Personal Budgets More Accurate If Annual, Not Monthly

Budgeting. Nobody enjoys it. But it’s important. So for my clients that do budget, I take great care in making sure the time and pain they invest in doing it gives them a good return. I want to help them do it right.

I typically advise breaking spending down to a monthly basis so that when we compare results during the year, we can readily see whether we’re on track — or where we can get back on. But it looks like my initial emphasis was on the wrong piece. You’ll do better creating an annual budget first.

Are You Sure About That? Most of us are pretty certain about what we’re going to spend this month, and even next month. But for the whole year? We’re not so sure about that. So in addition to thinking about all of the different kinds of expenses we incur, we also build in more cushion for the unexpected. In other words, we’re more realistic about what is likely to happen during the year. As a consequence, annual budgets are far more accurate than monthly budgets according to a study recently completed by professors at USC, Cornell and New York University.

Quote with Quicken photo from NYT article featuring this study (registration may be required). Quicken was not involved in this study and its appearance here does not represent a recommendation.