What Is Reverse Budgeting And How Does It Work?

I talk about budgeting a lot, in fact, I won’t shut up about it. But it’s the foundation of financial security, being able to save, and feeling in control of your money. But there are a lot of different budgeting methods out there. I’ve spoken about the 50/30/20 method, zero-based budgeting (the method I use), priority budgeting, and cash stuffing. Today I’m talking all about reverse budgeting.

The trick is finding out which method works for you. You may need to trial and error some to see what fits your mindset and lifestyle.

What is reverse budgeting?

Reverse budgeting is about paying yourself first and then figuring out the rest of your budget from the leftover. So you would start with your savings and investments first. Then your bills and fixed costs. And the leftover money is for your basic spending needs and other things.

By doing this you’re putting yourself first and making investing and saving a priority. This doesn’t mean sacrificing basic needs like housing and food. But it means putting it before eating out or shopping.

How does reverse budgeting work?

The first thing you should do before any budgeting method is assess your spending. Figure out what your basic essentials come to like housing, household bills, insurance etc. Then how much do you spend on groceries?

Then work out your short and long-term financial goals, what are you saving or planning for? It could be to buy a home, a new car, a wedding, or simply to put towards your future.

How to meet your goals

Now you know how much you need to simply live, then you can work out how much to set aside so you can meet your goals.

If you’re getting married in two years’ time and want to save £12,000 then you know that you need to save £500 a month towards that goal.

Make sure the number is realistic and gives you room to have a little leftover after your living expenses.

Bills and living costs

You’ll already know how much your non-negotiable living costs are from assessing your finances. However much this is in total take that from how much you have leftover in your budget. I’d recommend transferring all of that money into a separate account when you’re paid so it’s safe and isolated from being touched.

Once the non-negotiable living costs are factored in, also consider any other bills that are nice to haves such as subscriptions. You may have more than you think! If they’re important to you then factor them into the budget, but if they’re not cancel them.

The rest is yours

Once you’ve budgeted for savings and investments, then done both your non-negotiable living costs and the other bills you have you’ll have a figure left over.

This is for anything you want to spend during the month and will be different for everyone. Mine would probably go on eating out and books, but yours might be some new clothes or theatre tickets.

What to do on payday

You can set up standing orders to automate your reverse budgeting plan and save doing anything manually.

The day after you’re paid have all of your savings and investments come out. This move can be moved to whatever account you’re using such as a cash ISA, a Lifetime ISA, a bond, your pension etc.

Then set up a transfer for all of your bill money (aka anything that is automatically taken from your account) into a separate pot/ bank account. If you’re using a separate bank account you may need to update the bank details for payments.

Then the rest of the money stays there for your spending. You can spend that money without feeling guilty as you’ve already saved money and paid all of your bills.

Who is reverse budgeting suited to?

If you’re someone who struggles to save money or doesn’t find they’re left with much at the end of the month then reverse budgeting may be for you.

It can also be good for people who feel like they spend too frivolously and could be saving more. By prioritising those savings you’re leaving yourself less to spend on a whim. And you won’t have to worry about not meeting your savings goal.

Pros and cons of reverse budgeting

There are pros and cons to every type of budgeting method, it’s all about finding what works for you.

Pro- it’s easy to use

You don’t need to use complicated percentages or anything to figure out reverse budgeting for you. And unless you want to change your savings goal or your bills go up it won’t need constant adjustment.

Pro- automation makes it easier

You don’t need to do anything manually as you can automate your money moves on payday. You can set up money to move to savings and investment accounts as soon as you’ve been paid.

Pro- it focuses on the bigger picture

As you’re prioritising your savings you’re able to focus on the longer-term bigger picture. You’re likely to hit your savings goals quicker as you’re focusing on them and not leaving them to the end.

Con- doesn’t work for everyone

You may need something a bit stricter with a better plan. As you’re just left with spending money at the end you may not know how to separate out and may end up spending on the wrong things.

Con- not great if you have debt

If you have debt to pay off then this needs to be your number one priority and you may need a different budgeting system. While savings and investments are important they shouldn’t be prioritised before debt repayment.

Have you ever tried reverse budgeting?

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