What is Variance?

What's Budget Variance, and How Does it Differ from Accounting Variance?

Businesswoman using digital tablet at office desk
Hero Images / Getty Images

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

As an accounting term -- which is arguably the word's most common use -- variance measures the spread between two numbers within a given data set. Here's how it's calculated:

Step 1: Calculate the difference between each number and the data set's mean. Example: Mean = 10. Numbers = 8 and 14. Difference = -2 and 4, respectively.

Step 2: Square the differences (so that the result of Step 2 is positive numbers).

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

However, variance also carries a budgeting definition, as well. Let's take a look at variance, as it relates to personal budgeting.

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

In our budgeting worksheets, we ask you to fill out the estimated amount that you plan to spend on things like clothes, car repairs and Christmas gifts. Then we tell you to wait one month before you fill out the following column, labeled "actual."

In the next column, we ask you to fill out the actual amount that you spent on these items. The difference between your estimated total and your actual total is your variance. Variance can be either positive or negative (you spent more or less than you planned).

The formula is: Actual Spending - Planned Spending = Variance.

Some people and businesses even calculate their variance percentage. If you planned to spend $80 and you actually spent $100, you were off by 20 percent. (The percentage is calculated based on the actual spending, not the estimated amount.

In this example, $20 is 20 percent of $100, the actual amount spent.)

Having some variance is normal. Don't beat yourself up if you experience variance every month. Your goal isn't to avoid it completely -- that's almost impossible. Your goal is to minimize your variance by making more accurate estimates about your spending patterns, and that only comes with practice.

Why do you want to minimize variance within your budget? The more accurately you can estimate your spending, the less likely you are to accidentally "go over-budget" and wind up with a shortfall.