How to calculate the percentage of variance

Routes to finance

What exactly is variance and how does it relate to both accounting and personal budgeting?

From an accounting point of view - which is probably the most common usage of the word - it measures Variance the spread between two numbers within a given data set. Let's see how it is calculated:

Step 1: Calculate the difference between each number and the mean of the data set. Example: mean = 10th numbers = 8 and 14th difference = -2 and 4, respectively.

Step 2: Square the differences so that the result of step 2 is a positive number.

Step 3: Divide the sum of the squares by the number of values ​​within the set.

So as not to confuse things, though Variance is also a personal budget definition. So let's look at the variance related to personal budgeting.

Variance is the discrepancy between the projected amount you spend within a category and the actual amount. For example, if you think you are going to spend $ 400 on groceries, but you actually only spent $ 350 on groceries, you have a variance of $ 50.

On our budget planning worksheets, we ask you to provide the estimated amount you would like to spend on clothing, car repairs, and Christmas gifts. Then we recommend that you wait a month before filling in the following column labeled "actual".

In the next column we ask you to indicate the actual amount that you have spent on these items. The difference between your estimated total and your actual total is yours Variance. The variance can be either positive or negative depending on whether you spent more or less than projected.

The formula is simple: Actual Spending Versus Planned Spending = Variance.

Some people and companies like to calculate their percentage of variance. If you were going to spend $ 80 and you actually spent $ 100, you lost 20 percent. The percentage is calculated based on actual expenses, not the estimated amount.

In this example, $ 20 is 20% of $ 100 of the amount actually spent.

Some degree of variance is normal, so don't beat yourself up if you see variance every month. Your goal is not to completely avoid variance - that is almost impossible. Your goal is to minimize your variance by making more accurate estimates of your spending patterns. This is something that only comes with practice.

The bottom line is that the more accurately you estimate your spending, the less likely it is that you will be accidentally outbid and stop underfunding.