Reverse Budgeting

Reverse budgeting makes savings the top priority.

Reverse budgeting makes savings the top priority.

Budgeting requires making specific financial choices. A budget is a financial game plan that you make with your spouse to maximize your mutual financial resources. Your budget should consider your priorities and define your boundaries. By adhering to a budget and controlling your spending now, you and your spouse will have the freedom do the things you have always wanted to do later. Reverse budgeting is a trickle-down concept in which your save first and spend what's left.

Savings and Investments

Many people budget by tallying up their monthly expenses and subtracting that amount from their monthly earnings. As the name implies, reverse budgeting involves the opposite approach. With a reverse budget, you first set aside a predetermined amount of money from your paycheck for your savings and investment accounts, such as IRAs and 401(k)s. According to Prudential Financial Planning, the average amount to save in a reverse budget is around 10 percent of your monthly take-home pay and half to all of your bonuses, raises and tax refunds.

Essential Expenses

The secondary priorities in reverse budgeting are your essential expenses. Essential expenses vary according to family but generally include, housing, insurance, utilities, transportation and food. Prioritize your most necessary expenses and pay those items first. Reverse budgeting is less concerned about tracking expenses as it is with ensuring that you stick to a definite savings plan while living within your means and curtailing your expenses.

Discretionary Money

The third priority in reverse budgeting is your discretionary cash. This includes whatever money is left after you have made payments to your savings and investment accounts and paid your primary debts. Discretionary cash can be used for your recreation and other non-essential items. Discretionary money is considered "petty cash" and can be used for personal items such as a cup of coffee, a pair of shoes or night on the town, for example.

Zero Debt Theory

The underlying concept of reverse budgeting is to prioritize savings and eliminate debt. According to the Million Dollar Journey website, you and your spouse should use cash or your debit cards exclusively to pay your debts and avoid credit entirely. The reverse-budgeting method teaches you live within your means. This method is simpler to use than a budget that demands a detailed account of your spending habits.


About the Author

Tracy Stefan began writing professionally in 2007, with work appearing on various websites. She earned a Bachelor of Arts in creative writing and performing arts from the Evergreen State College. Stefan is also a graduate of Dell'Arte.

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