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The Fine Art of ‘Reverse Budgeting’

Written by Nickel - 31 Comments

Budgeting is an incredibly popular topic amongst the financially savvy. And yet… We don’t budget. Not in the traditional sense, anyway.

Rather, we practice what I like to call “reverse budgeting.”

Instead of setting up a detailed budget, complete with projections of how much we’re going to spend in particular categories, we have predetermined (and rather aggressive) savings goals. Beyond that, we mostly let the chips fall where they may. Of course, we also have a few other targets (like giving a prescribed percentage to charity). But, for the most part, as long as we’re hitting our savings targets, we don’t really worry about the details of where the rest of our money is going.

Admittedly, it’s a lot easier to make this system work now that we’re making decent money. But even back in the day, this is how we managed things and it worked great. I think that one key has been that we’ve never carried consumer debt. And of course, our savings goals were correspondingly lower when we were just getting started, so it was easier to hit our targets.

Could we do better if we were better about tracking where our money is going? Perhaps. But as many of you know, we have a big, busy family and we’re spread pretty thin time-wise. When you combine our approach with a generally frugal outlook on life, this system works quite well for us. Thus, the additional effort associated with budgeting per se just isn’t worth it to us.

What about you? Are you a budgeter?

This article is part of the MBN Group Writing Project on budgets.

Published on February 7th, 2008 - 31 Comments
Filed under: Miscellany

About the author: is the founder and editor-in-chief of this site. He's a thirty-something family man who has been writing about personal finance since 2005, and guess what? He's on Twitter!

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31 Responses to “The Fine Art of ‘Reverse Budgeting’”

  1. 1
    Frugal Bachelor Says:

    Yeah, this is pretty similar to how I “budget”. I set aside a fixed amount to spend every month, and save the rest, and I don’t plan or even care too much about how it is spent, as long as I don’t go over the fixed amount.

    Arguably, this approach may really only be workable for those with decent income and enough left over to save a meaningful chunk and still have fairly comfortable spending allocation. For lower earners where every dollar counts it is more necessary to set up detailed budget, IMHO.

  2. 2
    Sam Says:

    One of our 2008 goals is to finally come up with a 0 based budget. But, last year and so far this year we really use a spending plan. We pay all our fixed and semi fixed bills then we put money towards our 2008 savings goals and we live off (groceries, dining out, clothes, gifts, entertainment) off the remainder. When the money is gone we stop spending.

  3. 3
    CF Says:

    We also budget in a very similar way. Most of our investments are automated, so we “pay ourselves first”. I maintain a very simple profit and loss statement each month in Excel showing (net) income, expenses and investments. There are only a few variable entries each month and we have very few line items (we lump credit card, cash and checks in to one line). We have 3 young kids and are pretty frugal, so I’ve never seen the point (in our case) in having a detailed budget. The P&L statement just gives me a bird’s eye view of how we’re doing and whether adjustments are needed. I can look at an entire year with running totals on one sheet, with different tabs for prior years. Works well for us and requires little time.

  4. 4
    Saving Freak Says:

    The only problem I see with this system is you will never really know if you are overspending in a category. It may not matter in your individual cases since you are able to save a significant amount anyway. However many people have no idea what they are spending on food, entertainment, etc. Without doing a detailed budget they may never know and thus never change their problem spending.

  5. 5
    Toby Says:

    I’m with Saving Freak. I budget the exact way you describe. We have our savings/investments pulled out automatically and the rest this amorphous blob of cash that can be spent on groceries and gas or just as easily on designer towels for the guest bath.

    The problem with this, I am realizing is that the amorphous blob is bloated and I *could* be saving more of it if I tried. We are generally frugal, but somehow almost every month the blob is consumed.

    The reason I know we could do better is that recently, I’ve realized it is time to replace the computer. After discussing it with the wife we tightened our belts in January and squeezed $400 out of our spending in the past month to save towards the computer. That’s no small bit if change.

    Where is this $400 going every month? I need to analyze our spending to get a better picture but it’s clear that not all of the amorphous blob needs to be used up every month.

