Reverse Budgeting

When it comes to budgeting, the aim of the game is to manage your expenses and reserve some money for savings and investments on the regular. But money is never as simple 1 + 1 = 2. Successfully smashing your money goals comes down to finding a budgeting strategy that works for you. If you’re getting started with a budget, or you want to give your existing money management system a shake up, reverse budgeting could be for you. At the core of reverse budgeting is a ‘pay yourself first’ philosophy, that prioritizes saving and simplicity. Keen? Here’s everything you need to know about reverse budgeting and how to implement it.

What is Reverse Budgeting?

Reverse budgeting is an approach to managing money that prioritizes ‘paying yourself first’. In other words, paying a set amount of money into your savings account before you spend on anything else. As soon as your pay hits your account, you send your chosen amount to savings — and keep it separate. Then, you’re free to spend what’s left on your regular expenses and other discretionary purchases.

Reverse budgeting is a much simpler approach to organizing your money in comparison to other methods like Zero-Based Budgeting. Rather than budgeting for endless different categories, you’re simply splitting your money into saving and spending. As long as you’ve paid yourself first, you can enjoy a lot more freedom around what your spending looks like.

Pros and cons of Reverse Budgeting

Just like all budgeting methods, there are pros and cons. Let’s take a look at some of the upsides and downsides to reverse budgeting.

Pros

• Provides autonomy. The beauty of reverse budgeting is that you don’t need to give every dollar a job, or commit to a certain amount of spending per category. You just commit to prioritizing your savings, and managing the rest as you see fit.
• Allows flexibility in your spending. With reverse budgeting, you have the freedom to spend your money differently each month. You don’t have to decide in advance whether you’ll spend it on entertainment or hobbies — you just decide as you go, knowing your savings have already been set aside.
• Prioritizes savings. No matter what happens, you know you’ve set aside your money for saving. This teaches you to live below your means and gets you used to consistently setting aside a portion of your income.
• You don’t need to track every dollar. Some people find tracking their money tedious, which makes them less likely to stick to it. With reverse budgeting, there’s no need for complex spreadsheets that make you want to run for the hills.
• Slow and steady progress. Rather than making rapid progress towards a goal by going all-in on an aggressive savings goal, reverse budgeting allows you to make slow and steady progress with set amounts each month. As they say, slow and steady wins the race.
• Can foster a healthy relationship with money. We know overspending isn’t great for our finances, but we forget about the psychological dangers of oversaving, too. Reverse budgeting gives you permission to spend, which helps you build a positive relationship with your money that encompasses spending and saving.

Cons

• Risk of excessive spending. The lack of structure in the spending portion of your budget can mean you spend more than you would have otherwise. This can go unchecked because you’re not technically spending below your means, but it can cost you significant savings opportunities if you’re not in tune with your spending habits.
• Requires a steady, reliable income. Reverse budgeting doesn’t tend to work well for those with a variable income, as you need to be able to commit to the set savings amount to ‘pay yourself first’ every month.
• You may miss opportunities to save and invest more. While reverse budgeting will ensure you’re not living beyond your means, you may miss opportunities to save to your maximum potential.
• Not generally suitable if you have debt. Paying down debt generally requires a more specific approach, like the Debt Snowball or Debt Avalanche methods.

The brain bit: The Reverse Budgeting mindset

Budgeting and money management is far more than just a numbers game. Our emotions and motivational style comes into play too, which is why the secret to budgeting success is to find something that works for you specifically.

Reverse budgeting often appeals to people who struggle to stick to a more granular budget, or who feel restricted or overwhelmed by allocating their money into categories. Generally, more granular budgets like the Zero-Based Budget work well for people who have a consistent routine, where their spending follows a pattern that’s easy to put into a certain box. Reverse budgeting, however, works better for people who might spend a high amount in one category one month, but much less in that category the next.

Reverse budgeting can boost financial wellbeing

A healthy, positive relationship with money is all about being able to spend and save money in a balanced way that suits you and your lifestyle goals. At one end of the financial spectrum, people overspend and undersave. At the other end, people underspend and oversave. Neither of these extremes create a positive relationship with money.

A big part of financial wellbeing is a perceived sense of freedom and choice around your money. Reverse budgeting hits in all three of these areas, and as a result, may improve your relationship with money.

By embracing reverse budgeting, you’re teaching yourself to live below your means as standard, because you get used to stashing that exact same amount of money each month. You get used to prioritizing your future self, and embracing the ‘pay yourself first’ philosophy. Once your savings are set aside, you also get the benefit of complete autonomy over the rest of your spending. This allows you to explore how money can add value to your life, and change up your spending based on what season of life you’re in. This teaches you to see money as a resource to help you live the life you want, which amplifies your positive relationship with it.

