Reverse Budgeting: How To Create A Budget That Actually Works

Peter Lazaroff, CFA, CFP® Chief Investment Officer

What if budgeting was quick rather than time consuming. Simple, not complex. Imagine a budget you loved: a plan that propelled you every month toward your goals, instead of restricting your options. The stigma against budgeting is reversible. Introducing a better way to budget: reverse budgeting. 

Rather than focusing on expenses, reverse budgeting focuses on savings. Simply figure out how much you need to save, make those savings automatic and then spend your remaining money as you please.

Align Your Money With Your Values

Because reverse budgeting focuses on saving, you can’t spend what you don’t have.  Increasing the amount you save naturally reduces the amount you spend, but it also forces you to prioritize your expenditures. This is important because most people find that gradually saving more allows them to cut spending that doesn’t really fit with their values.

If you have spent your budgeted amount on restaurants, but something very important comes up unexpectedly that requires you to dine out, then you can shift spending elsewhere to fall in line with your priorities and values.

Best of all, reverse budgeting requires very little maintenance. A traditional budget requires weekly or monthly reconciliation of financial transactions.  Once a reverse budget is set up, the entire thing can be automated.  The lack of ongoing time commitment makes it much more likely you will stick to a reverse budget.

Here is how to set up a reverse budget in three easy steps:

1. Add up the monthly savings necessary to reach your short-term goals.

Writing down a goal with an estimated date and expected cost dramatically increases your likelihood for success. It also clarifies the things that are most important to you.

Start by writing short-term goals (five years or fewer), the date of desired completion and the expected cost. If you add up the expected cost of all your goals, then you can determine how much you need to save monthly to make this happen. Once this is completed, number the goals according to your priorities – now you know where to begin directing your monthly savings.

Below is a quick sample of some short-term goals that are totaled and divided by 60 months (five years) to derive the required monthly savings to reverse budget:

Example of budgeting for short term goals.

I’d encourage you to do the same exercise for intermediate-term goals (five to 15 years) as well as long-term goals (15 years or more). Creating a goal in BrightPlan simplifies the process. Just input the target date and the amount you can save and we will do the math necessary to keep you on track. 

If you can’t meet the monthly savings required for your short-term goals, then you can try to escalate your savings over time (see step three), but it also probably means that you need to evaluate what is most important to you and adjust your goals accordingly.

2. Set up a monthly automatic withdrawal to a separate savings account.

Open up a savings account, preferably an online savings account that pays a little higher interest rate than traditional brick and mortar bank. In addition, online savings accounts serve as a barrier to impulsive spending since the money takes more time to access.

Next, set up an automatic monthly withdrawal from your checking account to the online savings account to meet the amount you reverse budgeted in step one. Then you are done – simply spend the leftover money in your checking account as you see fit.

3. Escalate your automatic savings over time.

This step is really powerful for both people wanting to supercharge their savings as well as those that can’t save the required monthly amount to meet their short-term goals.

Let’s return to our short-term goals example from step one. That example would require a savings rate of just under 10% for someone with a $150,000 income.  Imagine this hypothetical person hasn’t been saving much prior to this exercise. In that case, suddenly removing $1,208 per month from his/her lifestyle can be challenging.

Escalating savings is a way to slowly advance towards your ideal monthly savings. Start by setting up several automatic withdrawals from your checking and deposit into your online savings account. The first three months should withdraw $100 per month. The second set should withdraw $150 in the next three months, then $200 in the next, and so on.

Start Saving for your Goals Today

Reverse budgeting is all about freeing up more money to save for your goals, but you don't need a pen and paper to get started. BrightPlan can help you plan and invest for the goals that matter most. Our digital advice helps you:

  • Write out all your financial goals
  • Define when you want to reach them, and how much you will need to save
  • Break each goal down into monthly savings amounts
  • Invest automatically with systematic contributions