  6. 6
    Nicole Says:

    I have been using a budget for about a year and it works great for me. I always saved some money before that, so it wasn’t that I “needed” a budget to get out of debt or anything. But I just decided that I wanted to know where my money was going and figure out ways to cut more and save more. Using a budget gave me a reality check on how much I was spending on “frivolous” categories such as dining out, new clothes, etc. It also makes me conscious of every penny I spend. I am saving much more now and tracking my spending keeps me in line.

  7. 7
    Mr DebtBeater Says:

    We’re certainly trying to follow a budget very closely until we can get a handle on living frugal. The last 10 years we just didn’t do so well w/o a focused plan. Perhaps once we are sure we’ve completely adopted the lifestyle we could try a more relaxed approach with the same result, but I’m not betting on that for now.

  8. 8
    mbhunter Says:

    I found that doing it this way didn’t really work, but it may work better if you shunt a lot of the discretionary income (as in 30% or more) into savings. At least that’s the percentage I’d need to save in order to feel comfortable with your reverse budgeting.

    Do you track expenses at all?

  9. 9
    nickel Says:

    Toby: If you do things this way and feel as if you are overspending, then the answer is to increase your savings targets. Note that I said we have “aggressive” savings targets. As our income has increased, we have increased these both in terms of actual dollar amounts and in terms of percentages.

    mbhunter: Yes, I keep track of expenses in Quicken, but I rarely look at that aspect of the data.

    As for how much you’d have to be saving to feel comfortable doing it this way, ask yourself how much money you are setting aside with a detailed a budget. That’s a good place to start. Is the 30% number that you tossed out more than, less than, or the same as what you’re currently saving? If it’s more, then I’m curious to know why would you hold this approach to a higher standard than a regular budget.

  10. 10
    planner Says:

    The 30% number seems to be mbhunters “aggressive” goal, probably a few notches higher than mb is achieving.

    I use a method similar to yours. It works for us, like you, because we do have savings goals that we meet. One other thing that works well for me is reviewing summary totals each month. At that point it is close enough to dive in if needed, but quick enough to record every month to watch trends.

  11. 11
    planner Says:

    Actually I also wrote a post about my thoughts on this not long ago. It is here if you care to read it.

  12. 12
    ChristianPF Says:

    I work aspects of this into my budget… As each hour of my time costs more and more, it becomes a better method of budgeting rather than investing hours on hours to save $15 a month… Good post…

  13. 13
    Danielle Says:

    I think my answer to this is no, I don’t budget now, or plan to do a detailed budget in the future.

    After working on debt reduction I plan to try the 60%/40% budget that I am sure many of you have heard of. A few tweaks for my personal preference of saving a bit more than 10% for retirement and others.

    I know this is not a budget in the true sense of the word, but I can check my spending allocation for the 60% periodically by looking at a sampling of the last month, and as others have pointed out, my time is worth money as well, so I don’t want to spend it budgeting!

    Link to the 60/40 budget basics on MSN Money who as far as I can tell were the first people to post this budget: link

  14. 14
    Ken Mott Says:

    My wife and I are trying to save 3k per month after taxes in taxable accounts. Pre tax we are doing 20% plus employer match and then funding IRAs. Also i put 8% into employee stock purchase plan which is basically my new car/fun money for the future.

  15. 15
    James Says:

    My wife and I were using 0 based budgeting but found that the maintence of inputting all the data became too much of a drain. (We live in NZ and don’t have sites like Mint yet)

    We switched to what I now realize is a reverse-budget where we direct 20% of our combined after-tax income to a seperate savings account.

    What I’m wondering is how everyone handles expenditures that exceed monthly pay? Let’s say you want to buy a car and put $10,000 down, do you draw from savings, or try and conserve the “left over” until you’re at that mark (which isn’t always feasible as sometimes you need it sooner than later).

    It seems like the more aggressive the savings plan the more likely you’ll have to go into it to cover this capital expenditures…

    Anyone have any strategies?

