Is Reverse Budgeting the Right Money Move for You?
One of the keys to getting a handle on your spending – and getting ahead financially – is to create a monthly budget, and it’s so easy to do today.
Your budget rests at your fingertips, with a bounty of apps available to keep you on track. Your parents had to keep receipts and enter them in a monthly ledger, then do the math. All you must do when you run through the drive-thru for lunch, or pick up a bottle of wine as a gift for a friend, is punch the amount into the app and you’ll see at once how much you have left in your spending categories for the month.
Does your budget system maximize your savings? If it doesn’t, consider shaking up the way you do things and adopting the reverse budgeting method.
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What Does Reverse Budgeting Involve?
Under a traditional budgeting system, you pay your bills first and yourself last. The rent, the car payment and insurance, the utilities, the grocery bill and your miscellaneous expenses, such as clothing and dining out with friends, all get a line item in the budget – with your savings often limited to what’s left over.
But with reverse budgeting, you do the opposite. Make the first line items in your budget your monthly contributions to your savings account, retirement account and investments.
Once you’ve accomplished that, dole out what’s left for your monthly expenses.
How Much Should You Save?
Figuring that out requires taking a hard look at your current budget. And if you don’t keep a monthly budget – instead just winging it when it comes to your spending – now is a perfect time to start.
Financial advisors often recommend dividing your budget this way: 50% for necessities, 30% toward discretionary items and 20% toward savings. If your monthly expenses don’t allow 20% savings – student loan payments or a large credit card debt could get in the way – the goal still is to save money before paying your bills. And as you pay down those balances, you can increase your saving.
To get started, track your expenses for one month and you’ll get a good look at just where your money goes. Think, too, about expenditures that come up annually or semi-annually, such as homeowner’s insurance premiums, and prorate those into your monthly spending. Once you’ve got an idea of your required spending on necessities and debt, you’ll get an idea of your savings potential.
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Do You Really Need This?
Whether you make a standard or a reverse budget, you need to look at how you spend your money that isn’t a monthly necessity or a debt. Think clothing, eating out, subscriptions to streaming services, weekend trips with friends or monthly tickets to see your favorite basketball team play.
Taking a good luck at your expenses allows you to ask yourself the big question: “Do I really need this?” You undoubtedly will find some things you’re spending money on that you don’t really use and can cut out, such as that third streaming service. Or a new outfit every month, which you figure you don’t need since you work from home now. And you’ll probably find things you can reduce, such as limiting your basketball games to one each season. (Your team hasn’t been to the playoffs in years, anyway.) This effort is a good financial spring cleaning, and you’re sure to find extra money you can put toward saving without much struggle or sacrifice.
Between your budget analysis and cutting out nonessentials, you’re ready to set the amount of money you can save. Remember that it isn’t an exact science. If you find yourself running short of money at the end of the first month of reverse budgeting, make slight tweaks in the next month to balance your budget. Just remember that paying yourself first is what’s most important.
Are You a Good Candidate for Reverse Budgeting?
People who don’t save at all and spend, spend, spend until their money runs dry before the next paycheck are the best candidates for a reverse budget. You’ll cut out impulse purchases that you’ll regret later if you don’t have idle money sitting in your account, waiting to be spent and ultimately not saved.
Anyone who wants to boost the household emergency fund or add to retirement savings could benefit from this method, though. There is no better feeling than looking at your bank statement and seeing it grow.
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