Budgeting is not a new concept, but it has suddenly become a popular strategy to be on track. After the pandemic outbreak, when millions of people lost their jobs and struggled throughout the last year to land another one, they realized the worth of budgeting.

It is a must if you want to take control of your expenses. This can help you gain control over your money. However, creating a budget is a tough job. Tracking everyday expenses to ensure that you have not overspent is very challenging.

This is why it is recommended to focus on your savings instead of spending. Expenses keep going up and down. Instead of relying on them, you should try to achieve your per-month saving goal so you know that the rest of the money you can spend anywhere. This is where reverse budgeting comes in.

What is reverse budgeting?

Reverse budgeting is nothing but a strategy that allows you to pay yourself first. It includes planning finances around saving goals, including emergency cushions, retirement savings, and the like.

Instead of focusing on your fixed and variable expenses, you will be emphasizing your savings. Reverse budgeting ensures priority on savings.

However, it does not need to be at the cost of your necessary expenses like housing and utilities. Here is how you can set up a reverse budget for yourself.

How to follow a reverse budgeting strategy

Here are some tips to follow reverse budgeting:

  • Identify the amount of money you should set toward your goals

First off, and you need to set goals. Jot down all goals you want to achieve. If you set the estimated date for achieving goals, you will be more encouraged to make it happen. Divide the goals in the short term and long term. It is easy to achieve short-term goals.

However, you will keep setting aside money for long-term goals as well. As you make progress in the achievement of your goals, you will feel complacent.

You can set your goals based on your priority and work out to achieve them accordingly. Take a look at the table below:

Priority Goals Estimated Cost Estimated Time
1 Emergency Cushion £3,000 November 2021
2 Car’s down payment £6.000 December 2022
3 Debt payment £10,000 March 2022
  • Evaluate how much you need to spend on essential expenses

Though reverse budgeting focuses on your savings, it does not mean that you will do it at the cost of your essential expenses. This is why it is crucial to analyze how much money you need to spend on other expenses. Make sure that you do proper calculations.

You can increase the size of savings later, but you must realize how much money you need to spare for other day-to-day activities at the outset. Of course, it is not possible to stash away at the cost of your regular expenses.

After spending on all of your essential expenses, the money you are left with is what you can save. Note that these essential expenses include recurring expenses like food, travel, and utility but the bill payments.

These expenses also include debt payments. If you have taken on debt like loans for bad credit with no guarantor, you must keep them at the top of your list. This is because failing to pay off debt will further take a toll on your finances.

  • Set up an automatic withdrawal

You will have to stick to your savings goal. Otherwise, there is no point in reverse budgeting. Since it means paying yourself first, you will have to stash away money as soon as you receive your monthly income.

You should link your payment account to a savings account and set up an automatic withdrawal. By doing so, you do not need to take the headache of transferring money every month to your account.

The benefit of automatic withdrawal is that you will, anyhow, be stuck to your goal. When you do not fall behind the saving goal, you will keep your savings increasing.

Pros and cons of reverse budgeting

Every kind of budgeting method has its own pros and cons. Here are the benefits and drawbacks of reverse budgeting:

  • It is easy to use. You have to pay yourself first so you can easily build your savings.
  • It does not require revamping your budget every time because the focus is not on tracking expenses.
  • It cannot work for you if you have a lot of debts like credit card bills benefit loans today, bad credit loans, and so forth.
  • This is not meant for those living paycheques to paycheques or who need a very strict budget.

The bottom line

The bottom line is that reverse budgeting focuses on your saving, not on your spending on each expense. If reverse budgeting suits your finances, you should never bother.