Is reverse budgeting the right money move for you?


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One of the keys to getting your spending under control — and making financial progress — is creating a monthly budget, and it’s so easy to do today.

Your budget is at your fingertips, with a host of apps available to keep you on track. Your parents had to keep the receipts and put them in a monthly ledger, then do the math. All you need to do when you’re driving through the drive-thru for lunch or buying a bottle of wine as a gift for a friend is enter the amount into the app and you’ll immediately see how much you have left in your spending categories for the month.

Does your budget system maximize your savings? If not, consider changing your ways and adopting the reverse budgeting method.

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What is reverse budgeting?

In a traditional budgeting system, you pay your bills first and yourself last. Rent, car payment and insurance, utilities, the grocery bill, and your miscellaneous expenses, such as clothes and dining out with friends, are all in the budget—your savings are often limited to what remains.

But with reverse budgeting, you do the opposite. Make the first lines of your budget your monthly contributions to your savings account, retirement account and investments.

Once you’ve accomplished that, distribute what’s left over for your monthly expenses.

Continue reading: 9 bills you should never put on automatic payment

How much should you save?

To understand this, you need to take a close look at your current budget. And if you don’t keep a monthly budget — instead, you just pilot it when it comes to your spending — now’s a great time to start.

Financial advisors often recommend dividing your budget this way: 50% for necessities, 30% for discretionary items, and 20% for savings. If your monthly expenses aren’t saving you 20%—student loan repayments or significant credit card debt might get in your way—the goal is always to save money before you pay your bills . And as you pay off those balances, you can grow your savings.

To get started, track your spending for a month and you’ll know exactly where your money is going. Also think about annual or semi-annual expenses, such as home insurance premiums, and divide them in proportion to your monthly expenses. Once you have an idea of ​​your basic spending needs and debts, you will have an idea of ​​your savings potential.

Useful tips: 19 ways to manage your budget and manage your debt

Do you really need this?

Whether you’re doing a standard or reverse budget, you need to look at how you’re spending your money that isn’t a monthly necessity or a debt. Think clothes, restaurants, subscriptions to streaming services, weekends with friends or monthly tickets to see your favorite basketball team play.

Trying your luck in your expenses allows you to ask yourself the big question: “Do I really need this? You’ll no doubt find some things you spend money on that you don’t really use that you can cut out, like this third streaming service. Or a new outfit every month that you think you don’t need since you’re now working from home. And you’ll likely find things you can cut back on, like limiting your basketball games to one per season. (Your team hasn’t made the playoffs in years, anyway.) This effort is good financial spring cleaning, and you’re sure to find some extra cash that you can save without too much difficulty or of sacrifice.

Between your budget analysis and the removal of non-essentials, you’re ready to define how much money you can save. Remember this is not an exact science. If you find yourself running out of money at the end of the first month of reverse budgeting, make slight changes the following month to balance your budget. Remember that paying yourself first is what is most important.

Related: 35 unnecessary expenses you need to cut from your budget now

Are you a good candidate for reverse budgeting?

People who don’t save at all and spend, spend, spend until their money runs out before the next paycheck are the best candidates for reverse budgeting. You’ll eliminate impulse purchases that you’ll later regret if you don’t have unused money in your account, waiting to be spent and ultimately not saved.

Anyone who wants to increase the household emergency fund or add to retirement savings, however, could benefit from this method. There’s no better feeling than looking at your bank statement and watching it grow.

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About the Author

Jami Farkas holds a degree in communications from California State University, Fullerton, and has worked as a reporter or editor for daily newspapers across the United States. She brings to GOBankingRates her experience as a sports writer, business writer, religious writer, digital writer – and more. Passionate about real estate, she passed the real estate licensing exam in her state and is still debating whether to get into home selling – or just writing about home selling.


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