Reverse budgeting is one of those budgeting methods you’ve probably heard of but never stopped to think about too deeply. And if it sounds a bit unconventional, well that’s because it is.
Unlike traditional budgeting, reverse budgeting has you “paying yourself first”— as in, putting funds towards your financial future above all else. This means paying yourself before your rent, or your student loans, or even your credit card bills. So how does this unique budgeting style pan out so that everything gets paid for? Let’s find out.
What is the reverse budgeting method?
The reverse budgeting method is a popular way of increasing your savings with minimal effort and planning. Reverse budgeting gets its name from the fact that your budget is essentially reversed. Rather than paying your bills first (as you would with a traditional budget), you pay yourself first and your bills later.
This budgeting system can be hugely beneficial for anyone with big savings goals who needs a way to cut down spending. Maybe you want to save more money for retirement, or even put aside some extra money for a down payment on a new car or house. Whatever your savings goals, reverse budgeting can help you get there. As long as you know you’ll have enough money left to cover your essential bills, reverse budgeting can help you reach your savings goals by making them the number one priority of your budget, followed by monthly bills and expenses, and in the last place— all of those extra nonessentials. Does reverse budgeting sound like it might be a good fit for your personal finance goals? Let’s dive into more details to find out.
Rules for the reverse budgeting method
In order to get started with this budgeting style, you’ll need to follow a few simple rules. Here are some basic guidelines that will set you up for success with reverse budgeting.
Evaluate your spending
The first step in getting started with reverse budgeting is to evaluate your spending. You can do this the old-fashioned way by going over old bank statements with a pencil and paper, or you might even consider downloading a top-rated budgeting app to help you track your expenses automatically. However you choose to go about doing this step, it’s an important one and you won’t want to skip it. By evaluating your spending early-on you’ll have a better sense of where you might be able to cut some of those expensive habits and allocate more money towards your savings goals. Try and come up with a rough total of your spending on nonessentials in the prior month, and this will help you understand how much expendable (and flexible) income you truly have available.
Set a savings goal
With a rough estimate of your monthly spending in mind, it’s time to start setting some savings goals. Since most people have more than one thing they want to save up for, it helps to make an ordered list of your goals and assign an amount of money to put towards each one. Maybe you’re hoping to prioritize your retirement savings in an IRA account, followed by saving up for a down payment on a house, followed by a savings account for your dream vacation. Ordering your goals and setting monthly savings amounts for each one will help ensure that your money goes towards the most important thing first and that whenever you pay yourself first, you’re really making that portion of your income count.
Calculate what’s left
Now that you know how much you want to allocate towards your savings goals, it’s time to calculate what’s leftover. To do this, simply subtract your monthly savings goals from your monthly income. Then make a list of all of your monthly expenses and bills— this should include things like paying the rent or mortgage, buying groceries, making minimum credit card debt or student loan payments, and any other recurring bills you may have. With your savings goals and monthly expenses accounted for, you’ll be able to calculate exactly what’s leftover— and herein lies your newly adjusted spending allowance for the month.
Because this budgeting style accounts for everything else before your personal spending money, it’s good to set realistic goals that actually leave you with enough for all the extras. Be sure to keep this in mind when setting up your goals, and be prepared to adjust (see the next rule) as needed.
Adjust your goals as needed
While some people might find they set overly ambitious savings goals for themselves, others may discover the opposite. After your first month using the reverse budgeting method, take a moment to reassess the amounts you set in your savings goals. Did you have enough leftover for your non-essential expenses, or did it feel like pinching pennies? Alternatively, did you find you had even more money than you actually needed at the end of the month? The only way to really make a budget work for you is by tweaking the numbers until you find the right balance.
While all budgets come with a certain amount of pressure to spend less and save more, it’s important to set goals that feel attainable, otherwise, you’ll probably give up on the budget entirely. After your first few weeks with this budgeting style, be sure to check-in and see what adjustments you can make in order to keep moving closer to those savings goals.
Reverse budgeting example
Let’s say you make $4,000 per month with $2,100 in monthly expenses. Here are two examples of what your reverse budgeting system might look like.
|Budget View #1||Budget View #2|
|Retirement - $300||Retirement - $400|
|Down payment - $500||Down payment - $600|
|Vacation fun - $200||Vacation fund - $200|
|Leftover spending - $900||Leftover spending - $700|
As you can see, the first view allows for more spending money while the second more aggressively pursues savings goals. This example illustrates some of the ways you might tweak your budget to accommodate your lifestyle. By ordering your goals in level of importance (here they are retirement followed by a down payment on a house) you’ll also know where to cut funds should you need to. For example, if you needed an extra $200 one month, you might consider taking it from your vacation fund rather than cutting into your other more important savings goals.
Who is this budgeting strategy best for?
