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Budgeting can be challenging, which ultimately impacts your ability to save.
According to the Northwestern Mutual’s 2018 Planning and Progress Study, 21 percent of Americans have nothing saved, and an additional 10 percent have less than $5000 put away for the future. If you can relate, here’s how a reverse budget can help you put your savings first.
While most people budget based on their expenses and then save whatever’s left over, a reverse budget highlights the opposite approach. When you reverse budget, you first decide how much you’d like to save, and then, you use the remaining amount to pay your expenses and purchase whatever else you please.
This is why many refer to this approach as “paying yourself first.”
Meaning, you budget and plan based on your savings goals, instead of focusing on your fixed and variable expenses. In fact, many already reverse budget without even realizing it. For example, if you currently contribute to a retirement account, such as your 401k, you already reverse budget. You can keep it going with an online IRA, which are simple to set up.
Since this approach highlights the importance of saving, you simply cannot spend what you don’t have, preventing overspending. This forces you to prioritize and best of all, this type of budget requires little maintenance.
Unlike a traditional budget, a reverse budget doesn’t require regular reconciliation, allowing you to automate your savings plan. Without any need to track your expenses or categories what you spend, reverse budgeting allows you to save a significant amount of time.
To get started, you’ll want to select a realistic amount to save. For example, you may want to use the 50/30/20 approach, which allocates 20 percent of your monthly income to your savings (50 percent to your necessities and 30 percent towards your needs). The key is focusing on your personal goals.
Next, set up an automatic withdrawal that comes out monthly, transferring X amount of funds to a savings account. Then, spend whatever is left over. Across time, you can then increase the amount you save each month based on your short- and long-term goals.