Ask Away Blog: Reverse Budgeting: Could It Work For You?

Reverse Budgeting: Could It Work For You?

Wednesday, January 6, 2021

 
The very best way to keep your finances in check (or get them there) is to make a budget. There are a number of different ways to do this, but whatever you choose, once you have done it and you stick to your budget, you’ll find your finances are much easier to deal with, and you might even have more ‘spare’ money than you thought, allowing you to save or pay off debts.

One particularly popular method of budgeting is called ‘reverse budgeting’. This can work very well for some people (although not all; if you have a lot of debt of you are in the habit of overspending, it might be wise to try a different option), and often feels like an easier way to work, even if the end result is the same. Read on to find out more about reverse budgeting and whether it could work for you.


 

Image from Pixabay

 
What Is Reverse Budgeting?

In its most simple terms, reverse budgeting means ensuring you have enough money for your saving needs first and using anything that’s left to pay your bills and so on. You would therefore have a specific amount that you choose to place into a savings or investment account each month, and you would move that first. Then you would pay your bills. Anything that’s left is to be used for your additional living expenses and spending requirements.

This means you are making your savings a priority, which is not something that usually happens. In most cases, people will concentrate on paying their bills (which is important) and then give themselves more money than they really need to see them through the month. This can lead to spending when it’s just not necessary, and very little left over for your savings account. It’s far easier to learn to live on a small amount of money than it is to manage without savings as the years go by.

Who Should Use Reverse Budgeting?

This kind of budgeting is great for people who usually find there is little or no money left over to put into their savings account at the end of the month. It’s also useful for anyone who sometimes has trouble ensuring their bills are paid, as it prioritizes these over any ‘extra spending’.

Reverse budgeting will force you to look at your spending habits and you will need to make changes in some cases so that this system of saving works and you are able to pay all your bills. Really evaluate what money you need personally each month, and if it is not necessarily required and would better off elsewhere, that’s where it should go. Although it might be fun to have some money to use however you like, if you have debts to settle and you want to save, this must be thought of first.

How To Start Reverse Budgeting

If you think the idea of reverse budgeting is going to suit you and your spending habits or help you save more and curb any extra spending you might otherwise have been tempted to do, read on. Here are some great tips on getting started.

Assess Your Spending

As with any budget, the first thing you’re going to need to do when you want to start reverse budgeting is to assess your spending. Calculate how much your basic essentials cost (like your mortgage or rent payment, your utility bills, your groceries, and transport costs). This will be the minimum you need to have left over once your savings and debts have been paid).

Then take a look at any debts that need to be paid. Add these costs to the basic minimum costs above.

Now, look at the other expenditure. Are you spending a lot on eating out or takeout? Do you buy lots of items online (many of which probably aren’t entirely necessary if you really think about it)? These are the costs that you don’t need to worry about unless you happen to have money left over – that can be determined over the next few steps.

How Much To Set Aside

Once you know what your absolute minimum that you are going to need to get through the money is, you’ll be able to work backward. Take the minimum you need away from your monthly income, and you’ll know how much you have left that you can put into a savings account. It’s then down to you to decide how much of that amount is going to be saved. Ideally, you’ll want to put as much as possible into savings, and if you can put everything that’s left in a safe place (one that earns you interest would be useful) that’s wonderful. However, if you have any gifts to buy or your car needs servicing that month, or any other unusual outgoings, you’ll need to account for them too.

Money For Fun

Do you want money left over for the hobbies and pastimes you enjoy? If so, this will also need to be factored in. You’ll need to be honest with yourself, however, as ‘needing’ too much in this area will affect how much you have to put into your savings account. A good way to maximize the amount you can set aside for your savings is to look at the percent change calculator. This will help you factor in reductions and deals, and enable you to put more aside than you thought you would be able to in many cases.

Set Up Automatic Payments

After you have done all your calculations, you should set up automatic payments so that, starting the next time you are paid, you immediately put money into your savings account. This way, you won’t be tempted to spend it. It is this prioritizing of your savings that is at the heart of reverse budgeting, and although it might be hard to do at first, especially if you’ve been used to spending everything you have in your account and wondering why there’s nothing left to save, but it’s a habit that will become much easier over time, especially when you see how much you’re saving without any problems.






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1 comment:

  1. Thanks for sharing this. I have never heard of it before.

    http://www.amysfashionblog.com/blog-home

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