The Simple Premise of the Reverse Budgeting Method Is Just What We Needed

Making and sticking to a budget can be easier said than done, especially if you’re trying to build wealth. The reality is that budgeting isn’t a one-size-fits-all approach. Instead of a standard budget, using the reverse budgeting method could be the right move.

We explore what a reserve budget is, how to set one up, and how this type of budgeting strategy could help you get ahead financially.

A reverse budget emphasizes paying yourself first. Instead of saving money after you pay the bills, it involves putting the funds you intend to save away before covering the rest of the expenses in your budget.

A reverse budget works by putting your savings and investing goals in a priority spot for your budget.

When you get your paycheck, you’ll send funds directly to your savings and investing goals. From there, you can use the rest of the funds for living expenses.

The key is to stay serious about saving and investing. After covering those major line items, the rest of your spending has to fit into what’s left over.

If you want to build a reverse budget, the process starts with a spending audit. Open up your bank statements and credit card statements to determine what your spending looks like in a typical month.

Some of the basic things you’ll want to note are how much you spend on housing, food, and other essential bills. Also, take a look at how much you spend on nonessentials, like shopping and takeout.

Next, consider what you want to save for. As a baseline, you’ll likely want to build up an emergency fund.

Most experts recommend tucking between three to six months’ worth of expenses into an emergency fund. For example, if you spend $2,000 per month, a healthy emergency fund might range from $6,000 to $12,000.

Other potential savings goals could include a home purchase fund, vacation fund, auto repairs fund, new car fund, or holiday shopping fund.

For each of your savings goals, determine how much you want to save on a monthly basis toward each. For example, if you want to add $6,000 to your emergency fund in a single year, that breaks down to saving $500 per month toward that goal.

In addition to savings goals, it’s worthwhile to consider your investment goals when setting up a reverse budget. After all, investing for your future can help you cover major costs, like a stable retirement.

Determine how much you want to save per month toward retirement as you set up your reverse budget.

Once you know how much you want to save and invest each month, it’s time to automate your savings. By setting up automatic transfers, you’ll be more likely to stay on track. You won’t have to choose between saving for your goals and spending at the moment every single month.

Depending on your employer, you can split your direct deposit into multiple bank accounts. If not, you can design automatic transfers after your paycheck lands each payday.

With some of your funds automatically whisked away from your spending reach, you’ll use the remaining funds to cover your living expenses.

Depending on how you set up your budget, the amount you can spend on living expenses and fun purchases might feel tight. If things feel too tight, you can adjust your reverse budget by easing up on your savings or investing goals.

If you’re worried about switching due to a tight budget, consider gradually transitioning to your ultimate savings goals. For example, you might aim to set aside $500 per month. But in your first month, you might only set aside $100 and then $200 in the second month.

You can work up to your savings goals if cutting your spending cold turkey seems daunting.

The main advantage of sticking with a reverse budget is that you’ll likely reach your financial goals faster with this ‘pay yourself first’ system. Focusing on saving and investing might help you cut out unnecessary spending.

Although paying yourself first can be difficult when money is tight, working toward the ultimate goal of prioritizing your savings is a worthwhile goal.

If you need to ease into the reverse budgeting system by starting with smaller savings goals, that’s OK. You just need to start somewhere if you want to build wealth.

The important thing is to keep making consistent progress toward your savings goals even if you have to save less than you hope to in the future.