If you struggle with overspending on nonessentials, then this style of budgeting might be a great one for you. Since the reverse budgeting method minimizes spending by prioritizing your spending goals followed by your monthly expenses, it doesn’t leave much room for bad spending habits, let alone really bad ones. If you want to kick a bad spending habit and improve your money management (without hiring a financial advisor), having a budget like this one could help you control your spending and limit it to only the things you really want or need.
Anyone struggling to save
Similarly, if you’re someone who’s struggling to save money and meet your savings goals, then the reverse budgeting method might also be a good pick. This budgeting method makes paying yourself first (ie. your savings) the number one priority— making it virtually impossible to ignore your savings and investment accounts.
Anyone with a steady income
Because of the goal-setting nature of this budgeting style, it’s best for someone who has a steady income and can commit certain amounts of money towards their goals each and every month. This type of financial planning will help minimize adjustments with your budget, while also keeping consistent and achievable savings goals.
Who is this budgeting strategy not for?
Someone who already has a handle on spending
If you’re happy with your current financial situation and style of spending, then this type of budgeting might not be the best fit. One of the main points of reverse budgeting is to place a hard cap on spending by making it the very last priority. If you’re a person who feels your spending is within appropriate limits, then you probably won’t enjoy the rigidity of this budgeting system.
Someone with an established savings regimen
Likewise, anyone who’s already making strides and saving money regularly (either manually or via automation software) probably won’t find the reverse budgeting method all that helpful. This budgeting style tends to assume you have little to no hustle when it comes to saving money. If that doesn’t describe you, consider trying a budget that’s less savings focused— like zero-based budgeting.
Anyone without a steady income
If your income tends to vary quite a bit, then this style of budgeting may not be the best choice. Because this budgeting system has you setting savings goals at the outset, it would be a frustrating budget to adapt to fluctuating income. If your income changes frequently, but you’d still like to set a new budget, check out the 50/30/20 budgeting method.
How to get started with the reverse budgeting method
To get started with the reverse budgeting method, you’ll want to have a basic understanding of your income, spending, and where you’d like to put your savings. You can do this by simply writing these things out, in an itemized list. Assuming your spending tends to fluctuate, go back a few weeks (or even months) and pick the top number of how much money you spent in any given month on nonessentials.
Once you have these numbers in mind, you’ll want to jot down your monthly expenses. This will include all of your essentials like housing, food, and any bills you have to pay. Armed with these numbers, you’re ready to set your savings goals. Setting savings goals is the most important piece of this budgeting method, since it’s literally at the crux of what the budgeting system is meant for. So why go through all the trouble of listing out your cash flow before setting your goals? Because this will give you an idea of the absolute most money you have to devote towards those goals, and how much you can actually afford to pay yourself when you do.
Before assigning values to your savings goals, take the time to write them out in order of importance. Writing down your goals will not only help you have a clearer idea of what they are, but also help you start understanding how much you might want to put into each one. Some of these goals might be short-term, like saving up for a trip abroad, while others will be long term, like saving for retirement or creating an emergency fund.
With your goals written out, and your numbers in mind, start assigning monthly amounts to each one. Keep in mind that these can change, and the pool of money you’re pulling from will also include your spending allowance. In other words, whatever you put towards savings gets taken away from your leftover spending pool, so you’ll want to allocate that money wisely. Remember, adjustments are part of any new budgeting style. If you find your budget is too rigid or too lax, you can always make changes in the following months in order to strike the right balance.
Pros and cons of the reverse budgeting method
If overspending is one of your main financial struggles, then the reverse budgeting system can probably help. Because of the way this system has you prioritizing your money (first with savings, then expenses, followed by nonessentials), it will easily kick your bad spending habits to the curb.
Pay yourself first
There’s something incredibly rewarding about paying yourself first, which is at the heart of this budgeting method. If you want to prioritize your financial goals above all else, you’ll enjoy the satisfaction of this unique style of budgeting.
Minimize nonessential purchases
Much like overspending, some of us have a tendency to spend too much on nonessentials. If you find yourself buying things you really don’t need and doing it frequently, this budgeting system can help. Because it leaves you with limited spending money for the month, you’ll find it much easier to focus on buying only the things you truly need or want, and skipping all the extras.
Can feel strict
For anyone who already has a savings plan in place, this style of budgeting can feel pretty strict. Since it places savings at the forefront, and personal expenses last, you may not enjoy this budget quite so much if your savings (and spending) already feels under control.
Requires steady income
This budgeting style is planning-intensive, meaning it makes the most sense for those who have a steady income than lends itself to financial planning. If that doesn’t describe you, this budgeting style will likely be more work than it's worth.
The bottom line
Although not for everyone, the reverse budgeting method is a great way to prioritize and maximize your savings while still being able to afford monthly expenses. This unusual style of budgeting will help you stop overspending, and start putting funds aside for the things that truly matter— like retirement and any upcoming major expenses. If you're struggling to put your savings goals first, while still being able to pay your bills, then you might just want to give this unique budgeting style a try.