Have you tried to set a budget only to watch the whole thing go up in flames in the first week or two?
If so, don’t feel bad. You’re not alone. I’ve done it. In fact, the vast majority of people just can’t seem to get the hang of budgeting. But that doesn’t mean you should wave the white flag, give up, and start spending with wild abandon.
What you might need is a new way of looking at budgeting. You might benefit from a reverse budget.
Simply put, reverse budgeting is paying yourself first to fund the most important goals you have in your life. Anything that’s left over after that and after you’ve taken care of your necessities, you can spend as you please.
The idea is simple. Concentrate on the good – the things you want to work toward. Give up the negativity and you’ll start to see results.
Paying Yourself First
After you know how much you want to earmark to reach your goals, you need to find a way to make it happen. A plan isn’t good enough – you need to take action to make it a reality.
One great way to ensure you’ll take action is to pay yourself first. Before you’ve taken a penny of your money out of your account to pay bills or use for other essentials, pay yourself that money.
You can move it into a savings account where you won’t touch it if you wish. But the important thing is that you get it out of your checking account so you don’t spend it.
Too many times, we are content to try to save the scraps of what is left in our accounts at the end of our pay period. But by then, there isn’t enough left there to reach our goals. Paying yourself first solves that problem. We are no longer treating ourselves as people who deserve the leftovers from our accounts – we’re recognizing that we have to put ourselves first.
The beauty of reverse budgeting is that it can be effective for everyone. It can help those who are struggling with the traditional budgeting process. But it can also be a kick in the pants to those who are doing well with their budgeting and overall goals.
How To Pick Your Goals
With reverse budgeting, there’s no spreadsheets, budget trackers, software, etc…
To start you need to simplify identify your top goal(s). Then, pay those goals first, ideally with an automatic transaction.
It’s best to have total focus on one or two clear, well-defined goals than have your energy and attention scattered over too many.
For example, say your goal is to pay off credit card debt. With reverse budgeting, you’ll look at how much you want to throw at this debt. Then, actually go into the credit card accounts and schedule the transaction immediately after your paycheck hits.
One way to help you find a good starting point for your goals is by using the 50/30/20 budget. This budget is based on the premise you can use 50 percent of your take-home pay to cover your essentials. Then you’ll use 30 percent for your wants, and 20 percent to fund your financial goals, like extra debt repayment or investments.
Using the 50-30-20 budget is a good starting point, but it doesn’t have to stop there. You can tweak those percentages however you see fit. If early retirement is a goal for instance, eventually you’ll want to work that 20 percent up to a higher percentage for investing.
To get you started on your way, download TW2W’s free goal setting workbook below.
Tips For Getting Started with the Reverse Budget
Here are some suggestions you can use to launch your reverse budgeting effort.
- Ease your way into this process: Avoiding drastic changes may improve your chances of success. You can review and categorize your current and past expenses and transactions with Truebill. Knowing how your spending has been in the past can give you a springboard from which you can start. Once you get the hang of your the reverse budgeting process, you can adjust it to be more aggressive in the future.
- Automate things: You might hear about automating a lot, but it’s more than a phrase. It’s an important tool. Line up regular transfers from your checking to your savings, for your 401k or your IRA, and for credit card payments.
- Use envelopes to stay on track: If you’re worried you’re going to overspend after you pay yourself first, keep your reverse budgeting on track with a cash envelope system. If that seems too old-fashioned for you, indulge your love of technology with an app like Debitize. It allows you the benefit of technology to help you stay within your goals for your spending categories. It’s like the cash envelope system of the tech world.