Under-confidence appears to result in more careful budgeting and more accurate estimation of expenses. Personally, I believe the You Need A Budget (YNAB) process trumps all other budgeting processes available because it’s designed to help you stop living paycheck to paycheck, assigns a task to every dollar, helps you beef up your savings account, and has built in flexibility. YNAB compensates for your under-confidence!
Photo by Jeff Keen
A 2008 study in the Journal of Consumer Research discovered that people were more accurate when calculating their budget on an annual basis that when figuring it monthly – even when they were logging their expenses weekly. Researchers Ülküman, Thomas, and Morwitz also found that an individual’s perception of their budget making ability affected the accuracy of their 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.
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.
Why more accuracy? Confidence – or the lack of it
The authors concluded that our “default tendency” is to underestimate our expenditures, regardless of the time frame. But our lack of confidence in projecting our expenses and income for 12 months causes us to take special care and pay much more attention to the task at hand, so we adjust our expenses upward, presumably as a cushion.
So perhaps the best way to prepare your budget is to calculate it on an annual basis then divide by 12. And don’t worry about being “under-confident.” It may actually be a virtue when making your budget!
We can’t “assess” the future, nor can we “predict” it. These are euphemisms. We can only guess. An informed guess is still a guess. – Michael Crichton
Still, try YNAB to help your guess become as informed and accurate as possible!