Reverse Budgeting: What it is and How to Do it
Whether you are saving money, paying off debt or just trying to get a better grasp on your finances, budgeting is important. But not everyone likes traditional budgeting. Tracking down all expenses to the penny, figuring percentages, fumbling with receipts ‐ it is just too much for some people. How can you stay on top of your finances if this is you? Consider the reverse budget.
Reverse budgeting turns the traditional budget on its head. Rather than tracking every dollar down to the last penny, reverse budgets focus instead on larger financial goals, leaving the small stuff to be flexible.
How to Create a Reverse Budget
Begin by deciding on a financial goal and figure out how much you need to make it happen. For example, let's say you owe $12,000 on credit cards and want to pay the high interest off over the next four years. You would need to pay $3,000 per year, or $250 a month, to be debt free in that time. If you are paid bi-monthly, you should then set aside $125 out of each paycheck. With reverse budgeting, it is best to set aside automatic bank transfers for the amount you need to pay in order to be sure you meet your financial goals.
You also need to add up any other monthly essentials you pay for, including gas, mortgage, groceries, utility bills and more.
The rest of the money you can spend however you want because you set aside money for your goals and living expenses.
No tracking your purchases or figuring details into categories. If you want to splurge on a fancy coffee, you can just do it. No calculating necessary because your bills are paid!
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