe it is time for a car check up.

Reply to this comment

avatar Elizabeth

Flexo –

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.

Reply to this comment

avatar Jesse

Hey Flexo, were the variances expressed in real dollars, or as a percentage?

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.

Reply to this comment

avatar Slinky

This is more or less how I ‘budget’. I tell people I use a budget, but mine is labeled ‘SpendingPlan’. I plan my spending generally long term. I have all my fixed expenses, and I always try to overestimate when the amount isn’t certain. I generally budget from ‘event to event’. That is, semester to semester, this job to that job, etc. (college student).

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.

Reply to this comment

Leave a Comment

Connect with Facebook

Note: Use your name or a unique handle, not the name of a website or business. No deep links or business URLs are allowed. Spam, including promotional linking to a company website, will be deleted. By submitting your comment you are agreeing to these terms and conditions.

Notify me of followup comments via e-mail. You can also subscribe without commenting.

Previous post:

Next post: