How to Create and Stick With a Successful Reverse Budget Plan

A reverse budget plan is a powerful tool that can help individuals achieve their financial goals and create long-term wealth.

An AI generated image of a cat dressed like an accountant and thinking about reverse budgets.
A cat working on a reverse budget as generated by the Dall-e 2 AI.

A reverse budget plan is a powerful tool that can help individuals achieve their financial goals and create long-term wealth.

Reversing the traditional budgeting process by starting with a savings goal and working backward to determine the necessary monthly income and expenses, reverse budgeting allows individuals to prioritize the important spending over the frivolous. Executed well, reverse budgeting can help an individual or family become financially secure —as much as such a thing is possible.

Paying Yourself First

Reverse budgeting is sometimes called "paying yourself first" because it makes your own goals the top priority.

So it should not be surprising that the reverse budget process begins with setting a goal. This goal should be both realistic and achievable in the time frame given.

Once a goal has been set, financial commitments such as bills need to be identified and factored into the reverse budget plan.

After factoring in all financial commitments, reverse budgeting allows individuals to determine the allocation of income necessary to meet their savings goals. This step is critical — it will allow individuals to make sound decisions on how much they need to save each month and what spending can be reduced or eliminated.

Once a reverse budget plan has been created and implemented, it is important to stick with it. Consistency and commitment are key in reverse budgeting, so keep track of progress and adjust spending habits as needed to reach financial goals.

By reverse budgeting, individuals can create a strong financial foundation that will provide security now and into the future. Start implementing reverse budgeting today to begin enjoying the benefits of a successful reverse budget plan.

Here is an example. Imagine Juan wants to reduce his credit card debt to zero. He owes $1,200 now, so he set a goal of paying $250 per month. Juan get's paid every other week, so when a pay check comes in, the very first thing he does is make a $125 payment to the credit card company. From there he takes care of the commitments, etc. as described above.

Similarly, imagine that a fellow named Kyle wants to stay on top of his tithing. He sets giving ten percent of his total income to his church. The reverse budgeting method let's him ensure he pays his tithe.

Setting Up a Reverse Budget

When it comes to the act of setting up a reverse budget, the steps might look like this.

  • Determine your monthly income: This is the amount of money you bring in each month from all sources, including your salary, any side hustles, and any other income streams.
  • Set your savings goal: Determine how much you want to save each month and how much you want to have in your savings account at the end of the month.
  • Calculate your fixed expenses: These are the expenses that are the same amount each month, such as rent, utilities, and insurance.
  • Calculate your variable expenses: These are expenses that can change from month to month, such as groceries, gas, and entertainment.
  • Subtract your fixed and variable expenses from your monthly income: This will give you an estimate of how much money you have left over each month.
  • Subtract your savings goal from the amount left over: This will give you an estimate of how much money you have left over after saving.
  • Track your spending: Keep track of all of your expenses throughout the month, making sure to stick to the budget you've set for yourself.
  • Adjust as needed: If you find that you're consistently over or under budget, adjust your expenses accordingly.
  • Review and Reflect: Review your expenses at the end of the month and reflect on what worked and what didn't.

Obviously, the specific steps and the details of each step will change relative to an individual's situation.

Automation & Tracking

At You, Money, Happiness, we are big fans of automatic savings plans. Set up your savings goal, automate it, and just like that your reverse budget is starting to work.

Short of automation —or even with it— you are going to want some way to track your reverse budget. This may be as simple as a spreadsheet. Here is an example of what just a sheet might look like.

Income Amount
Other income
Total Income
Savings Monthly savings goal
Fixed expenses
Other fixed expenses
Variable expenses
Other variable expenses
Total Expenses
Money Left Over

Someone could add more columns or rows, or even add more sheets to the spreadsheet to track spending over time, and also to have a year-over-year comparison.

Formulas in the spreadsheet may be used to automatically calculate the total income, total expenses, and money left over, so it does not have to do the calculations manually.

And, of course, there are loads of banking and financial tracking software that can help with a reverse budget.

Reverse budgeting and Kakeibo share many similarities. Both are based on the idea of setting financial goals and using this as a basis to reverse or reverse engineer a budget in order to reach those goals.

Results of a six-month Kakeibo experiment.

The main difference between reverse budgeting and Kakeibo is the approach used to achieve the goal. Reverse budgeting is more focused on saving money by cutting back on expenses, whereas Kakeibo emphasizes mindful spending within a certain budget.

