Ep. 10: Reverse Budgeting

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Welcome back to Money Matters where I guide you in becoming better more confident investor!

When you get right down to it financial planning comes down to cash flow and creating a plan and sticking to it. But before you actually get to the point of adopting a plan that’s going to work for you, you’re going to have to look at your cash flow and figure out what’s reasonably obtainable. And to get an accurate idea of cash flow, you’re going to have to create a budget. Now this is where I used lose a lot of people initially because making a budget is time consuming and ambiguous at best. Traditional budgeting forces you to take arbitrary numbers and try to fit them into a spread sheet. This isn’t real life. You know it, and I know it. Going through Mint or some other application and trying to figure out your expenses on how much you spent and where, from retail, food, bars, travel etc… It’s exhausting and hard to keep up with it. I figured I’d share what I’ve personally been doing for years which works really well for me in keeping myself on track financially.

It’s the concept of reverse budgeting. I figure out how much money I need to save today to get me to where I would like to be in the future and then make those savings automatic. Then the money I have left over I spend it on whatever I please guilt free because I know I’ve prioritized my savings and what’s important to me and my future self. Right from the start, because reverse budgeting prioritizes savings first – You can’t spend what you don’t have! Then as you become better at this technique you can increase the amount that you’re saving which will simultaneously prioritize your money you spend on things – whether that’s material or activities and it will naturally help you stop spending on those things that don’t add value to your life. Things you can live without. Having this loose idea of a budget in mind I find makes it much easier to stick with over time. I great results for those professionally I work with in the Rochester community who adopt this concept, it can help simplify their financial cash flow picture.

Step one in this process is figuring out what your short goals are – get ball-park-expected cost and how many years out in the future you expect to obtain these goals. And if I was you I would write them down. There’s something that sticks when you write goals down! Then you can reflect back on these goals over time and see if they’re still a priority as you and your life changes. After writing all your goals down you can add up the total expected costs and then back track and determine how much you need to spend on a monthly basis. From here you can number you list of goals to know where to priorities those monthly savings. For an example. Your goals for 2020 and the next five years looking forward might look something like this. Building an emergency fund. Contributions to an IRA. Pay off credit card debt and start saving for a down payment on a home. Once they are all added up the total required is $56,000. Then divide that by the five years, or 60 months makes this $933 a month cost, or payment to yourself. And then as you allocate the money from the $933 a month toward these different goals the financials to fund these goals will start to accumulate and will be there for when you need them. From this simple short-term exercise I would do the same for long-term goals say over 5 years. And don’t focus too heavily on the exact number amount this is just a great exercise to get you proactively thinking about it, and I promise you going through this exercise you’ll be better equipped financially when the time does come.

In step two set up monthly automatic withdrawals from your checking account to a separate savings account or an investment account if you’re comfortable taking on some added risk to potentially get you to your goals quicker with added reward. If you need to open a savings account I would recommend doing so online and not the traditional banks as you can typically secure a higher rate and banks fees can be on the higher side. Once this account has been opened then set up an automatic monthly withdrawal plan from your checking account to this online savings account or an investment account to reach your monthly savings amount. Then after your monthly savings goal of in this case $933 has been met - with the left over money in your checking account you won’t feel as bad spending knowing that your priorities are already covered. It’s a beautiful thing. As time goes on and you get a better hold of your discretionary spending I would encourage you to up the automatic monthly savings over time paying yourself first - with tools such as a Roth IRA or other tax deferred accounts.

I did another video called the Ladder of Personal Finance, I’d encourage you to check out if you need direction on where you should be focusing your investment efforts. I hope this video helped give you another tool to build wealth and plan for your financial future. I’ve helped many professionals in the Rochester area get their goals in order and get their finances on an automatic plan – Life is complicated, your finances don’t need to be. If this sound like something you’d like to implement give me a call, or shoot me an email and I’d be happy to sit down with you for a conversation. Thanks you for watching! And as always Thank you for giving your finances the attention they deserve!