Budgeting – a dreaded word for most people struggling with being able to save money for a financially secure future. Most friends, philosophers, and guides will recommend creating a budget and sticking with it. However, no one will tell you that this is a time-consuming process and you will have to watch every financial decision like a hawk. However, there is another way to approach budgeting – reverse budgeting that is highly effective in helping you save money and get into the habit of savings. Today, we will talk about the significance of reverse budgeting in day-to-day life.
| Reverse Budgeting |
|---|
| 1. What is reverse budgeting? |
| 2. How does Reverse Budgeting Works |
| 3. Significance of reverse budgeting |
1. What is reverse budgeting?
Typically, when you create a budget you try to curtail your expenses to be able to save as much as you can by the end of the month. This process involves listing your expenses and cutting off avoidable expenses when you can. However, this also implies that you need to think about your budget before making any purchase.
Reverse budgeting or Pay Yourself First budgeting, on the other hand, is understanding how much you want to save and spend the balance amount according to your liking. No restrictions. Let’s say that you have already spent the budgeted amount on shopping. However, a friend is getting married and you need to buy new shoes. With reverse budgeting, you can buy them and cut costs somewhere else like dining.
Check: What is the Budget and how to make the budget?
2. How does Reverse Budgeting Works
To create an effective reverse budget, you can follow these steps:
- Calculate Expenses
- Fix the amount you want to save
- Why are you saving?
- Adaptation is the key
Step 1 – Calculate Expenses
Since you will be saving first and spending later, you need a good idea of your average monthly expenses. You also need to factor in quarterly, half-yearly, and annual expenses to get a better picture. Remember, you can always increase the savings amount later but do not want to start tapping into your savings if the necessary expenses are not met.
Step 2 – Fix the amount you want to save
You know your income and expenses. So, it is now possible to fix an amount that you will set aside as savings every month. You can use the 50-30-20 rule of allocating 20% of your monthly income to savings or determine an amount yourself.
Step 3 – Why are you saving?
If the answer to this question is preparing for a rainy day, then define a rainy day. The point is what will you dip into your savings? Having goals helps. It can be about creating an emergency fund of an ‘x’ amount, buying a new phone, or financing your next dream vacation. A goal can keep you motivated and away from your savings funds in day-to-day life.
Check: Importance of Emergency Fund
Step 4 – Adaptation is the key
Life is unpredictable and once you are on a journey of saving and working towards a financial goal, you are bound to face roadblocks. Hence, you must be ready to adapt your budget to ensure that your savings amount is not disturbed. You can also look at freelancing in your area of expertise to boost your income if needed.
3. Significance of reverse budgeting
There are many features that make reverse budgeting appealing to most people. Here is a quick look:
- Out of Sight; Out of Mind
- Time-Efficiency
- Impulse Control
- Good for people who are not financially savvy
- Perfect for fixed monthly income
- You will always save money
- Living within your means
1. Out of Sight; Out of Mind
In this process, you save money even before you have an opportunity to spend it. When you start budgeting, one of the most difficult aspects of the process is refraining from making that purchase you really want. With reverse budgeting, you don’t have to worry about savings since that part is already done. Even if you make that purchase, you have the liberty to cut costs somewhere else and make the budget a success.
2. Time-Efficiency
When you follow the traditional budgeting methods, you have to track every penny spent as it allows you to identify areas where you can cut costs in the future. This also means that you have to invest time to enter all your expenses on a spreadsheet or mobile app. With reverse budgeting, you don’t need to track any expenses. You do all the thinking before determining the savings amount and then simply get through the month within the allotted budget.
3. Impulse Control
Let’s say that your salary is 15000 AED. Now, if you look at the traditional budgeting methods, you will create categories and sub-categories of expenses and try to meet your spending goals in each of them. This requires a lot of restraint especially to control impulse spending.
However, if you opt for reverse budgeting and decide to save say 4000 AED every month, then you start the month with 11000 AED in your account. Psychologically, this works as a deterrent for impulse spending. Also, since you have less money to spend, you spend less. We know that theoretically, you can buy something now and pay it later using funds from your savings, but that does not happen often.
4. Good for people who are not financially savvy
Budgeting is not rocket science but for someone who hates calculations and finance-related processes, reverse budgeting is a lot easier. All you do is think once and live your life the way you want for the rest of the month. While traditional budgeting can make you more financially aware of your situation, it is not something that everyone can manage.
5. Perfect for fixed monthly income
Since reverse budgeting approaches your finances by determining your costs and savings in advance, the income needs to be fixed. If you have a business or part-time works with no minimum or maximum income limitations, then a reverse budget might not be so effective for you. People with variable incomes should opt for traditional budgeting methods.
6. You will always save money
With traditional budgeting, you push yourself all through the month and try to save as much as you can. With this method, there can be months when an impulse purchase or unplanned expenses shrink your savings. With reverse budgeting, you save money before the month begins. This gives you a good start knowing that your savings are done and as long as you get through the month within the set budget, you will be fine.
7. Living within your means
One of the best ways to save money and create a financially independent future is to learn how to live within your means. This is not as easy as it sounds, as digitization and globalization have created limitless distractions. With reverse budgeting, you are always living within your means and that ensures financial security. Also, in the future, when you start investing, you can follow the same method of investing first and spending later for success.
Summing Up
As can see, reverse budgeting offers several benefits and is ideal for most people. Whether you opt for traditional or reverse budgeting, it is important to divide your income between expenses and savings. If you are spending all the money that you make, then you might find yourself in a bad spot when an emergency arrives like a loss of a job or an unforeseen medical expense, etc. Think well and determine which budgeting method can work for you. Good Luck!
About the author
Nikitha is a Senior Analyst at MyMoneySouq.com. She has been writing about personal finance, credit cards, mortgage, and other personal finance products in the UAE. Her work on Mortgage loans has been featured by the GulfNews and other popular Financial Blogs in the UAE.
