What Is a Reverse Budget and How to Use One

From Everything Finance

What Is a Reverse Budget and How to Use One is a post originally published on: Everything Finance – Everything Finance – Its all about Money!

I’m sure you already know the importance of budgeting but may not make it any easier. There are so many different budgeting methods out there that can be helpful. But, what if you’ve been trying to budget your money for a while now and keep coming up short. If you need a fresh start and need to shake things up when it comes to managing your money, you can always try a reverse budget.

A reverse budget basically flips traditional budgeting on its head. It’s more flexible and forgiving than a line-by-line budget and can also help you finally regain control of your money while working toward important financial goals. Here’s how it works and how to start using one.

What Is a Reverse Budget?

A reverse budget basically inverts the traditional line-item budget in every way. Let’s think about how we were taught to budget initially. Maybe you were told to list your expenses and income then organize all your monthly spending into neat little categories. 

The key with traditional budgeting is to keep your spending within a particular limit. Then, if there’s anything left over at the end of the month, it can go to savings or extra debt payment.

The problem with this type of budgeting is that it assumes nothing in life will ever change or go wrong. What do you do if you happen to spend an extra $50 on groceries or the price of gas goes up and it increases your spending? In order for a budget to truly work, it needs to be flexible and reflect your real life.

With reverse budgeting, you start by prioritizing your financial goals, covering your basic needs, then using what’s left to spend on your heart’s desire. Well, it’s not as simple as that. There are certain steps involved as well but it’s a very easy concept to grasp. Here’s what you need to do.

Start By Identifying Your Main Financial Goals

It’s important to realize that your budget is a tool. You are planning your spending and managing your money so you can have enough to do what you want you truly want to do. So what are those goals or bigger intentions for your money?

Instead of looking at your budget as a way to cover your bills, think of it as a tool to help you go from merely surviving to thrive financially.

So, if you want to save $400 per month for a future purchase, vacation, or side business ideas, clearly spell that out in your budget. Then, pay yourself first each month by prioritizing that goal before you get to the other expenses.

Add Up Your Needs and Subtract From Your Income

Of course, your budget should help you stay current on all your bills and provide a roof over your head. Once you have your savings goal and priority spending established, add up the cost of all your needs and basic expenses. 

The key is to make sure you have money left over after your needs are met. If money is tight and you’re living paycheck to paycheck, your first step should be trying to see where you can cut existing expenses or earn more.

One of the easiest ways to earn extra money quickly is to pick up hours at your current job if it’s an option. You’re already working there and could earn a decent amount with overtime. This money will help you catch up on bills and get everything current.

RELATED: Can You Save Money on a Tight Budget

Calculate How Much is Left Over For Discretionary Spending

Now, it’s time for the fun part. I tried to budget for things like entertainment, dining out and outings with friends using a fixed line-item amount. It’s never worked for me.

Instead, I find it a lot more helpful to budget for my essential spending and goals first. Then, spends what’s left on fun, food, or whatever I want. 

Here’s how that might look. Let’s say you bring home $4,000 every month. Your basic bills and expenses are $2,200 per month. You’re also using $600 to go toward your goals. This leaves you with $1,200 leftover each month to spend on everything else. This breaks down to $300 per week or $42 per day. 

It’s up to you to decide how to spend that money and you may use some of it to fund small unexpected costs or hiccups that life might throw your way during the month.

RELATED: 6 Simple Ways to Save Money While Dining Out

Track and Readjust as Needed

With the reverse budget, you still want to track your progress but you don’t have to be so precise. You’ll be meeting your basic needs and prioritizing your other goals. However, as your situation changes, you may want to adjust your budget in response. 

Let’s say you move to a more expensive home or want to start saving for a new car. You may need to lower your discretionary spending as a result. However, reverse budgeting doesn’t require you to get too caught up in spending or saving the perfect amount 24/7. 

Summary – Could Reverse Budgeting Work For You?

Reverse budgeting helps you prioritize your spending to cover what’s important without being too strict or worried about overspending. It releases you from the burden of having to track and optimize every little penny and feel guilty whenever you overspend or life happens. 

If you think reverse budgeting might work for you, make sure you are in a place where you can spend less than you earn. That way, there is something left over for discretionary spending after you spend on your needs. Give reverse budgeting a try for 30 days and see how you like it.

What Is a Reverse Budget and How to Use One is a post originally published on: Everything Finance – Everything Finance – Its all about Money!

This post was published on Everything Finance