This week, we are revisiting our discussions on budgeting. We’ve talked in previous week’s about how I don’t budget and I personally practice reverse budgeting. In this week’s video, we are going to run through a comparison of traditional budgeting and contrast it with reverse budgeting.
So let’s start with what traditional budgeting actually is. Traditional budgeting in essence is developing a good understanding of your spending habits. This ends up getting very granular and you’ll often see people divide expenses into multiple categories with the intention of not exceeding the sometimes arbitrary values they restrict themselves to.
For example, in the traditional budgeting system a household may have $4,000 of monthly spending money. They would then break this down into categories and allot specific amounts to each. $1,200 to the mortgage, $400 goes to utilities, $200 to insurance, $400 goes to groceries, $200 limit on going out, etc… etc…
The household then tracks their spending against these categories monthly. This can be very effective for people with bad spending habits and or not a lot of monthly surplus. Being able to see exactly where your money is going and setting limits for yourself can be just what you need to alleviate some of your financial stress.
I’m not totally in love with this method for myself, nor do I often recommend it, however, that’s not to say that it’s not the best strategy for you. What I find is that most people burn out budgeting rather quickly. People with troubled spending habits or limited surplus usually won’t make the time to be their own personal accountant on a monthly basis. They could consider using software to help smooth this out and make it more efficient, but it still can be time consuming.
For those that don’t have a spending problem, or have large surplus monthly, this method can feel restrictive and unnecessarily so.
Enter reverse budgeting. In light of everything I’ve just shared about traditional budgeting, reverse budgeting ironically starts with traditional budgeting. You look at your categorical spend, tally up your total expenses, understand your fixed expenses, and then measure your new surplus from that.
Let’s assume I do this and I find out my monthly surplus. The next step is to automate my spending. A portion of this surplus goes to my emergency fund, another portion pays my fixed expenses and then I’m free to spend the rest how I see fit. No reason to track individual categories monthly – I’ve already automated most of them, and I’m meeting my savings goals.
Reverse budgeting in essence ends up saying: live your life, but live within your means. Don’t outspend your monthly surplus, but enjoy the freedom to spend on what you want!
This was a quick post and video, I hope you found some value in it. As always, I appreciate you reading and can’t wait to have you back next time!