12 months vs. 1 year? Study finds long-term thinking best for budget

Consumers concerned about stretching a dollar should set out their budgets on an annual basis rather than planning monthly, a new U.S. study suggests.

'When budgeting, it seems to be wiser to assume that one's knowledge is unreliable.'—Gülden Ülküman, researcher

Lead researcher Gülden Ülküman of the University of Southern California suggests in a study published in the August issue of the Journal of Consumer Research that consumers tend to be over-confident when planning in the short-term.

"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 said in the study.

The researchers conducted a series of four experiments to test budget forecasting. They found consumers making short-term monthly budgets tended to underestimate their expenses while participants making long-term budgets were more conscious of uncertainty, citing care for "room for error," "hidden costs," and "unknown expenses."

The researchers also noted that participants who were warned budgeting was a difficult task tended to produce more accurate budgets as compared with people who were assured that financial forecasting was easy.

"When budgeting, it seems to be wiser to assume that one's knowledge is unreliable," the study said.

"This suggests that analysts and budgeting programs should question consumers so that they doubt the accuracy of their initial budgets. Ironically, lack of confidence, in the context of budget estimation, seems to be a virtue."

The researchers acknowledge that in some instances consumers may plan better on a monthly basis, such as for utility and housing expenses, because bills are collected on a routine schedule.

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