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All You Need to Know about a Reverse Budget

 Published on August 15, 2019

Do you have a bad habit of not saving money? Studies show nearly one in five Americans don’t have anything set aside for retirement or emergency expenses. And those that do are saving much less than experts recommend.

There are a lot of reasons why saving may be hard, including working with a tight budget. Creating a budget and sticking to it can be challenging, and you may just be making things harder for yourself if you haven’t geared your spending plan around your financial situation.

If you haven’t had any success following a traditional budget — or if you’re relying on lines of credit and online loans too often — the reverse budget could be what you need. It’s a different take on managing money, compared to a more traditional budget plan. So, let’s take a look at this reverse budget guide to see what it takes to build a reverse budget.

What is a Reverse Budget?

A reverse budget is like any other budget in that it is a strategic plan that may help you achieve financial goals — whether you want to pay more than the minimum of your line of credit, pay back installment loans, or retire by 40.

But the way a reverse budget helps you do that differs from a more traditional budget.

A traditional budget may build your spending plan around bills

A more traditional budgeting method puts a laser focus on your monthly expenses. Many traditional budget strategies organize your monthly spending in a way that ensure your bills are covered first. The hope is that you can pay them and still have some money left over for savings.

These methods tend to leave saving as an afterthought. It’s something you do with any cash you haven’t devoted to bills and other expenses.

For some people, setting aside money for savings is a no-brainer. They pay their bills, buy a few splurge items, and still manage to save money. But if you have a habit of overspending, it can be a little more challenging. It’s easy to dip into the leftovers and use that cash on unnecessary items. If you aren’t careful, you may end up spending the money you meant to put into savings on things like movies, new clothes, or takeout.

A dinner you don’t have to cook might sound worth it, but it can eat into the savings you rely on in emergencies. If an unexpected repair happens when you don’t have these savings, it may help to look into online direct lenders.

Although installment loans and lines of credit can help you out of a tight spot, these online loans shouldn’t be a regular way to pay for normal bills. Lines of credit and other online loans are designed for non-recurring, unexpected bills, emergencies and repairs.

A reverse budget makes savings your priority

The reverse budget is a simple spending plan that turns the traditional budget on its head. Rather than focusing on bills and other expenses first, it dictates you save before you take care of any other expense.

So, let’s say it’s payday, and you just deposited your check. Here’s how to follow the reverse budget in three easy steps:

Step #1: Contribute to your savings account and investments.

Step #2: Pay off bills and other necessary expenses, including rent, groceries, internet, hydro bills and lines of credit or installment loans if you have them.

Step #3: Spend any remaining money on treats and other fun splurges.

This budgeting style makes your savings the most important bill in your budget.

stacks of coins growing plants

It’s how the reverse budget got its other name: the pay yourself first budgeting method.

By paying yourself first, you’re giving your savings a chance to grow. You won’t be working with your budget’s leftovers, which may change from month to month. Instead, you’ll be making regular contributions right off the bat.

Why Does the Reverse Budget Work?

Looking through past banking statements may help you get a feel for your spending habits and help you understand how much you’re spending every month. By going over these totals for the last three months, you may get a better idea of the average amount of money going towards your expenses and have an easier time determining whether you need to cut back on spending or not.

Whatever timeframe you end up choosing, this exercise helps you understand how you spend your money in a typical month.

The only problem? Few of us actually have a “typical” month.

It’s easy to track fixed expenses like rent or car insurance because they don’t typically change very often, unless you move, are subject to a rate increase or switch insurance plans. The same goes for nearly all installment loans if you have them. Each payment required for an installment loan is usually nearly the same amount.

Man holding wallet with credit cards and cash

What’s harder to anticipate is all those random expenses that can pop up. Like, let’s say, your child gets invited to several birthday parties, and you have to buy a gift for each one. The summer may mean that you’re taking more day trips with the family, which may cause you to use your credit card(s) more often.

It’s tricky to figure out what limit you should set for these spending categories in a traditional budget because they can fluctuate so often.  With a traditional budget, you risk paying for these extras with the money you’ve dedicated to savings, leaving nothing to set aside in a rainy-day fund.

Do this often enough, and your savings won’t be able to cover a true emergency. If one strikes, lines of credit or online loans may be your only option.

The reverse budget eliminates the need to track these spending habits altogether. It concentrates your efforts on saving what you need and spending what’s left without worrying about the next expense.

How Do You Make a Reverse Budget?

The reverse budget can be one of the easiest budgets to make. You don’t have to track your expenses every month to make sure you’re on track. You just have to invest a little time and effort at the beginning of the process. Then the reverse budget is likely to stay consistent until your goals or living expenses change.

Here are the three main steps to making your reverse budget:

1. Name your savings goal

There’s no denying it — saving takes patience and hard work. It usually involves sacrificing fun splurges so you can make regular contributions over weeks, months, or even years.

Saving just to have extra money may work for some people, but for others it just isn’t enough.

You need a reason to save your money over the long-term. Otherwise, it’s all too easy to lose focus and spend money frivolously on things in the present.

coins spilling out of mason jar

A goal gives purpose to squirreling away cash at every payday, rather than spending it on something fun and unnecessary. So, pick something that makes you want to save — whether it’s an exotic vacation or a new house.

Don’t shy away from practical goals either. The security of an emergency fund is a sensible option, especially if you rely on installment loans and other online loans often.

2. Figure out what you need to meet your goal

Once you have a goal in mind, your next task is figuring out how much money you need to reach this target.

