We’re all familiar with a budget and living within our means. It’s personal finance 101. Instead of the traditional budget, I do something called reverse budgeting.
What is Reverse Budgeting?
Most people budget for the common expenses like food, shelter, clothing, medical, and other basic needs. Reverse budgeting is paying yourself first, then paying the basic expenses.
When I say pay yourself first, I’m referring to paying into your investments first. If you invest in index funds, that means allocating a certain percentage of your income into the index of your choice and dollar-cost averaging every month.
If you’re a real estate investor, it’s investing every month into a down payment for a new property, into upgrading the property, or even the debt pay down of a rental.
Whatever your investment of choice is, you are paying into that before anything else that month. Then you use the remaining money for your basic needs and whatever else you want to spend it on.
For example, Sammy makes $5,000 per month. He wants to invest 20 percent of his income every month into index funds. He would take his first $1,000 (20 percent) and invest that into an index fund. Then he would take the remaining $4,000 and pay his rent/mortgage, pay for food, clothing, medical, etc.
Anything left over after that can be spent however he wants, whether it be on entertainment, travel, restaurants, etc.
My Style of Reverse Budgeting
With my reverse budgeting, I add another layer, which is the buckets of money I write about in this post. After I pay myself first, I then allocate percentages of money to different buckets such as general savings, travel, emergency, etc.
That keeps my money organized and gives every dollar a job, or purpose. It also is highly intentional as I want every dollar to perform a specific task that will make my life better.
An investing dollar is meant to help my future self, a savings dollar will provide short-term security, a travel dollar will give me an experience, etc.
Why I Like Reverse Budgeting Over Traditional Methods
Reverse budgeting is highly intentional and purpose driven. There’s a clear place for every dollar, and it’s easy to see how each and every dollar provides value to my life. It doesn’t seem like a chore or tedious process.
Whereas traditional budgeting almost seems obligatory and it’s definitely not fun. It also feels constricting.
The Catch
Here’s the catch. I really don’t recommend reverse budgeting until you are completely out of consumer debt. I believe that anyone in consumer debt needs to go with a traditional budget and focus on getting rid of that debt.
Consumer debt is probably the biggest wealth killer and causes high levels of stress–a double negative. Getting rid of it as quickly as you can will provide more financial benefits than anything else you do with your money.
Conclusion: Reverse Budgeting is the Dessert After You’ve Eaten Your Financial Vegetables
If you’re out of consumer debt and investing regularly, reverse budgeting is a great option. It’s kind of the dessert though, you get it once you’ve done some of the hard stuff like paying off consumer debt, being in a position to invest, have career skills, etc.
When you get to start this is up to you. There are people in their early twenties who can start doing this now if they are coming from a position of financial wellness. There are also fifty and sixty year olds who shouldn’t start this because they need to pay off consumer debt first. So age really isn’t the driving factor, it’s more about where you are in your financial life.
Have you tried reverse budgeting?
