What is reverse budgeting, and is it right for you?

We’ve all been there: It’s the end of the month, and we’re not sure where our money went. And suddenly, that savings goal — whether it’s for building an emergency fund or saving for retirement — we set up for ourselves will have to wait until the next pay period. And so the cycle repeats itself.

While we all know that making and keeping a budget is an essential part of managing your finances, we also know that finding the right budgeting system can take some trial and error. If you find yourself struggling to keep your finances on track, then reverse budgeting might be the right budgeting strategy for you. Here’s what it is and who might benefit from it.

What is reverse budgeting?

Reverse budgeting puts your savings goal front and center: You move a chunk of your money to your savings account before you get a chance to spend it. It’s also known as the “pay yourself first” approach, because you put money in your savings as soon as you get paid. Once you’ve met your monthly savings goal, you’re free to spend the rest of your money on regular bills and expenses, knowing that you can spend what’s left over guilt-free.

For example, let’s say you have a monthly income of $4,000 after taxes and your monthly savings goal is $500. In that case, you would move $500 into your savings account, IRA account, or preferred savings tool as soon as you get your paycheck. (Or $250 per paycheck if you’re paid bi-weekly.) Now, your monthly take-home is $3,500 instead of $4,000.

If you can cover your monthly expenses after you’ve “paid yourself,” then it really doesn’t matter how — or if — you budget after the fact. The most important thing is hitting that savings goal as soon as possible so you don’t have to worry about it for the rest of the month.

What are some pros and cons of reverse budgeting?

Here are some of the biggest advantages and disadvantages of this money management strategy.

Pros

• Makes it easy to meet your savings goals: By meeting your savings goal as soon as you get your paycheck, you reduce the risk of accidentally spending the money you originally intended to save.
• Doesn’t require constant monitoring: If you don’t like keeping track of your individual expenses, this budgeting method lets you take a more lax approach to your monthly budget. By front-loading your savings, you can use the remaining balance to spend as you see fit. No need to stick to rigid spending categories if you’ve already met your savings goal.
• Can be easily automated: Many banks let you set up automated transfers between your checking and savings accounts. So, if you get paid on the first of every month, you can set up an automated transfer for the second of every month. That way, you’ll know you’re contributing to your financial goals without having to lift a finger.
• Guilt-free spending: Your monthly budget should bring you joy, not stress. Reverse budgeting can let you relax and spend your money freely once you’ve committed your goal amount to your savings.

Cons

• Not ideal if you have a lot of debt: Saving money should always be a priority, but paying off debt can be more important if you have a lot of debt or have any debt with a high interest rate. For example, lowering your credit card debt can help you attain financial freedom faster than saving because it’ll help you reduce the total amount of interest you’ll pay.
• Can enable overspending: Because reverse budgeting emphasizes saving (rather than how you’re spending money), you run the risk of overspending simply because you’re not tracking things closely. In turn, you might have to dip into your savings account to cover the gap. This defeats the entire purpose behind reverse budgeting, so you might benefit from a more strict budgeting method like envelope budgeting.
• Unexpected expenses can be challenging: Saving a certain amount of money can sound like a good idea until an unexpected event throws a wrench in your plans. And again, you might find yourself withdrawing from your savings account (or borrowing money) to cover them.
• Not suitable for people with variable income: A reverse budgeting plan depends on having a fixed income and, to a certain extent, fixed expenses. If you’re a freelancer, contractor, or business owner with variable income, then you might not be able to tell how much money you’re able to save in any given month.

Who should consider reverse budgeting?

Reverse budgeting isn’t for everyone. If you’re still wondering whether this is the right approach for you, consider if you fall into any of the following categories:

• You have a regular income: Reverse budgeting works best when you have a good idea of how much money you can count on each month. Otherwise, your monthly savings goal may turn out to be over- or under-ambitious.
• Debt-free individuals: Repaying debt early should be the main priority of people with high-interest debt. If you’ve already paid all or most of your debt, then you may be in a prime position to prioritize your savings with reverse budgeting.
• Those who have a hard time sticking to a budget: It can be hard to stick to a budget, no matter how meticulously planned it is. If you find yourself running out of money before you get a chance to save any of it, then reverse budgeting could help you avoid this by putting some money away before you can spend it.
• People with specific saving goals: This can be a great budgeting strategy for those with clear financial goals. For example, you may be looking to save for a down payment on your first home. In that case, you’ll want to give yourself a timeframe (say, one or two years) and divide the goal amount by the total number of months. Since theaverage mortgage down payment in 2023 is just above $24,000, you could use reverse budgeting to save $1,000 each month and meet your goal in two years.

The best financial tools are the ones you can stick to

There are so many different money management techniques out there, and reverse budgeting is just one of them. If you have a regular income, not a lot of debt, and tend to have a hard time sticking to a budget, then reverse budgeting may be the right strategy for you. Otherwise, you may benefit from other budgeting techniques, like zero-based budgeting or even a YNAB budget.

Whatever the case may be, we can all benefit from budgeting a few dollars each month for a life insurance policy. Buying a term insurance policy is more affordable and accessible than ever, with policies that can fit any budget. Start with a free online life insurance quote, and begin your journey toward providing financial protection for your loved ones.