  16. 16
    Josh Says:

    I had never really been able to get a grasp on my finances. To the point of never having savings and living paycheck to paycheck. But when I set aside a specific percentage each month (10% of what I grossed) in a fairly accessible but not too easily accessible money market account, I began living within my means and getting a nice little goose egg while getting better at paying off debt. I now have no more credit card debt and usually end up with excess in my checking account each month. I feel like a commercial, but reverse budgeting has really worked for me. The biggest thing it helped me do was live cheaper, which ends up turning into living nicer without the burden of debt. Do it.

  17. 17
    Finally Frugal Says:

    Unfortunately, I don’t have enough wiggle room after I pay all bills (including $$ to a 403b) to be able to save (aggressively or otherwise)!
    After my cc debt is gone (by this October, I hope) I’ll be able to add a little flexibility in terms of saving/investing.

    This month I’m experimenting with a zero based budget (you can see this on my blog), so we’ll see how that goes. I’ve found that I really do need the structure of a budget (even if I don’t follow it exactly), otherwise my money runs through my fingers like water. . . .

  18. 18
    Josh Says:

    In response to James.

    Something I started doing with my savings, which is partially influenced by the principles taught in the book The Richest Man in Babylon, was having two savings accounts. One where 10% of my income went to serve the purpose of only making more money. This account has not been used to help buy a car or a new piece of furniture (as much as I have wanted it to). The second savings account I also put 10% in but with the purpose of saving up for cars, furniture, vacations, or anything else my heart desires. So far this has worked great for us (we don’t feel guilty about spending the money), but takes some easing into. But if you’re already saving 20% it shouldn’t be too hard to adopt.

  19. 19
    mbhunter Says:

    Planner, you’re correct.

    Nickel, good question. Judging from what’s happened to our finances the past few years, if I’m going to spend organically, I’m going to need to get a lot more of my income out of my reach. I tend to spend more without a detailed budget than with one (even if it’s just one category of spending), so overcompensating with the saving offsets this extra spending.

  20. 20
    Bryan Says:

    I have pondered the this idea, but with a twist. I have the money that I can spend and leave it the bank that my check is deposited into and then I put the rest of the money in an online only account that I don’t have a debit card to or checks.

    With this second account I can pay my bills online. Most websites don’t require a card just a routing number so this seems like it would work, and for those places that do need a card number then you can leave that amount in the first account and pay it quickly.

    I would just need to stop being lazy and do it. It looks good on paper at least. What do you think.

  21. 21
    megiex Says:

    Living below one’s means is KEY to this program.

    I started on this method of budgeting with my first full time job…that paid next to nothing. It has worked FABIOUSLY for me but getting started did require some rough calculations to determine what % of my salary was a feasible amount to save. My savings account is treaded like a nice second landlord…once I pay the rent I never see it again. (I say nice because some times my savings account lets me “postpone” payment if something drastic came up)

    The best part of this program is now the only time I have to look at where I spend my money is when I want to buy something price and need squeeze some dollars out of my
    “consumable cash” . Instead of taking extra cash out of my own pocket, I take it out of the grocery store’s, or the cable company’s…you have to get creative but some times you want the new designer swimsuit more then the $30 weekly night out with girls.

    It does work.

  22. 22
    MITBeta Says:

    I was just reviewing my budget for the month, as well as checking to see how closely I came to meeting my budget for the last two months. After I ran all the numbers on my savings goals, plus some of the money that I “owed” to myself, I still ended up with a surplus of over $10,000 (and this doesn’t count our emergency fund).

    So I’m wondering: does it really matter if I met my budget, as long as my savings and investing goal are met?

    My budget is set up to be very fluid. I review it at the beginning of the month and divert any non-regular, large expenses from my extra payments to any debts. I also save monthly for annual expenses, such as insurance (home, auto, life x2, umbrella), Christmas, taxes, etc.

  23. 23
    Dogberry Says:

    I really like the idea of the “reverse” budget. Although we have ‘targets’ for many categories, I found I was always borrowing from one category to pay for another, all balancing so I would not have to touch the amount I wanted to save.

