Let me start by saying, I hate the idea of budgeting. If you’ve tried and failed to budget before, don’t let that put you off to a reverse budget!
Perhaps you’re already budgeting successfully? I think you’ll find a reverse budget makes more sense and is more intuitive to use!
So what’s a “reverse budget” then?
It’s probably best to describe what it is and how it works by explaining how I came up with my current system.
The problem
It’s been nearly 20 years since I got my first job out of college. I was making decent money as a software developer and bringing home a little over $3K/month. My girlfriend (now wife) and I started renting a basement apartment for $500/mo. I opted to buy an expensive car as my gift to myself for making it. My car payment was a whopping $680/mo on a 5-year loan!
While my salary allowed me to afford that, I clearly wasn’t thinking long term at that point…
Before that, I had been an intern making $15/hr living at home with virtually no expenses. I was used to having the money to buy what I wanted/needed upfront. Now I was being paid weekly, and my paycheck would have been around $690/wk. That was just barely over my $680/mo car payment… or $500/mo rent. The numbers worked okay monthly ($3000 – $500 – $680 = $1820 leftover), but having enough money on any given week to pay my car loan or rent meant I’d need to… <<gulp>> budget.
In other words, I’d need to ensure my spending on other categories was limited, and I’d sort of magically have enough money at the end of the month. I hated the concept.
The solution
I have to give major props to my wife (then g/f) for this. I explained the problem I was having making my weekly paycheck match my assorted monthly bills and their time frames. She said, “I have an idea” and disappeared off into another room. She came back a short time later with her largest sketch book (and as she was in college at the time to become an animator she had tons of sketch books in various shapes and sizes).
What she did next, I wish I still had, as I used that exact paper for years until I eventually digitized the concept.
How to create a bucket budget grid
She drew a grid – a simple grid of 3 rows and probably 6 columns.
Then she said, “How much is the car payment weekly?” I Did some quick math: 680/4 and replied, “170”.
In the top left box, she wrote “Car: $170/wk”
Then she asked, “weekly rent?” to which I responded 500/4: “$125/wk”, and she wrote “Rent: 125/wk” into the next box – column 2.
We proceeded this way until we had written down all of our fixed monthly expenses (insurance, student loans, cell phones, housing, utilities, car).
Then wrote down our mandatory expenses and made some guesses about how much we spent on these categories (dental, food/dining, car maintenance, vet bills for our pets, and clothing).
I looked at what was left of my income and put some toward vacation and some toward investing. I left the rest of the money unallocated to spend how I wanted each week. This amount didn’t get written down.
How to use the bucket budget grid
Once we were done filling in the grid I asked my future wife, “So how do I actually use this?” “Simple,” she said, “first, we add up all of the weekly amounts on the paper”.
This came out to around $650. Since I had an income of about $690, I had $40 to play with each week. Because that was after food, gas, and everything else I could think of at that moment, $40/wk was quite a bit of free money!
Then my wife explained the last bit, “You have a checking account and a savings account right?”, she inquired. “Yes”, I reassured her.
“Every week when you get paid, put a check mark in each box. When there are 4 check marks something is probably due. If nothing is due, move the full amount, $650, into savings. But if something is due, leave that amount in checking. If two bills are due at the same time, take the money out of savings to cover the difference. Whenever you pay a bill, cross out the check marks on the paper for that category.” Simple.
So how’s this different than a budget?
Well, for starters…
A budget can feel arbitrary
When you create a budget you do the numbers and you know how much your allowed to spend, but in practical use it can feel forced. If you budget $200/mo for food, and you’ve spent $200 that month, any additional spending on food puts you “over budget”.
But what does that mean? How does that affect you in the big picture?
A budget isn’t designed to answer these questions until you re-evaluate your budget to see why you’ve been spending so much on food and what you can do to “make up the difference.”
Likewise, being under budget one month may feel good, or may even inspire you to spend more since you still have the budget, but it doesn’t actually tell you anything or offer a benefit to your life. At least not until you re-evaluate your budget.
