Average vs. Median to determine budget

[jimstolz76]

Hello all,

I'm looking at old banking statements from the past year and am trying to double-check my budgeted amounts for each 'category'.

I put together a spreadsheet that shows me the average AND the median for each category over time. Which is a better number to use for determining an amount of money to budget for each item?

The median seems a bit more accurate. The average seems artificially high due to buying groceries on the 30th of the month even though they get used in the next month.

Just looking for opinions. Thanks!

[jIM_Ohio]

Add up yearly expenses and divide by 12 for that category
Why would any other method be needed?

Or budget based on the highest monthly charge (because after all eating in Feb costs more per day unless you buy less Jan 30 to cover 28 days of eating. feb doesn't have 30 days either, so do you starve the month of march (that is lent). LOL.

[jimstolz76]

Add up yearly expenses and divide by 12 for that category
Why would any other method be needed?

Or budget based on the highest monthly charge (because after all eating in Feb costs more per day unless you buy less Jan 30 to cover 28 days of eating. feb doesn't have 30 days either, so do you starve the month of march (that is lent). LOL.

I'm only looking at Jan 08 - Jun 08, so I don't have 12 months to go by. (living situation has changed in the past year, so going back farther doesn't make much sense for me) The average I have is already each month's expenses divided by 6.

I was just wondering if in the financial/economic world there was a significant difference between averaging amounts and getting the median of amounts. I can't even imagine why there would be, but I figured I'd ask people who are better at this stuff than I am...

[jimstolz76]

The more I look at the numbers, the more I realize that the average and median are almost the same anyway.... looks like I'm thinking too much again!

[DebbieL]

For budgeting I prefer to average. Median tends to ignore extremely high (or low) values, but for budgeting I think they should all be included. For example, I just average out my electric bill over the course of the whole year and use that figure in my monthly budget (although my winter bill is twice what my summer bill is).

[gekkoplus]

The more I look at the numbers, the more I realize that the average and median are almost the same anyway.... looks like I'm thinking too much again!

Average and Median are not the same.

For the purposes that OP posted, I say use Average.

[cptacek]

I budget for the highest bill I've gotten in the past year, except if I've switched services or something that will drop the price. That way, I 'll KNOW I have the money for it. Almost every month you have money left over from what you budgeted, and you can't wait to pay your bills so you can use that money for something else.

[maat55]

The more I look at the numbers, the more I realize that the average and median are almost the same anyway.... looks like I'm thinking too much again!

A budget is nothing more than a goal. Because of changing prices and our needs change, we have to adjust regularly. Budgets have to made each month outside of the fixed parts.

Budgets are only non necessity busters. You can't help if needs cost more, you can only adjust around them. The main goal is to make sure you don't compromise on your investments to keep the wants.

[snafu]

Relax, OP, don't fret, as maat55 pointed out, it's just a target! Any of us who based our auto operational expenses on 2007 averages, had to make swift adjustments having not foreseen the doubling cost.

[jimstolz76]

Thanks for the replies.

I guess what was throwing me off on my own expenses is the fact that my wife has started working and while our income is up, so is the amount we spend on gas and occasional parking. The 'average' is way off for our gas spending, since for the first 4 months of the year we only hardly ever used our car to drive anywhere (I have a company provided vehicle). It just made me question whether using a different method might be better.

Again, thanks

[skydivingchic]

In that case it sounds like your situation changed. Assuming your wife will continue working (and therefore driving), I would use an average for your gas spending only looking at the last several months. That should be more accurate for that particular category of spending than the entire 6 month period. After another couple months, you'll have a better idea of how accurate that number is and can adjust accordingly.

For monthly variable bills (namely gas, groceries, and utilites), I budget the highest those bills have ever been. Most months, it is less, and I transfer the remainder into savings at the end of the month. It is an easy way for me to save a little extra and still have enough to cover bills.

[feh]

Use average for budgeting purposes.

Median can be an interesting statistic, but it has no use here. You want to plan on how much money you'll spending for something over the next 12 months...12 x average gives you that number. 12 x median does not.