  24. 24
    livingalmostlarge Says:

    Absolutely reverse budget. It’s how we decided on our house, etc. We reverse budgeted our 401k, Roth IRAs, taxes, etc. This way we prioritized what was important and then picked a house based on what we thought we could afford.

    But I also track our spending to see how we’re doing. And while it’s not fantastic, we don’t overspend. I can see definite areas we could save more, but I question if it’s really worth it.

  25. 25
    "Mo" Money Says:

    I find the concept of reverse budgeting enlightening and though provoking. I can see where the zero based budget is time consuming and you really must be into looking over the numbers all the time to keep up with that concept. But the to use the reverse budgeting would free up the time spent on the zero based budget.

  26. 26
    conedude13 Says:

    I do a different sort of reverse budgeting. My wife and I both work full time, I get paid every week and she gets paid every other week. So what I have come up with is a complete bass ackwards way of budgeting. I pay all the bills that are due either when it gets close to their due dates or if it happens to work out for us to pay the bill collector that week. We do have the usual credit card debt, but we pay the minimum payments, hold on I know about snowballing and snowflaking and all that, I’ll get to that in a min.

    After all is paid up for the week, I work it so that i leave ourselves with between $100-$200 for our usual weekly spending. Then, I take what is left over from out “allowance” and throw the extra at the credit cards.

    I do have the CC’s organized by order of highest APR to lowest and we are just starting this getting out of debt thing, so i don’t feel that any savings is necessary right now. it is on the goals list, i just want to knock down some debt first, which is also the first step in getting out of debt for us. Cheers!

  27. 27
    jasmine Says:

    i’m very happy to hear about this type of budgeting, i have never budgeted before and since i have become a stay at home mom with only my husband working, i figured we needed to be more money management savvy, especially with savings, he gets paid well, but we are constantly playing catch up with our bills, never pay them in time. so most of the money he brings home is just for paying the bills we owe from the previous month, i have figured out how much we need a wk to save for the month to be able to send them out for the 1st. i just don’t know where to begin, i will be receiving my taxes soon, hoping that through that cash we will be able to get everything paid on time (everytime), so how do i start my reverse budgeting after all this is set and done, how much should i take out of the (extra) money after i take out what we need for the wk to put away for the bills???

  28. 28
    Furball Says:

    I’m surprised no one has mentioned this article:

    http://articles.moneycentral.m.....ution.aspx

    The 60% solution is a great starter article on this topic. I use a variant of this. I do agree that it is better when you have more income. But then again, I have used this method since I was just out of college eating Ramen everyday. I feel I get 99% of the benefits of detailed budgeting with 0% of the hassle.

  29. 29
    Matt Wegner Says:

    The most effective budgeting method I’ve found (and I teach budgeting for a living) is the zero based budget. I see some posts on here of folks having trouble with maintaining the zero based budget. I have some cash flow planning forms on my website under the free resources tab that may be useful for you guys. These are the forms we use in our home. They have columns to list your plan, track your actual spending, and check the % of take home pay for each category.

    Hope that helps!

  30. 30
    Matt Wegner Says:

    @Jerry,

    I have yet to fund budgeting software that’s effective. The programs try to do too much thinking for you and unless you take the time to categorize every expense, you’re not going to get much out of it. Even then, the software programs just give you a general projection for the year, not a specific spending plan for each month. It’s important to do a new budget each month because every month is unique and has different income and expenses.

    Here’s a link to the free budgeting form I mentioned in my post above. There are more free resources there on my site at financialexcellence.net but this form is the foundation for everything else. I’ve used this form for years and it has helped our family stay accountable to our own spending plan each month.

  31. 31
    Steve Says:

    My wife and I do this. We have enough automatically transferred to various savings, such that if we spent every penny that makes it into our checking account, we would still be making good progress. We rarely spend all the money in our checking account either – every few months I notice a surplus has built up and transfer a little extra to savings.

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