Reverse Budgeting and How It Works

Reverse budgeting

If you want to get your finances in check, you need to make a budget. In fact, more Americans than ever are budgeting. There are a lot of different budgeting options out there. Some focus on envelopes, others on percentages, and some focus on spending habits. The trick is to find one that works for you. One possible budgeting solution is reverse budgeting.

What is reverse budgeting?

Reverse budgeting is simply paying yourself first and figuring out the rest of your budget with what’s leftover. Essentially, you put your money in savings and investments first thing. Then you pay your bills, and you can use whatever is leftover for your basic spending needs.

It’s about making investing and savings a priority before anything else. Of course, that doesn’t mean sacrificing your basic needs, like housing and food.

Instead, you focus on making sure you include your savings in your basic needs before you spend it on things like eating out or shopping.

Depending on how your reverse budget is set up, it can help you establish a minimalist approach to budgeting.

Who should use reverse budgeting?

This style of budgeting is best for people who have a hard time-saving at the end of the month. It can also be good for people who are trying to stay on top of their bills, as it forces you to evaluate if all of your spending habits are in your best interest.

If you put your savings and needs ahead of your wants, you won't have to worry about not meeting your savings goals before your next paycheck.

How reverse budgeting works

Want to give reserve budgeting a try? Then follow our step-by-step guide. You can also check out our completely free course on budgeting to find a system that works for you.

Assess your spending

The first step of any budget is to assess your spending habits. Write down all the details. How much are your basic essentials, like housing and transportation? How much do you spend on groceries?

Do you eat out a lot or do a lot of shopping? What about things like student loans and credit cards? Don’t forget to include your short and long-term financial goals. Are you planning to buy a house or a new car?

Knowing what your spending and what your goals are will help you determine how and where you spend your money.

Decide how much to set aside to meet your goals

Now that you know how much you spend and what your goals are, you can start to figure out a budget. How far away are you from reaching your goals?

Determine how much you need to meet your goals. How much can you set aside each month? Shoot for a number that’s realistic and gives you room to both pay your bills and have money left over for things you enjoy.

Pay your bills

Once you have decided how much you’d like to set aside each month towards your savings and investment goals, it's time to pay your bills. How much do you spend each month, really? Don’t forget to include things like monthly subscriptions.

Now could also be a good time to evaluate if you really need those subscriptions. When you’ve paid all of your bills, you can figure out exactly how much you can afford to set aside each month.

Invest in yourself

When you get your next paycheck, invest in yourself first. Put money in your savings and investing accounts first thing. If you’ve done steps one to three, then you should know exactly how much you can afford to set aside.

Pay your bills and use the leftover money for everything else, like going out to dinner with friends or buying that new top.

The best part about reverse budgeting is you can spend that extra money without feeling guilty, as you’ve already put money in your savings and paid your bills!

Learn and adjust as needed

You might find that you’re putting aside too much or maybe not enough. That’s okay! No one is perfect and even I sometimes go over budget. Adjust your budget as needed.

Some months might be easier to save then others- you might decide to not put aside as much in savings during December for example, to pay for Christmas gifts. Just don’t give up and keep trying to make investing in yourself the priority.

Pros of Reverse Budgeting

Every budget has its own advantages and disadvantages. That said let's get into the pros of why this budgeting method might be right for you!

Easy to use

Reverse budgeting doesn’t require complicated equations or even a financial advisor. It’s easy to adjust and make a plan that works for your unique financial situation.

Doesn't require a lot of math or constant budgeting

One of the reasons we all fall short on budgeting goals is because of the need to constantly check our balances. With reverse budgeting, you can go a bit easier on yourself.

Focuses on big picture goals

Instead of focusing on the nitty-gritty, focus on your goals. When you fall short, remember why you are doing this in the first place.

Easy to set up with automation tools

You can easily have your money deposited into your savings and investment accounts as soon as you get your paycheck. You don’t even need to think about it! Plus, automating your finances makes it more likely for you to achieve your financial goals.

Cons of Reverse Budgeting

Depending on your financial situation, reverse budgeting can also present some cons.

Doesn't work for everyone

Some people need a stricter budget. If reverse budgeting doesn’t work for you, there are lots of other budgeting methods out there.

Not best if you have a lot of debt

If you have a lot of debt, such as student loan debt, reverse budgeting probably isn’t for you. Instead, try out other budget systems like the zero-based budgeting system.

Not a good budget strategy if you're in the habit of overspending

If you overspend every month no matter how hard you try not to, you’ll need a stricter budgeting tool. Preferably, you'll want to track your spending in more detail to tackle your overspending.

Reverse budgeting may work for you!

Reverse budgeting is a budgeting system that focuses on you paying yourself first. When you put your investing and savings goals ahead of everything else, it’s easy to get ahead.

But it might not be for everyone. Still, reverse budgeting is just one of many budgeting options available and one worth trying. Other types of budget methods you might want to check out include the following:

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