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If you’re stuck in a financial rut, consider an alternative way of budgeting that puts your savings first. Instead of putting away what’s left at the end of the month, put money into savings first and use the rest for monthly bills and expenses.
This is called reverse budgeting, and it could do wonders for you if you are keen on boosting your savings. Here’s how to do it.
Key Takeaways
- Reverse budgeting prioritizes savings before other expenses.
- First, you set money aside for savings, and then you pay off monthly bills and expenses.
- Reverse budgeting helps to simplify your financial management by automating the movement of money to savings and retirement accounts.
- If your financial life changes, revise your automated savings settings to match your new goals.
Understanding Reverse Budgeting
“Reverse budgeting flips traditional budgeting around by prioritizing savings first, rather than saving whatever might be left at month’s end,” said Trent Porter, a certified financial planner with Priority Financial Partners.
With reverse budgeting, you use a “pay yourself first” method. First, decide how much you wish to put aside each month or each paycheck for a short-term goal—such as building an emergency fund—and a long-term goal, like saving for retirement. Next, automate those savings.
“Automation keeps the process simple and consistent, requiring minimal effort,” Porter said. “Many payroll providers will actually allow you to spread your direct deposit across multiple accounts so you can split it before you get it.”
Important
Many financial specialists recommend a 50-30-20 budget: Spend 50% of your paycheck on necessary expenses, 30% on savings, and 20% on discretionary expenses.
How to Implement Reverse Budgeting
Reverse budgeting can help improve your finances, but there’s no single formula that applies to everyone. Here are some additional factors you will have to consider when designing your reverse budget:
- Debt management: If you have a large amount of high-interest debt, paying down that debt should be a top financial priority, so a typical reverse budget with an emphasis on savings may not be right for you. However, you can modify a reverse budget to focus on debt repayment rather than savings.
- Fluctuating income: If you have a variable income, it can be challenging to budget. “It can be difficult for those with variable incomes, but this is easily overcome by using percentages rather than fixed amounts,” Porter said.
- Potential for overspending. Putting savings first is exciting, but don’t neglect the other expenses in your budget. If you do, you may miss a bill or payment. You’ll also want to keep a handle on your discretionary spending. If you forget to track your spending, you might wind up overspending.
- Setting savings goals. Make a list of all your important goals like a home purchase, emergency fund, or retirement savings.
In addition, you should be ready to revise your budget as life changes. “Reverse budgets aren’t set in stone,” said Daniel Milks, a CFP and founder of Fiduciary Organization. “Anytime income changes, new expenses arise, or goals shift, revisit your plan. Adjust savings rates up or down to stay balanced.”
The Bottom Line
If you feel you can’t reach your financial goals, reverse budgeting prioritizes automating savings. Simply decide how much you want to set aside each month or pay period and automate it to the appropriate account.
