Reverse Budgeting Explained

Reverse budgeting is a mirror-image approach to traditional budgeting. A traditional budget typically focuses on expenses. A reverse budget focuses on savings and investments and the idea of “paying yourself first.”

Any kind of budget is a fundamental part of personal finance. But budgets can follow different strategies.

A reverse budget prioritizes the future rather than month-to-month living expenses. It creates a balance to allow you to meet your bills while building savings for an emergency fund, future purchases or retirement.

It can help you set financial goals and priorities, address high-priority expenses and adjust your spending habits. If traditional budgeting doesn’t work for you — if you find it too rigid or difficult to stick to — reverse budgeting may be a better fit.

Once you set it up, a reverse budget can be easy to follow.

The first thing to do in creating any budget is to know how much you have to spend each month. Write out all your necessary expenses — rent, mortgage, transportation and all the other bills you have to pay. This gives you an idea of how much you have to spend each month.

The next step is to figure out how much you need to put away each month to meet your financial goals. This should include both money you’ll put into savings and investments.

When you get your next paycheck, invest in yourself first. Put a specific amount of money directly into savings.

While you have to manage a traditional budget on an almost monthly basis, you can automate the management of a reverse budget. Set up automatic withdrawals, paycheck deductions and payments to prioritize your savings and monthly bills. Then use the rest of your paycheck to cover other expenses.

Once you save, stick to the same self-pay amount from each paycheck. If you can’t stay on track, look for items to cut to keep you at the same pace.

Savings should be your last area to cut. But if you must cut, zero in on saving for one goal at a time — a retirement or a down payment on a house.

Over time, aim to increase your savings. Bump up the dollar amount when you get a raise. Have more withheld from your check for your 401(k) or automatically deposited into your savings account. These are painless ways to close in on your savings or retirement goals.

The purpose of reverse budgeting is to put an emphasis on building your savings. The key advantage of it is how you can automate it. By having your savings automatically deducted from your paycheck or bank account, there’s less chance you’ll spend that money on something else.

With a reverse budget, you never touch the money that goes into savings. Then you adjust to making the rest of your paycheck meet your wants and needs. This makes it easier — and quicker — to build up your savings.

Once people see how much they can save in a short time using a reverse budget like the 50/30/20 plan, it transforms into an “addicted to saving” strategy.

Reverse budgeting offers many advantages if savings are your top financial priority. But it doesn’t work for everyone.

This is especially true for people who have large amounts of debt. They should try other budget systems that prioritize paying down debt.

You still may use a reverse budget to pay down debt. Some financial professionals suggest addressing your debt as savings and directing your automatic withdrawals toward your debt to pay it down quickly.

Reverse budgeting is best suited for people who prioritize savings and investments above all other financial goals. It also appeals to people who want a relatively hands-off budgeting approach with relatively simple math.

Reverse budgeting can be an excellent tool for people who take the long view on their finances — focusing on long-term purchases such as a home or toward a nest egg for retirement — rather than covering monthly expenses.