Reverse Budgeting

Posted 06 Jun 2014 by Rick Irwin, CFP, CLU


In today's busy world, there are many conflicting demands for one's financial resources. Meeting the ever-rising cost of food and energy, paying down debt, insuring against risk and achieving education and retirement savings goals all compete for your paycheck's attention so it is no wonder that many of us have to adhere to a strict budget to make it all work. For sure, the exercise of tracking one's expenses for a few months in order to determine a reasonable budget level and see areas where expenses may be curbed, is a healthy exercise. But for many, tracking and adhering to a strict monthly budget on a long-term basis is something like being on a permanent diet.

For those with sufficient financial discipline the "reverse budget" may be a better route. The reverse budget is simply this: if you set, and stick to, strict debt pay-down goals and set in place specific retirement savings goals such that, if followed, you will be financially independent and debt free by your target date...there is no reason to budget at all really! The concept is "paying yourself first" meaning before any spending takes place debt is paid down and savings goals are met, automatically. It sounds easy but it takes a great amount of discipline to stick to this month in month out but the results are that investment and debt freedom goals happen on auto-pilot, Without careful ongoing budgeting.

Like any plan, the reverse budget needs to be monitored regularly, to ensure that the debt and savings plans are on track. And if they are, there's no need to fight about the cost of the golf membership or the expensive shoe collection! This approach may not work for everyone as it takes great discipline to pay your self first and stick to that 100 percent of the time but doing so will allow you to spend the rest if you choose to, knowing your financial future is secured according to plan.