Your budget serves as a roadmap for your money. A solid budget can help you determine how to best spend and save your money to hit your goals.
There are several different budgeting strategies you can follow — but if saving money is your biggest priority, reverse budgeting might be the best method for you.
With traditional budgeting methods, you start with your income and list out all your expenses (such as rent, utilities, food, entertainment, etc.). Whatever is left over at the end of the month is what you save. However, some people feel this approach is too restrictive and makes it easy to overspend, leaving little leftover for savings.
Reverse budgeting is a strategy where you set savings aside for your financial goals first — such as a down payment, retirement, or your kid’s college education — then use what’s left in your budget to cover your expenses. This strategy is sometimes called the “pay yourself first” method.
“Reverse budgeting works because it is essentially an additional method of forced savings, which is one of the best ways to build wealth over time,” said Christopher Mattern, CFP®, vice president and financial advisor at Wealth Enhancement.
However, Mattern noted the drawback is that after putting money away for savings, you may end up with less money in your checking account for bills and other expenses than you’re typically used to. “However, the growth in your investment account over time is certainly worth having less money in your bank account,” he said. “We also typically see that funds sitting in a checking account tend to get spent one way or another, so a forced savings strategy like reverse budgeting is a great way to avoid this.”
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If a traditional budgeting style makes you feel limited, prioritizing your goals first with reverse budgeting may also give you a sense of freedom and the momentum you need to stay the course.
If a reverse budget sounds like the right strategy for you, here are a few steps you can follow to set yourself up for success:
Start by getting a lay of the land. Review your last few bank statements to get a sense of your spending habits and tally up your recurring expenses.
This is a good opportunity to gauge what percentage of your income you can realistically afford to allocate toward your discretionary spending and savings goals versus non-negotiable living expenses.
Take some time to think about your goals and what you want to save money for. Perhaps you want to finally pay off your car loan, or you want to save enough money to go on a vacation at the end of the year. Having a clear objective can help you build a budget with those goals as your focus.
While saving is important, you still need to be able to cover your living expenses. So, as you’re creating your budget, be honest with yourself about how much and how often you can comfortably afford to pay yourself.
“The most typical timeframe we use for reverse budgeting is monthly, but it can be implemented on a quarterly or semi-annual basis as well,” Mattern said. “In this scenario, an individual would transfer a predetermined amount to an account (such as an investment or savings account) each month, and then use remaining excess funds to pay their ongoing living expenses.” In order for the strategy to work, however, Mattern said it’s essential to understand your personal cash flow so you can determine a transfer amount that’s realistic and practical.
That’s why you may want to start with a small percentage of your paycheck and see how that goes before parking a large chunk of your earnings in your savings account and then feeling strapped between paychecks.
Read more: How much of your paycheck should you save?
Once you’ve settled on the amount of money you want to pay yourself first, reaching your goals is all about consistency.
Consider automating your savings so that the money you’re paying yourself is automatically deducted from your paycheck or checking account and deposited into a savings and/or investment account.
Your personal finances can and will evolve over time, and so will your budget. If you need to adjust the amount of money you’re paying yourself or adopt a new budgeting strategy, don’t be afraid to switch things up so that they work better for you and your finances.
