Creating a budget and sticking to it is difficult for most people because the process is time-consuming and restrictive. Traditional budgeting forces you to make every decision as if you live in a spreadsheet. But guess what? You don’t live in a spreadsheet.
Listen now and learn:
- Why a reverse budget is better than traditional budgeting
- 3 steps to set up an automatic reverse budget
- An extra tip for supercharging your savings
Listen Now
Show Notes
Creating a budget and sticking to it is difficult for most people because the process is time-consuming and restrictive. Traditional budgeting forces you to make every decision as if you live in a spreadsheet. But guess what? You don’t live in a spreadsheet.
Rather than focusing on expenses, it is better to focus on savings through a process I like to call “reverse budgeting.”
Reverse budgeting simply figures out how much you need to save, makes those savings automatic, and then you spend the remaining amount of money as you please.
If you have spent your budgeted amount on restaurants, but something important comes up unexpectedly that requires you to dine out, then you can shift spending elsewhere to fall in line with your priorities and values.
Because reverse budgeting focuses on saving, you can’t spend what you don’t have.
Increasing the amount you save naturally reduces the amount you spend, but it also forces you to prioritize your expenditures.
This is important because most people find that gradually saving more allows them to cut spending that doesn’t really fit with their values.
Best of all, reverse budgeting requires very little maintenance. A traditional budget requires weekly or monthly reconciliation of financial transactions. Once a reverse budget is set up, the entire thing can be automated.
Plus, the lack of ongoing time commitment makes it much more likely you will stick to your reverse budget.
RESOURCE: Download my free Goal Planning worksheet to help you create your reverse budget.
Here is how to set up a reverse budget in three easy steps.
1. Add up the amount per month that you need to save to reach your short-term goals.
Writing down a goal with an estimated date and expected cost dramatically increases your likelihood of success. It also allows you to understand the things that are most important to you.
Start by writing short-term goals (five years or fewer), the desired date of completion, and the expected cost. Next, rank each goal in order of priority. The very top short-term goal should be your annual retirement savings target. The second should be contributions towards an emergency fund or cash reserve.
Beyond those top two priorities, here are some other resources to help you rank different goals:
- Should you invest or pay down debt?
- EP 11: Where to Save for Retirement
- The Secret to Using Money to Buy Happiness
With your goals in place, add up the expected cost of all your goals to determine how much you need to save on a monthly basis for the next five years.
If the monthly savings target is too high for your excess cash flow, then look at some of those lower-ranked priorities and think about how important they are relative to some of your other regular expenses.
There is no such thing as a final draft of your financial plan.
Short-term goals often change from year to year, whereas intermediate and long-term goals tend to be more static. That’s why I’d suggest reviewing the Goal Planning Worksheet on an annual basis.
Once your short-term goals are in place, do the same exercise for intermediate-term goals (five to 15 years) as well as long-term goals (15 years or more).
It may be difficult to assign an expected cost to your long-term goals, but that’s OK, the benefit of this exercise is thinking about it.
2. Set up a monthly automatic withdrawal from your checking account to a separate savings account.
Automating your finances is the easiest way to maintain your reverse budget.
Start by opening an online savings account that pays a little higher interest rate than a traditional brick-and-mortar bank. In addition, online savings accounts serve as a barrier to impulsive spending since the money takes more time to access.
Next, set up an automatic monthly withdrawal from your checking account to the online savings account to meet the amount you reverse budgeted in step one.
Then you are done – simply spend the leftover money in your checking account as you see fit.
3. Escalate your automatic savings over time.
This step is really powerful for people wanting to supercharge their savings.
It’s also a great strategy for those that can’t save the required monthly amount to meet their short-term goals – escalating your savings is a way to slowly advance toward your ideal monthly savings.
Start by setting up several automatic withdrawals from your checking and deposit them into your online savings account.
For example, in the first three months, you could withdraw, say, $1,000 per month. The second set could withdraw $1,500 in the next three months, then $2,000 in the next, and so on.
If you are already meeting your short-term monthly savings target, then escalating savings over time is a great way to begin addressing those intermediate- and long-term goals.
Next Steps…
Reverse budgeting is just one strategy to build your wealth. If you want more simple systems you can use in your finances, here are a few more options:
- First, take my financial assessment and discover content customized to your goals.
- Review my free online resources for other helpful financial guidance beyond setting financial goals, such as deciding if you should rent or buy a house or finding out your net worth.
- And finally, if you are ready for professional help to help you manage your finances, consider booking a free 30-minute discovery call with me. In this call, I can answer all your questions about working with Plancorp and help you decide if a more in-depth meeting with our wealth management team would be beneficial to you.
As always, thanks for reading and listening. And until next time, to long-term investing!
Resources:
- Free Goal Planning Worksheet
- Should you invest or pay down debt?
- EP 11: Where to Save for Retirement
- The Secret to Using Money to Buy Happiness
- Free financial assessment
- Book a free 30-minute call with me
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About the Podcast
Long-term investing made simple. Most people enter the markets without understanding how to grow their wealth over the long term or clearly hit their financial goals. The Long Term Investor shows you how to proactively minimize taxes, hedge against rising inflation, and ride the waves of volatility with confidence.
Hosted by the advisor, Chief Investment Officer of Plancorp, and author of “Making Money Simple,” Peter Lazaroff shares practical advice on how to make smart investment decisions your future self with thank you for. A go-to source for top media outlets like CNBC, the Wall Street Journal, and CNN Money, Peter unpacks the clear, strategic, and calculated approach he uses to decisively manage over 5.5 billion in investments for clients at Plancorp.
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