A reverse budget is intuitive
It’s similar to if you were to open a whole bunch of savings accounts and use each savings account for one bill or goal.
You’re increasing the amount in the bucket, then spending it down instead of watching your expenses grow until some artificial cap. Because of this difference, you’re dealing with “real money.”
If you have $45 for the week for food and you spend $30, the $15 carries over to the next week. This means you can save up for a micro goal like eating out, using day to day decisions about how quickly you want to run through your “food account.”
Likewise, going over means, you need to find the money from another account or deal with less money in that account the following week. If you have $35 left for food and a meal costs $45, then your “food account” is now -$10. Since every week you get $45 deposited in the food account, you will only have $35 for food that week.
Alternatively, you could decide to reallocate some money from a different account. This leaves you instantly realizing the tradeoffs and deciding how you want to spend your money moment by moment.
You could take the money from vacation, for instance. $10 one time from vacation won’t make a difference but do this often enough, and you’ll realize you’re eating your vacation dreams.
A reverse budget is about having the money first!
What’s great about this system is that you always know where you stand financially. This means that if you want to buy a new couch, you either start a separate category, “couch fund,” and reallocate some money to it from other accounts, or maybe you already have a general “household fund” that you use for this. The trick is, you don’t buy the couch until the “couch fund” has enough money to afford the sofa.
It can seem like a crazy idea in our culture of instant gratification. The reality is, though, people will often decide to finance a couch at high-interest rates using money they don’t have, and then a month later buy a TV. In that case, they’re spending even more money they don’t have while still paying off the couch.
There is no end to this line of thinking, and before they know it, they’ll have maxed out their credit cards and still need the next big thing while also having huge debt that is now accumulating interest. It’s a really tough spot to dig out of.
A reverse budget can be self-healing
For the astute reader, you may have noticed when my wife drew the original buckets on paper and asked me for the weekly amount of my car payment, I did $680/mo divided by 4 = $170/wk. This only works if every month had 4 weeks.
The reality is that on average there are 52/12 or 4.3 weeks in a month. So if I wanted an exact amount for my car payment weekly it would be 680*12/52 = $156.92/wk.
By dividing by 4, it allows me to pay off my debts a little sooner as I’m paying a full extra months payment every year. Additionally, it means that if I run short on one category, say food, one week, I can take from vacation and it will “heal” over time.
Granted this one is just an obvious mental trick I play on myself, but it definitely works! Granted I don’t use it for all of my categories, but remember you ave a choice when converting monthly to weekly. You can divide by 4, or multiple by 12 and divide by 52. (You could also divide by 4.33333, but I find x*12/52 easier to remember).
All this on a piece of sketch paper?
Well believe it or not, for about 2 years I did it on paper! Then I transferred it into a spreadsheet. No idea why I waited so long to do that, aside from that, well, it worked!
Over the years I’ve refined the spreadsheet and modified it to account for sporadic rental income and playing with credit card offers for points and all sorts of other tricks – but the base foundation has always been the same.
What if I’m not paid weekly?
Being paid weekly is definitely a rarity. The good news is that the steps outlined above should work for any pay frequency that is perpetual and consistent. You just need to divide differently, but if you have any questions, please ask in the comments 🙂
What if I have a sporadic income?
Sporadic income can be a bit more difficult for any budget, but it can still be handled in a reverse budget. In fact, I deal with this regularly with my Airbnb rental and ensuring that I can manage buckets for all of its different bills.
It’s a bit more complicated and so I’m thinking of writing a separate just on this topic!
How can I take this to the next level?
Once you’ve gotten the basics working you can:
- Plan for disaster
- Take a loan from yourself
- Make money by investing in credit card offers
- Earn points for free flight
This also probably requires it’s own blog post. If there’s enough interest in this post, I’ll definitely write that!
cool – like how you laid it out 🙂