Rethink how To Manage Money with A Reverse Budget

There are a few words that always seem to make people uneasy.

“Diet” is one. “Budget” is another.

The reasons are actually similar. Both can be hard to stick with, and they each leave you feeling guilty when you fall short. 

Although budgeting is an invaluable aspect of personal finance and shouldn’t be ignored, many people chafe at the rigidity of a traditional “budget.” For some, it’s too time-consuming and restrictive to track every expense and manage every penny. (Not coincidentally, those are often the same people who end up with too much month left at the end of the money.)

But there’s an alternative to this traditional, spreadsheet-heavy approach, and it’s an ideal method for those trying to get a better handle on their money – the reverse budget.

A reverse budget is exactly what the name implies. Unlike a traditional budget that prioritizes paying bills and day-to-day expenses, then relegates any savings or investments to whatever money is left over, a reverse budget puts savings front and center. 

The idea is to pay yourself first and then use what’s left for your normal expenses.

Sound simple? It is. But it requires a little introspection.

Set savings goal

The first step is to identify what you’re saving money for. By identifying a specific goal for the money you’re saving, you lessen the chances that you’ll find some other way to spend it. (If you’re just “saving for the sake of saving,” you’re far more likely to dip into those funds and derail the whole process.) It could be setting money aside for retirement, saving up for a down payment on a house, or building an emergency fund to cover expenses in the case of the unexpected. You need a clear goal for the money in question. You also need a firm yet realistic timeline. Because just like any other goal, if you give yourself unlimited time to achieve it, odds are you never will. 

The key next step is to automate the process. By having the money dedicated to your savings goal automatically deducted from your payroll or bank account transfers, you lessen the chances that you’ll spend that money elsewhere. Saving for your goals becomes an automatic process instead of an afterthought. 

So how much should you save? While most experts agree that 20% of your gross monthly income is a good place to start, everyone’s situation is different. You should start with a clear-eyed assessment of how much money is coming in and going out each month. Work backward from your savings goal to determine how much you need to set aside each pay period, then set up an automatic transfer to funnel that money directly to your goal.

Identify expenses

Once you’ve "paid yourself first" by setting that money aside, you can prioritize essential expenses like housing, food, and utilities. Determine how much you need to cover these basic necessities, then automate as many bills and expenses as possible. This process may take some adjustment, but the overarching goal is to make the process as turnkey as possible. Spending just a little up-front time automating your allocations into separate accounts – one for savings (which remains untouched), and one for expenses (which also covers unexpected costs), ensures that you’re making steady progress toward your goals while still budgeting effectively.

In essence, reverse budgeting is about taking a long-term approach to your finances. Instead of looking at monthly expenses, it flips the script and focuses on the things that truly matter to your future – your individual, targeted savings goals.

All too often, in a traditional budget, these things get overlooked in favor of categorizing household expenses. But with a reverse budget you can rest easy knowing you’re consistently moving forward toward your larger financial goals.

Jennifer Pagliara, CFP, CTFA, is an executive vice president and financial adviser at CapWealth and a proud member of the millennial generation. Her column speaks to her peers and anyone else that wants to get ahead financially. For more information about Pagliara, visit capwealthgroup.com.