Life is short even if you get to live for 100 years. The vision and goals you have in your life, the things you literally dream about, should be prioritized above the mundane responsibilities of being an adult. Reverse budgeting is exactly the tool to use in order to put your aspirations first. It does not put your responsibilities on the back burner but puts into practice prioritizing what is truly important.
Let’s chop!
What is Reverse Budgeting?
Regular budgeting is allocating a specific amount of money for a purpose you are obligated to pay. Mortgage, utilities, credit cards etc… but reverse budgeting allows you to save for your goals before paying your bills. It puts you first.
The financial strategy flips traditional budgeting into a modern way to manage money. The approach is simple, you invest and save into allocated funds before you focus on fixed expenses. A portion of your income gets directly deposited into the investment account or savings account and takes precedence over the remaining budget. After you’ve set aside for yourself, the next step is to allocate toward the basic needs and essential bills.
Who Should Use Reverse Budgeting?
People who have too much month left at the end of their paycheck need to assess their spending habits and readjust. For those of you who have a higher income and even higher financial goals for your future, this could be a brilliant option for you. It may seem as though reverse budgeting is a minimalist mindset but actually it encourages and ensures building funds for your future. Retirement, emergencies, plans for the vision and quality of life you hope to attain are addressed before discretionary spending.
It can be a no-brainer if you’re already used to the automatic allocation of funds. Maybe you have ten percent of your paycheck allocated to a church tithing fund before the rest is directly deposited into a checking account. Maybe you have a third account set aside for ten percent of your income to go directly into a savings account. Perhaps your fourth account is a retirement fund or 401 (k) option. You’re already reverse budgeting and on your way to achieving your financial goals. It’s time to grow your portfolio!
If you struggle at the end of the month to find what is left for your future after staying on top of your bills, you may find yourself stuck and not able to get ahead. There are always ways to scale back. But if you find yourself with excess funds and you want to be sure you place it smartly in an investment and not impulsively blow it all, not only does reverse budgeting reprioritize for you, it also gives you a hands-off approach so you work with what is left versus what you start with.
How to Use Reverse Budgeting
Before you assess your spending and build your budget, strategically plan your future lifestyle goals.
- Prepare Savings Contributions. Carefully comb through all facets of your debt to income ratio. Do the math and increase your contributions to future goals as much as possible.
- Determine the Amount to Pay Yourself. Realistically, what percentage of your income can go to savings and investments and what is left over for needs and wants.
- Identify Your Goals. Make a list of short term and long term goals and not just traveling and new houses but retirement and quality of life goals.
- Adjust as Needed. Ideally, as a high-income household, you have enough to cover your needs and it’s time to explore how you can bump up your investments. You can increase the percentage allocated toward retirement, insurances, education funds or real estate investments to name a few.
The Pros and Cons of Reverse Budgeting
Paying yourself first is easy compared to categorizing every expense and keeping a detailed spreadsheet of every dime. It allows you to focus on the big picture and not get bogged down on the flexible items. Be careful to have a healthy financial base before implementing reverse budgeting as toxic debt and high interest credit card balances won’t qualify you for this method of budgeting.
Implementing reverse budgeting means prioritizing early savings and investments before spending on anything else. Resolve to be more dynamic in your investment strategies and broaden the spectrum. Start putting your money to work so you can relax and enjoy the life money balance.
