Pay Yourself First: Reverse Budgeting Explained

While budgeting might seem like a practical solution on paper, it is difficult to implement. Traditional budgeting is time consuming to set up and tedious to manage. Rather than focusing on expense, it’s better to focus on a solution called reverse budgeting. 

The Reverse Budget
The reverse budget came to life when we realized no one actually wants to track every purchase they make. Also, life is unpredictable and it’s hard to know exactly what you will need month to month. By using the “reverse budget”, you can save first and spend the rest guilt free. 

This is done by setting up automatic contributions to retirement and savings accounts. Bills, insurance, debt, and other necessities are paid next. All remaining cash is available to be spent how you see fit. 

Why Reverse Budgeting is a Better Option 
Prioritize Your Savings
The wisdom in Warren Buffet’s words, “Do not save what is left after spending, but spend what is left after saving,” is undeniable. Reverse budgeting embodies this philosophy by ensuring you save before you spend.

Easy to Implement 
Once a reverse budget is set up, the entire thing can be automated. A traditional budget could require weekly or monthly updates. The lack of ongoing time commitment makes it easier to stick to.  

Flexibility
Unlike traditional budgeting, there’s no stress over rigid budget categories. As long as you hit your savings targets, you have the freedom to spend your money as you see fit. 

How to Build Your Reserve Budget

1. Define What You’re Saving For
   Start by thinking about what you’re saving for. This could range from contributions to your 401(k), a dream vacation fund, house downpayment, to an emergency fund.

   
   Once these goals are established, determine how much you need to achieve them. What monthly contribution can you comfortably commit to? Aim for an amount that is both feasible and allows you to manage your regular expenses.

2. Automate Your Savings
   Automating your savings is the most effective way to maintain your reverse budget. Ideally, these transactions should coincide with your payday. Here’s an example of what you could be saving:

   
   $1,500 month to your 401(k) plan
   $500 to your Roth IRA account
   $250 to your vacation savings

   I’ve found having distinct accounts for specific purposes helps. If everything goes to one account you might be tempted to spend it on something else. 

3. Spend the Rest
   With your savings set to autopilot, the remainder is yours to use on whatever matters most to you. Whether it’s dining out, taking art classes, or buying a designer bag, you’re able to spend as you please.

Bottom Line 
By prioritizing your savings and investments, you pave the way for stress-free spending on what’s important to you. Use this simple and effective strategy to build a better financial future and experience the freedom of knowing your finances are in order.

Disclaimers
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.