Who Reverse Budgeting is best suited to

• People who are debt-free. Paying off debt doesn’t work all that well with a reverse budget, so it’s best to pay down debt before trying this type of budget.
• People who like autonomy in their spending. If you don’t like being told what to spend your money on, the reverse budget is perfect. No categories, no set limits. As long as you’ve paid yourself first, your wallet is your oyster.
• People who want a simple budget. If you’re not up for tracking every single dollar or managing multiple different category budgets, the reverse budget gives you the simplicity you need.
• People with flexible spending routines. If you like to spend your money lavishly one month, and more frugally the next, the reverse budget allows you the freedom to adapt your spending to suit your changing lifestyle.

Horses for courses

Reverse budgeting teaches you foundational ‘budget hygiene’. You’re not hustling towards a short-term savings goal by trimming back every dollar, but you’re still making sure to consistently set aside some money for savings. You may find you like to revert to reverse budgeting as your default setting when you want a bit more budget freedom, but then switch to something a bit more granular when you have a specific savings goal you want to work towards.

How to implement a Reverse Budget

• Step 1: Review your spending and get an idea of where your money is going. Compare how much is coming in to how much is going out.
• Step 2: Set a savings goal. A savings goal helps to underpin your ‘pay yourself first’ mentality.
• Step 3: Reverse engineer your goal. Work out how much you can afford to put aside from each payday to achieve your goal, by dividing your goal amount by the number of times you get paid in different time periods.

 

• Step 4: Choose where you’ll keep your savings. It can help to have a separate account that’s slightly harder to access, to reduce your temptation to dip into it.
• Step 5: (optional) Automate your savings transfer for the day after you get paid. This streamlines your ‘pay yourself first’ approach and gets you used to your paycheck post-saving.
• Step 6: (optional) Work out how much you need to spend on your necessary living expenses, like rent and fuel. Consider keeping this in a separate account to your discretionary spending to ensure you don’t spend money you need for essentials.
• Step 7: Go out and spend freely, knowing you’ve ‘paid yourself first’!

Reverse Budgeting 🤝 PocketSmith

If you’re using a reverse budget because you like autonomy and simplifying your money management, PocketSmith can help you stay on top of your financial position and your spending behavior. With PocketSmith’s intelligent bank feeds, you can see all of your financial activity in one place, which can help you spot opportunity and get clear on where your money goes each month. You can then categorize your ‘pay yourself first’ savings and keep track of how they’re growing, and check in on your discretionary and non-discretionary expenses as often as you like.

Reverse Budgeting: How to nail it

We want you to crush this new budget of yours, so here are our top tips on how to nail it.

• Keep your savings separate. Freedom to spend guilt-free is great, but we want to ensure you’re not tempted to dip into your savings as you go. Keeping it in a separate, less accessible account can help you have better boundaries.
• Consider separating your living expenses. Calculating how much of your spending portion needs to be accounted for in your baseline living expenses can help reduce the risk of overspending.
• Check in with your spending each month. Reviewing your spending each month can help you see where your money has gone, and prompt you to reflect on whether that spending felt aligned to your values. Making gradual shifts to align your spending to your goals and values can help improve your money habits over the long term.
• Sweep any unspent money into your savings. If you have any money left unspent at the end of the month, sweep it into your savings to boost your progress, rather than letting it rollover to be spent the next month.
• Automate your savings. Set up an auto-transfer to separate your savings as soon as your pay hits your account. This almost conditions your brain to forget you ever had the money. This creates a sense of distance from that money and makes you less likely to spend it.

Reverse Budgeting: How not to fail it

• Don’t pull money from your savings for non-essentials. While reverse budgeting is great for its simplicity, if you drop the ball on the ‘pay yourself first’ portion, the whole thing kinda falls apart.
• Don’t try to oversave. It can be tempting to be really ambitious with the ‘pay yourself first’ approach, but the key to success with the reverse budget is consistency. You can’t enjoy the autonomy and simplicity of a reverse budget if you haven’t left yourself enough to live on after saving.

The PocketSmith verdict: 3.5/5

Broadly speaking, we like the reverse budget — paying yourself first is such an important factor in financial literacy. That said, we love to tinker with our budgets. PocketSmith was set up for you to be able to tinker to your heart’s content, so we reckon there’s a sweet spot between the ‘pay yourself first’ philosophy, and a little bit more scaffolding with categories and forecasts.

Ultimately, the best budget for you is one you’ll actually stick to. Give the reverse budget a try and see how it sits.