Financial Planning

Why I Hate Budgeting and A Better Solution

Too much of the personal finance content that exists is centered around cutting expenses and budgeting. I honestly don’t think budgeting works for the vast majority of people and here’s why. 

Budgeting is Cumbersome and Restrictive

Even though it is both of those things, budgeting is a necessary evil at the beginning. You have to do it for a short period of time to at least understand your spending habits. It’s really hard to manage your money if you have no clue where it is going and how much you are spending. But after the first few months, I don’t think actively tracking and spending the same amount on the same topics is a great strategy.

Why? 

Because it is so restricting and leads to people eventually burning out and giving up on budgeting. 

So what is a better option?

Reverse Budgeting Is A Better Option

Many of you have probably heard of reverse budgeting, but what really is it? This is where you take care of your goals first (debt, investments, savings, etc) and spend what’s left. To do this, you have to track your expenses for the first few months so you know how much your monthly spending typically is. Once you know that, you then can save and automate first based on your goals. 

Let’s say you make $10,000 a month and find out that you spend $3,000 on fixed expenses and $3,000 on variable expenses for a total of $6,000 a month.  

You would then automate the difference, that $4,000 to your goals. This could be $500 to your travel fund, $500 to housing projects fund, $1,000 to ROTH IRA’s, $1,500 to your taxable account, and $500 to crypto, etc. You can make it whatever you need it to be for your goals. The key here is that you automate these goals first. 

So every month you would move over that $4,000 right away to each goal and then be left to live off the remaining $6,000. Your goal is simply to spend that $6,000 however you like. One month you could spend half your variable expenses on shopping, then the next all on going out and entertainment. It doesn’t really matter, you just want to spend a similar dollar amount every month and find a balance.

This strategy should be freeing! Plus, it eliminates budgeting because you know and see you have $6,000 to spend and your job is to spend it how you would like since savings are already done.

I have found that reverse budgeting gives more structure, leads to more consistent savings, and also feels way less restrictive which is why almost every single one of my clients follows this method.

In the beginning, it takes time to understand your spending enough to get started. You will need to use budgeting software to track spending so you can figure out how much to automate, but once it is all set up and running, managing your money becomes easier. Just give it a try. 

Reverse Budgeting Best Practices

  1. When you switch to reverse budgeting, you should use some budgeting software like mint, you need a budget, tiller, etc. to check every once in a while and make sure your spending is aligned with what matters most to you. 
  2. Leave some sort of extra money in your checking account as a buffer. Could be $500. Could be ½ months income. Could be a full month’s income. Just understand yourself and if you will spend extra by seeing more, then hold onto less. If not, hold onto a little bit more as a cushion. 
  3. This works well until you get a new income, new expenses, etc. So you have to continually monitor and change the savings as your life changes. Make sure as your income goes up, so does your monthly savings. 
  4. You also have to ensure your savings are enough for your goals. If they aren’t you have to increase savings or decrease your goals. 

Give this a try for a few months and let me know how it goes!

And as always, if you would like a partner to help you manage your money, plan for your goals, reverse budget, etc. I am always here. Just book your first free meeting here!

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