By Hanniz Lam
The reverse budgeting method is a popular way of increasing your savings with minimal effort and planning. “Yeah, right” you say. Hear me out.
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.
If you’re a solopreneur like I was for a really long time, I wouldn’t be able to comprehend this. Whatever I made for the business, went back into the business and if I made a healthy income for a certain project, I would then pay myself.
Reverse budgeting can help you as long as you know you’ll have enough money left to cover your essential bills. It can help you reach your savings goals by making your saving goal the number one priority of your budget, followed by monthly bills and expenses, and in the last place — all of those extra nonessentials.
Sounds selfish? Not really. It’s about self control.
Know your Spending Habits
The first step in getting started with reverse budgeting is to know your spending habits.
You can do this the old-fashioned way by going over old bank statements with a pencil and paper, or use an Excel sheet or an app.
By evaluating your spending early-on you’ll have a better sense of where you might be able to cut back and allocate more money towards your savings goals.
List your spending on nonessentials in the prior month, and this will help you understand how much 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.
You might be thinking of saving up for a new laptop, or a new phone or to invest in something. Since most people have more than one thing they want to save up for, it helps to make a priority list of your goals and assign an amount of money to put towards each one.
Setting monthly savings amounts for each goal 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 adjust your month’s spending accordingly.
This budgeting style accounts for everything else before your personal spending money so 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.
Reverse budgeting example
Let’s say you make RM4,000 per month with RM1,100 in monthly expenses. Here are two examples of what your reverse budgeting system might look like.
|Budget View #1
|Budget View #2
|Retirement – RM300
|Retirement – RM400
|Down payment – RM500
|Down payment – RM600
|Holiday fund – RM200
|Holiday fund – RM200
|Leftover spending – RM900
|Leftover spending – RM700
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 prioritizing 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 RM200 one month, you might consider taking it from your holiday 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.
Anyone without a steady income