People predict budgets better on annual basis

Jul 17, 2008

Everyone knows they should have a budget. But there's precious little research on how to go about it and what works best.

A new study in the Journal of Consumer Research found that people who made annual budgets were more accurate than those who made monthly ones. They also found that peoples' perception of their budget-making abilities affected the accuracy of the budgets.

During the study, researchers asked participants of various income levels to estimate their budgets for the next year and the next month. They also asked them how difficult budgeting was and told them a variety of stories about the challenges of budget preparation.

Authors Gülden Ülküman (University of Southern California), Manoj Thomas (Cornell University), and Vicki G. Morwitz (New York University) found that, contrary to popular advice, people were more accurate when constructing an annual rather than a monthly budget, even when they were logging their expenses weekly.

The researchers believe the annual budgets were more accurate because they were actually more difficult to construct, whereas people tended to be over-confident when preparing monthly budgets. The accuracy of the annual budgets improved when people were told the difficulty they experienced would result in more accurate budgets.

"Consumers' default tendency is to underestimate their budgets, for both next month and next year frames," write the authors. "However budgets for the next year are closer to recorded expenses because consumers feel less confident when estimating these budgets, and therefore, adjust them upward."

The authors propose that the best way to prepare a budget is to make an annual budget and divide by 12. They also recommend removing distractions when budgeting, since programmed distractions tended to reduce the accuracy of the research subjects' budgets.

Source: University of Chicago

Explore further: Best of Last Week – Evidence of quark-gluon interactions, new portable device hack and why we may never live forever

add to favorites email to friend print save as pdf

Related Stories

Earth's resource budget for 2014 already spent, NGO says

Aug 19, 2014

In under eight months, humanity has used up its yearly quota of replenishable Earth resources, according to a report published Tuesday by an environmental thinktank that monitors mankind's impact on the planet.

Online sites shake up hidebound retailing in India

Aug 14, 2014

Finding a way into India's vast but vexing market has long frustrated foreign retailers. Now, overseas investors are pouring billions of dollars into e-commerce ventures that are circumventing the barriers holding back retail ...

Recommended for you

Orphaned children can do just as well in institutions

3 hours ago

The removal of institutions or group homes will not lead to better child well-being and could even worsen outcomes for some orphaned and separated children, according to new findings from a three-year study across five low- ...

Bronze Age wine cellar found

3 hours ago

A Bronze Age palace excavation reveals an ancient wine cellar, according to a study published August 27, 2014 in the open-access journal PLOS ONE by Andrew Koh from Brandeis University and colleagues.

User comments : 0