Reverse Budgeting: How To Pay Yourself First

Budgeting is one of the best things you can do to get your finances under control. Your budget ensures your spending aligns with your financial goals and values.

You can use many budgeting methods to track your income and expenses. The key is to find a budgeting style that works for you.

Reverse budgeting, or “paying yourself first,” offers a way of budgeting your money that ensures you put money toward your financial goals every month.

Key Takeaways

  1. A reverse budget prioritizes saving over bills and discretionary spending.
  2. Also known as “pay yourself first” budgeting, it works best when you automate your savings through payroll deductions, direct deposit, or automatic transfers.
  3. It might not be for you if you carry a lot of credit card debt, live paycheck to paycheck, or your income is unpredictable.

What Is Reverse Budgeting?

Reverse budgeting, also known as “paying yourself first,” is a budgeting technique where you prioritize saving and investing a portion of your income before allocating the rest to your regular expenses. The key concept behind this budgeting approach is to ensure that your savings and investments come first, even before other essential expenses and discretionary spending.

Traditional budgets typically focus on using your monthly income to pay bills and cover daily living expenses. Short-term and long-term savings goals often take a back seat, especially if you’re living paycheck to paycheck.

The reverse budgeting method has you paying yourself first, meaning you put money in savings before you pay rent and utility bills, make your debt payments, or spend on wants.

Reverse Budgeting Goals

Reverse budgeting aims to help you build wealth over time, achieve financial goals, and increase your financial security. By consistently setting aside a portion of your income for savings and investments, you can take a proactive approach to your finances and prepare for the future.

Advantages of Reverse Budgeting

Here are the advantages to reverse budgeting and paying yourself first.

1. Encourages Discipline

The main advantage of reverse budgeting is that it encourages self-discipline and good money habits without forcing you to track every expense. You’ll have less money to waste, so you’ll likely spend more on your needs and less on instant gratification.

2. Easier To Use

Paying yourself first can be a more minimalist approach than other spending plans requiring logging and categorizing every dollar you spend. You can automate and adjust when needed. A more straightforward approach is easier to stick to, which is essential if you’ve had past problems living on a budget.

3. Helps You Reach Financial Goals Faster

Paying yourself first also helps you reach your financial goals faster by making your goals your priority. Whether your goal is to build an emergency fund, save for a down payment on a house, or retire early, paying yourself first can help you achieve it.

4. Builds Wealth Over Time

Another important benefit of paying yourself first is that it helps you build wealth. You can grow your nest egg by consistently saving before you do anything else with your money. 

How To Create a Reverse Budget

You can create a realistic budget that prioritizes saving with reverse budgeting. Here are the steps:

Step 1: Analyze Your Income and Expenses

The first step is figuring out your income and monthly expenses. Review your bank and credit card statements. Total up your income, essential bills, and other spending.

Step 2: Set a Savings Amount

Calculate how much of your income you can afford to pay yourself each month. This should be a realistic number you can maintain consistently.

Step 3: Determine Your Savings Goals

Your savings goals can include short-term goals like building an emergency fund or long-term goals like saving for retirement. You can divide the amount you came up with among all your goals or pick one to focus on.

Step 4: Automate

Set up automatic transfers to make saving consistently effortless. If your employer direct deposits your paycheck into your checking account, you can request that a portion of it be deposited in savings and the rest in checking. You can also set up an automatic transfer from checking to a savings or investment account with your bank on or around your paydays.

Step 5: Track Your Progress and Adjust If Necessary

Make sure you have enough money to handle your expenses, discretionary spending, and savings. Regularly check your savings to see how you’re progressing towards your goals. Adjust your monthly budget if needed.

Pay Yourself First Example

Here’s an example of paying yourself first or reverse budgeting and how it works.

  • Your monthly take-home pay is $3,500.
  • You’ve determined you can save 20% of your after-tax earnings or $700 per month.
  • You decide to put $300 toward retirement, $250 into your emergency fund, and save $150 for travel every month.
  • The remaining $2,800 of your monthly income will go to other expenses, including rent, food, utilities, debt payments, and wants.
  • You get paid twice a month. You have $350 auto-transferred into your investment and savings accounts every payday. Thanks to automation, that money is helping you reach your goals before you’ve paid a bill or had a chance to spend it on anything else.

Pros and Cons of a Pay Yourself First Budget

A reverse budget can help you live within your means, eliminate wasteful spending, create financial stability, and build wealth. But the pay-yourself-first approach to budgeting is not for everyone.

Here are the advantages and disadvantages of paying yourself first or reverse budgeting.

Pros Cons
Low maintenance compared to other budget systems Requires consistency and dedication
Saving for the future is a priority, not an option May require changes to spending habits or lifestyle
Helps you achieve your financial goals Can be difficult if your income fluctuates
Encourages discipline and self-control May not be the best approach if you’re carrying high-interest credit card debt
Creates financial security Can cause issues if you’re living paycheck to paycheck

Is Reverse Budgeting Right for You?

Reverse budgeting works well for people who have difficulty saving money at the end of the month. It’s also less labor-intensive than other budgeting systems, as it does not require tracking every penny and can mostly be automated.

It may not be right for you if you’re carrying heavy debt. You might be better served to focus on paying down high-interest debt while making smaller contributions to savings. Also, if you’re living paycheck to paycheck, transferring money out of checking before paying bills could cause problems with overdrafts, missed payments, or late fees.

Alternatives to reverse budgeting include the 50/30/20 rule, zero-based budgeting, and the envelope system.

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