Kakeibo was developed in Japan as a way to manage money, while reverse budgeting has become popular in other countries due to its focus on savings rather than spending.

In reverse budgeting, individuals start with their savings goal and then work backward to determine how much they need to save each month to reach that goal. On the other hand, Kakeibo follows similar principles but places more emphasis on knowing your limits when it comes to spending. It encourages individuals to create specific budgets for different areas of life such as leisure, food, housing, etc. while being mindful of how much they are actually able to spend in each area.

Also, reverse budgeting takes into account all expenses including fixed expenses (rent or mortgage payments) and variable expenses (grocery shopping or entertainment). Meanwhile, Kakeibo breaks down these expenses further into four categories: needs (necessities such as rent or mortgage payments), wants (non-essentials such as dining out), gifts (items you buy for other people), and savings (money set aside for future investments).

Learn the basics of Kakeibo in this six-minute video.

Although both reverse budgeting and Kakeibo have their advantages, one may be better suited for an individual depending on their lifestyle and financial goals. For example, reverse budgeters may be more comfortable with cutting back on spending whereas Kakeibos might find it easier to stick with mindful spending within predetermined limits. Ultimately both methods can help individuals achieve financial goals but which one works best really depends on the individual’s needs and preferences when it comes to personal finances.

The Advantages of a Reverse Budget

The reverse budgeting plan offers numerous advantages for individuals looking to secure their financial future. According to recent studies, reverse budgeting leads to greater savings and improved long-term investment strategies over traditional budgeting plans.

In reverse budgeting, individuals begin with a goal and work backward to determine what actions need to be taken in order to reach that goal. This allows individuals to prioritize saving and investing over spending, which can help them become more financially secure.

By reverse budgeting, individuals can gain better insight into their current financial situation and learn how much they can afford to save each month while still meeting their daily needs. It also helps create an overall financial plan which includes setting aside money for retirement or other long-term goals.

Reverse budgeting also promotes fiscal responsibility by forcing individuals to consider the potential costs of every action before deciding whether or not it is worth making. By taking into account all of the necessary expenses and creating a balanced spending plan accordingly, reverse budgeters are able to make informed decisions on where their money should go.

Finally, reverse budgeting makes it easier for individuals to stick with their plans because it begins with a goal – one that they have thoughtfully created themselves – rather than simply dictating how much money they need left after bills are paid each month. This gives them an incentive and motivation to reach the end result, which typically works out better than the fixed-amount approach of traditional budgets.

All in all, reverse budgeting provides an effective way for individuals looking to save more money and become financially secure. With its goal-oriented approach and inherent fiscal discipline, reverse budgets offer numerous advantages that allow anyone – regardless of income level – take control of their financial future.

The Disadvantages of a Reverse Budget

In reverse budgeting, there are certain drawbacks that individuals should consider before deciding if this is the right plan for them. For example, reverse budgeting requires a higher level of discipline and commitment to reach goals. As such, individuals may find it difficult to stick with reverse budgeting if they don’t have the motivation to make changes in their spending habits.

In addition, reverse budgeting can be more time-consuming than other types of budgeting plans. Individuals need to factor in all their expenses and goals when creating a reverse budget plan so that it is realistic and achievable. This can be a lengthy process that requires time and effort on the part of the individual.

Furthermore, reverse budgeting does not always account for unexpected costs or financial surprises that may arise over time. Since reverse budgets are based on an individual’s current situation and goals, they often do not adjust to changing circumstances as quickly as traditional budgets do.

Finally, reverse budgeting can be difficult for individuals who are used to living paycheck-to-paycheck and may find it hard to allocate money for savings each month without drastically cutting back on other expenses. It also puts pressure on individuals by forcing them to think about the future and how their actions today will affect their financial standing down the line.

Overall, reverse budgeting provides numerous advantages but there are drawbacks that should be taken into consideration before jumping into this type of approach. Though reverse budgeters need a higher level of discipline and commitment to succeed, those who follow through often find themselves in better financial positions than those who use traditional methods of saving and investing.

The Reverse Budget

In summary, reverse budgeting can be an effective method for achieving financial goals.  

The real benefit with this method may be that it provides a way of thinking about family budgeting that is focused on what is most important rather than on what is left over.