budgeting article

[Gootsy]

Found an interesting article in my feed this morning. Thought you'd like to check it out.

Financial counselors often tell their clients to prepare monthly budgets rather than yearly ones, on the theory that it is easier to predict expenses over a short period. But a paper recently published in The Journal of Consumer Research turns that advice on its head.

The New York Times
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.

Other studies described in the paper suggested that short-term budgeters tend to be overconfident. Long-term predictors expect to miss the mark, so they pad their estimates, which ends up making them more accurate. “Lack of confidence reminds consumers that here might be some expenses they have left out of their budgets, or some unexpected expenses that will come up,” said Gülden Ülkümen, an assistant professor at the University of Southern California and the paper’s lead author. ALEX MINDLIN

http://www.nytimes.com/2008/03/31/bu...12619c&ei=5088

[engchik]

This actually makes sense. whenever i do a monthly budget, i need a place to tlaly my insurances and such. i pay my car and condo insurance yearly (as to save on the monthly fees) and items such as car maintence, vet bills and food for my cat and insurance is added in overall- making for a broader understanding of what and where money needs to go!

[kav122]

hmm...I wonder how they can be so far off? If this is true, than my 2 week mini-budget would be even farther off.

I take our 2 week paycheck, subtract bills, subtract savings, and what is left is what to spend. How could you be so far off?--I don't get it.

[Philip Brewer]

Originally Posted by kav122

I take our 2 week paycheck, subtract bills, subtract savings, and what is left is what to spend. How could you be so far off?--I don't get it.

What do you do during the two-week period that annual expenses like insurance payments are due?

I find it easy to believe that people figure their monthly budget just that way: Add up all their monthly bills, throw in a bit of money for groceries and out-of-pocket expenses, and call it a budget. That ends up leaving out all the annual expenses (and also the unexpected expenses--car repairs, emergency room visits, etc.).

I do think it's a worth-while exercise, though, to come up with a "minimum" budget, that includes just fixed expenses and a minimum allocation for necessities. That's the basic info that you need for figuring your emergency fund, for example. But you wouldn't want to live that way, except during an emergency. (And you most especially wouldn't want to imagine that you were going to live that way when you really aren't--that's really a way to screw up your long-term financial planning.

[Gootsy]

I couldn't imagine trying to keep to a 2 week budget tbh.

I don't really have a written out budget that I follow to a tee. I just try to make it so that over time, I'm able to save X amount a month at least. If I miss this months saving 'goal', or know I will, I take steps to ensure that next pay cheque I'll most likely be able make up for it. So I guess my budget is every 6-8 weeks.

Actually these 2 months (april and may), look like they're going to be the first time in a long time, that I'll be unable to save the amount I want for each month. Due to expenses and a couple 'big' wants I've been craving for a while . I'm so weak hah. Maybe in June I'll be able to recover from it... But I ain't thinkin that far ahead heh.

[kav122]

Originally Posted by Philip Brewer

What do you do during the two-week period that annual expenses like insurance payments are due?

I find it easy to believe that people figure their monthly budget just that way: Add up all their monthly bills, throw in a bit of money for groceries and out-of-pocket expenses, and call it a budget. That ends up leaving out all the annual expenses (and also the unexpected expenses--car repairs, emergency room visits, etc.).

I do think it's a worth-while exercise, though, to come up with a "minimum" budget, that includes just fixed expenses and a minimum allocation for necessities. That's the basic info that you need for figuring your emergency fund, for example. But you wouldn't want to live that way, except during an emergency. (And you most especially wouldn't want to imagine that you were going to live that way when you really aren't--that's really a way to screw up your long-term financial planning.

We don't have any annual expenses that are larger than the the amount that would go to savings or extra onto the house payment, so we don't have that problem. As for unexpected expenses--either they subtract from the extra that we were going to send to savings or house payment or we use our emergency fund. We try to stay well beneath what we make in a two week period to account for something that pops up. I don't understand why this is not taking in our long-term goals?

[Philip Brewer]

Originally Posted by kav122

I don't understand why this is not taking in our long-term goals?

No, you're right. If you're actually living the budget that you mean to live--that's all it takes to match up your plans with reality.

I think though that most people--even most frugal people--have an occasional expense that exceed one paycheck's worth of savings. If your budget ignores, let's say, three payments, each of which is equal to one month's budget for savings, then your actual annual savings is going to be 25% lower than your budget suggests.

Where I used to own a home, property taxes were due in two installments about 5 months apart, and those payments were quite a bit more than, for example, a mortgage payment. At that time I wouldn't have been able to make them (or the car insurance payment), unless I'd budgeted for them.

On top of those, especially for homeowners, are the less-than-annual payments that can be deferred for a while, but that still need to be paid eventually. (New roof, new furnace, etc.)

[MoneyAdvice]

There is certainly a lot more gap between planning and execution of financial plans and we need to go a long way before we can actually realize our goals.

American Express Canada

[Finally_Frugal]

I use a 'hybrid' system, in which I budget monthly, but I add in the long-term expenses (like estimated tuition costs and auto insurance). I divide those estimated yearly amounts by 12 and include that amount in my monthly budget. So, for example, I save $133 in a sub-savings account each month to take care of future tuition costs. It works perfectly! The difficult part is estimating costs for things that occur irregularly, like auto repairs. I haven't quite figured this one out yet.

[montyloree]

We allocate a set amount to spend each month and don't go over that.. we have savings in place in case of emergencies and make more than enough income to cover our minimums.