The Fine Art of ‘Reverse Budgeting’

Author: Abby Hayes / Source: fivecentnickel.com

Budgeting is an incredibly popular topic among the financially savvy. And yet some of the most financially-savvy people I know don’t actually budget. With zero based budgeting, there’s no longer any excuse to avoid a budget.

When you think about a budget, what do you think of?

You might think of having umpteen different categories to divide all of your expenses among. Each time you make a transaction, you have to decide which category to put that expense into. And then what happens if you over-spend in one category? You have to decide which other category that expense comes from.

This can get really complicated really quickly. In fact, you could wind up spending hours and hours each month just managing your budget. I, for one, don’t have time for that!

Instead, I use a practice I call reverse budgeting. It can also be called zero-based budgeting.

Here, we’ll talk about how this works for me, how it might work for you, and some tools you can use to make it work.

How Zero-Based Budgeting Works

You may have heard about this type of budgeting from financial guru Dave Ramsey. Except he uses it to describe this incredibly detailed, category-oriented budgeting system we talked about above. That’s one way to do zero-based budgeting, but it’s not the only option.

At its core, zero-based budgeting is actually about subtracting all your expenses, savings, and goals from your total monthly income and coming up with a difference of zero. There are actually several different ways to make this process work for you.

Let’s talk about the options, and then figure out what might work best for your particular needs.

Option 1: Percentage-Based Budgeting

This is the option my family uses. Frankly, we have too much on our plates to spend loads of time examining every purchase. Instead, we devote a certain percentage of our income to savings goals each month, and then spend the rest. We can basically spend up to what we devote to spending, and no more, since we don’t do debt.

For instance, you could decide to devote 20 to 30 percent of your total monthly income to savings. You might split this between long-term goals, like saving for retirement, and shorter-term but necessary goals, like saving up to replace your vehicle. Then, maybe you’ll save 10 percent of your income to pay for one-off expenses, like getting your tires replaced or dealing with home repairs. Then you can spend the remaining 60 to 70 percent of your income on your daily needs and wants.

This is a very loose way to go about budgeting, but it works for a few reasons:

• It’s easy to maintain. When you’re just shifting money around to savings accounts on payday and then keeping track of your balance, you don’t spend hours maintaining your budget. You can spend more or less in certain categories, as long as you don’t wind up going into debt.
• You pay yourself first. One of the first principles of personal finance is to pay yourself first. This means you need to save before you start spending. This type of budget has aggressive savings goals, and you start saving right away.
• You can use it to get out of debt. If you’re still working your way out of debt, this type of budget can still be helpful. You can, for instance, set aside a certain percentage of your income for savings, but then another percentage for extra debt payments. Outside of those categories, you can spend what you need to spend.
• We’re still frugal. We could maybe save a few extra bucks a month if we more carefully tracked our budget down to the penny. But we’re still pretty frugal, especially since we have high savings goals. By putting a bunch of money into savings each month, we force ourselves to live on less. And as we’ve gotten pay increases over the years, we’ve been able to devote more and more to savings rather than falling prey to lifestyle inflation.
• It’s easier for a variable income. If your base income varies or you have a side gig that brings in varying amounts of money each month, this is an easier option. Category-based budgeting can be tough when you don’t know exactly what your income will look like from month to month. With this option, you know that no matter what your income is, you save a certain percentage. And then you spend the rest. If your income is…

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