Some things are easier to put a number on. Take a vacation, for example. A tour company may list the price for an all-inclusive vacation, giving you an idea of how much you need to book your trip.

By comparison, reducing your use of online loans and building out your emergency fund is a little hazier. Some experts suggest you have at least three months’ worth of wages set aside. But in all honesty, the more you have saved, the better. More on that later!

woman in front of laptop using calculator

3. Find out what you can afford to save

With a target in sight, you can figure out how much of each paycheck you need to save to meet your goal. But before you commit to any number, make sure it’s something you can afford.

Look to your bills and other essential responsibilities to see what you need to make ends meet. If you have payments due for installment loans or lines of credit, include these in your list. You must meet the due dates for any open loans, such as installment loans or lines of credit.

Tally all your expenses together and subtract their total from your income. What’s left is how much cash you have to work with.

Don’t devote all of it to savings. Although this strategy will help you reach your savings goal faster, it can be hard to deny yourself simple pleasures. You can burn out if you only ever pay bills and save money.

Finding a happy medium between saving and fun spending is essential. It helps you prepare for the future and live your life.

How Much Should I Save Each Month for an Emergency Fund?

Don’t worry if you’re saving for something like an emergency fund. There are guidelines to help answer a question like “How much should I save each month?”.

As a general rule, you may want to set aside 20 percent of your net income. Your net income is your take-home pay after taxes and other deductions are taken out.

So, if your annual net pay is $35,000, you’ll want to save $7,000 a year.

And how much of your paycheck should you save? The answer depends on your payment schedule. Assuming you still earn $35,000 a year, your contributions would look like this for each paycheck:

  • Monthly pay: Approximately $583.
  • Bi-weekly pay: Roughly $270.
  • Weekly pay: Around $135.

No matter how you slice it, saving these amounts per paycheck is a commitment. But it’s worth the effort if you can manage it. Consistent saving can help improve your chances of achieving your financial goals and avoid the use of loans to get out of sticky financial situations.

How to Save for a House

Saving up for a house is an exciting goal. It’s also an expensive one. This is a major purchase that few people can buy outright on their own, and they aren’t turning to installment loans to help them pay for this big of an expense.

As online loans designed for one-time emergencies, installment loans are simply too small for the big, planned purchase of a house. Instead, many people use mortgages to help them get their dream home.

person holding green house keys in their palm

As a rule, these mortgage payments should take up no more than 25 percent of your take-home pay. So you’ll have to work backwards to figure out:

  1. What equals 25 percent of your pay.
  2. What down payment you’ll need to reach an affordable mortgage payment.

To help you figure out what you need to save each month, you’ll need to do some research.

First, you need to know the average cost of the type of home you want in the neighborhood you want. Second, you’ll have to calculate the down payment you need using this number.

Generally, most people aim to save 10–20 percent of the house cost as a down payment. You’ll have to use this figure the next time you ask yourself “How much should I save each month?”

Of course, there’ll be no penalty for putting down more than this. Anything you pay up front will lower how much you pay in monthly mortgage payments. 

If you’re starting to sweat just thinking about this math, don’t worry. You don’t have to do this alone. There are financial advisors and mortgage specialists who will help you budget properly.

How to Save Money as a College Student

The reverse budget works even if you’re a college student. You just have to tweak it to fit your student lifestyle.

For most students, what you’re saving up for and your bills and responsibilities are one and the same. The cost of tuition, books, and your housing costs are simultaneously your goals and your expenses.

So, if your college education is your budget’s priority, you have to make sure you have enough to cover this big cost.

female student with backpack holding red binder

For a growing number of students, working full-time is the only way they can reach their goal and have enough to live on. Nearly 40 percent of undergrads work 30 hours a week in addition to their full-time studies.

But a paycheck may not be the only place you’re getting money — whether it’s from a full-time job or just a weekend gig. You may also be getting financial help from:

  • Student loans and lines of credit
  • Scholarships, bursaries, and grants
  • Family support

Include these in your budget and use your income and savings to pay tuition first. What’s left over is what you have to spend on everything else.

In the end, you may not have a lot of cash to spare. You may be able to stretch your dollars if you try to:

  • Follow these cheap recipes rather than buying an expensive meal plan
  • Join free clubs on campus to spend your time without spending your money
  • Cut back on going out to bars and clubs
  • Buy second-hand textbooks, share books with other classmates, or find them online for free
  • Make a tax return work for you, maximizing student credits and deductions
  • Cut out unnecessary spending on treats, shopping, and entertainment
  • Live off-campus with parents or roommates

While these tips are helpful, every student’s situation is different. You may have to manage your money in different ways if you expect to cut down on your expenses.

Stop Leaving IOUs in Your Savings

Cutting down on your non-essential expenses is one of the main pillars of good money management. But it can be a restrictive and time-consuming way to reach your goals. Most of us don’t enjoy meticulously tracking our expenses and tallying them in spreadsheets.

Luckily, it isn’t the only way to boost your savings. The reverse budget provides a different route to the same destination. You’ll have more money to put towards your goals. And with more cash in your pocket, you may not need online loans like installment loans as often — or at all.

If you’re ready to start building savings, give the reverse budget a try. It just might be the spending plan that fits your finances. Let us know how you like it in the comment section below.

Posted in: Financial Tips

Disclaimer: This article provides general information only and does not constitute financial, legal or other professional advice. For full details, see MoneyKey's Terms of Use.

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