Personal finance content seems to be geared towards cutting expenses, budgeting, and living as frugally as possible. In my opinion, budgeting doesn’t work for most. If you have tried envelopes, percentages, or any other method of budgeting to no avail, check out this and let me know what you think.
Budgeting gives me the “Ick”
If you don’t know where your money is going, it is hard to take control and achieve financial freedom. Unfortunately, to be in control you need to track. And if you are like most you may be burnt out from your current budget.
Why?
Because limiting yourself to a certain dollar amount per category month after month and tracking it is mind-numbing.
So, listen close…
The Reverse Budget
The name isn’t much better than any other, but the concept is. The idea behind the reverse budget is to pay yourself first and spend the rest. But in order to find out how much to pay yourself, you need to track your expenses for a few months.
Your first step is to open a spreadsheet or pull out a piece of paper and find out those expenses. These may breakdown as your rent/mortgage, utilities, bills, and subscriptions. Followed by your variable expenses such as fun, groceries, and one-off spending.
Automation
This section is key. Once you have tracked for a few months, it’s time to put your money in autopilot to avoid burnout.
Let’s say combined you make $13,000 a month, and you find you spend $4,000 in fixed expenses and $4,000 in variable expenses. Your total spending is $8,000 a month.
The remaining $5,000 would be AUTOMATED to achieve your goals. Travel? Automate $500 into that account. Retirement? Automate $1,000. Crypto? $400 etc.....
The key is to automate these transfers so in seconds all your bills are paid, your goals are funded, and the remaining dollar amount is yours to spend as you choose. Some months you may want to spend the majority of that on clothes, and next month it may be on fun activities. At the end of the day, it doesn’t matter because all your bills and goals have already been achieved.
Reverse budgeting gives far more structure to those looking to build their wealth. Besides, it’s less restrictive and doesn’t require counting and tracking dollars every single month.
It may take some time for you to start in the beginning, however once it’s all set up, it makes money management way easier.
Keep in Mind
1.Budgeting apps are great but personally I see more value in spreadsheets. Since you won’t be logging into it every day it is great to quickly update numbers when you audit yourself.
2. Audit yourself every couple month because bad habits can start to creep. Luckily the reverse budget allows consistency, but it can be tempting to go back to your old ways.
3. If your income is increasing, make sure to increase your savings. You may want to spend that extra money, but this is a great opportunity to beef up your investment accounts or your emergency funds.
4. Leave a cash buffer as safety. If you are someone who spends money when they see it, try to leave less money in your account. This rainy-day fund is a little extra cash if needed for a month.
5. Be honest about your goals. The best question to ask yourself is, “with my current savings rate, am I happy with what that amount will be in x years?” If not increase your goals. The key to the reverse budget is to slowly achieve goals and build net worth without thinking about it.
Let me know what you think about the reverse budget, it has helped me and my clients immensely and I’m sure it will do the same for you!
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