Reverse Budgeting

Reverse budgeting puts savings first.

Budgeting can be a tedious exercise, but it is essential to getting a handle on monthly expenses and saving for the future. Many people delay creating a budget, as it often brings to mind spreadsheets and complicated projections. Fortunately, simpler alternatives to traditional budgeting, such as reverse budgeting, are emerging.

Reverse Budgeting

In reverse budgeting, you force a set savings amount and pay all of essential bills immediately at the beginning of the month. You can also set other predetermined goals of course, such as a predetermined amount for charitable giving. Any discretionary expenses are allowed as long as they are paid from the funds remaining after these obligations are met.

Making Reverse Budgeting Work

Establishing automatic transfers of savings amounts from your checking account to an investment account or automatic deductions from your paycheck to a 401(k) ensures that savings goals are met --- before you have an opportunity to spend the money. You may also want to have those essential bills, such as your mortgage or rent payment, automatically deducted from your checking account.

Benefits of Reverse Budgeting

Simplicity is the key benefit of reverse budgeting. After your preset savings goals and major obligations are met, you have fulfilled your budget. By putting savings first, you are helping to secure your financial future. The simplicity of reverse budgeting also may help you stick to the plan.

Drawbacks of Reverse Budgeting

In some ways, simplicity is also the major drawback of reverse budgeting. Because discretionary spending is unrestrained after you meet your budgeted goals, you do not gain insight into your discretionary expenses. Other budgeting systems ask you to track and plan your spending across all categories --- including discretionary expenses, such as dining out and entertainment, which can often be significant income drains.

Envelope Budgeting

Envelope budgeting builds upon and addresses the limitations of reverse budgeting. In envelope budgeting, your paycheck is deposited into a checking account and all savings goals and essential bills are deducted or paid from this account. The remaining cash is withdrawn and placed into another account; funds can also be withdrawn and placed into individual envelopes. As in a more traditional budget, the amount of remaining income is then allocated across spending categories.

For example, one envelope may be labeled "movies" and the determined monthly amount placed in that envelope. If you keep your money in a separate account, you may create a "movie" ledger with the determined amount as the beginning balance. As you spend money on video rentals or movie theater tickets, take the money from the envelope or deduct it from your ledger. When the balance reaches zero, you cannot spend more money on movies for the month.

References

• Bargaineering; Brief Look at Five Budgeting Systems; Jim Wang
• CBS News: Preparing a Family Budget You Can Stick To