Introduction

When it comes to building the financial life you want, setting goals is just the beginning. Following through with your daily choices is equally important, and it can be an uphill battle. Creating a budget that tailors your spending toward your savings goals can bring those goals within reach. One effective method is reverse budgeting. In this article, we’ll explore how reverse budgeting works, its pros and cons, and how you can create your own reverse budget.

How Does a Reverse Budget Work?

A reverse budget is when you pay yourself first and then base your spending around what’s left. It’s a framework for improving your financial health by thinking first about the long term, then taking care of the short term. When you create a reverse budget, you first set aside money toward your saving and investing goals. Then, you allocate what’s left toward your expenses and discretionary spending.

How to Create a Reverse Budget

Creating a reverse budget involves several steps:

1. Do a Spending Audit

To know how large to make your savings goals, you’ll need to take a pulse on your current cash flow. Go through your bank and credit card statements and tally up your spending on basic essentials like housing, bills, food, and the like. Also, note how much you typically spend on fun stuff like eating out and shopping.

2. Brainstorm Savings Goals

Brainstorm savings goals that you want to work toward. Here are some ideas:

• An emergency fund
• Home down payment fund
• Vacation fund
• Back-to-school fund
• Home or auto repair fund
• Vet bill fund
• Holiday shopping fund

3. Create Specific Milestones

Once you have a list of things you want to save toward, pick a couple to start with. Then, turn them into specific, attainable financial goals. For example, you could aim to save $5,000 toward a down payment in the next year. Break that goal down into smaller goals, such as saving $400 each month.

4. Automate Your Saving

To make your reverse budget easy to stick with, automate it. Set up automatic transfers into savings each payday to fund your goals. You may even be able to split up your direct deposit to land in two different bank accounts. A high-yield savings account is a great place to store your short-term savings because you’ll earn more interest on your money without sacrificing liquidity.

5. Monitor for Overspending

The idea behind a reverse budget is that once you meet your saving goals, you can use the remainder of the funds in your bank account for whatever you want. However, ensure you can meet your basic, committed expenses before you spend freely elsewhere. Setting up spending alerts through your banking or credit card app can help avoid depleting your funds or running up a large credit card bill.

6. Make Adjustments as Needed

As you try out your new reverse budget, you may find that you’re not leaving yourself enough flexibility for bills and spending. You can always lower your savings transfers a bit to make your spending plan easier to stick with. Conversely, if sticking with your new reverse budgeting is a breeze, try upping your savings ratio a bit. Even saving an extra $20 a week will leave you with $1,000 more by the end of the year.

Pros and Cons of a Reverse Budget

Pros

• It can help you reach your goals faster.
• It’s flexible and requires very little upkeep.
• Your risk of budget burnout is lower.

Cons

• It could lead to overspending.
• Focusing on debt may yield better results.
• Paying yourself first can be difficult when money is tight.

Should You Use Reverse Budgeting?

Whether or not you should use reverse budgeting comes down to your personal financial situation and needs. Overall, reverse budgeting can be a great way to improve your financial health and align your spending with your goals. It’s an unfussy approach to budgeting because you don’t have to track every dollar. However, if you struggle with overspending or prefer more structure, consider other types of budget plans like envelope budgeting or zero-based budgeting.

Conclusion

Reverse budgeting can help you prioritize your savings goals to build the financial future you want. By transferring money directly into savings each payday, you can help curb the temptation to spend the money you want to set aside for the future. That can make a huge difference in building wealth over time, especially if you balance short-term savings with investing toward long-term goals for retirement.

Beyond building a budget that puts saving first, be sure you’re prioritizing building credit too. Improving your credit score can help you qualify for advantageous rates should you need to borrow down the line. Start monitoring your credit for free through Experian for alerts to changes in your score and personalized advice on how you can grow your credit over time.

For any mortgage service needs, call O1ne Mortgage at 213-732-3074. Our expert team is here to help you navigate your financial journey and achieve your goals.