AARP Hearing Center
Why You Might Want to Try Reverse Budgeting
This strategy automates savings and reduces the temptation to overspend
Reverse budgeting puts your savings goals first, then lets you spend what’s left on bills and everyday expenses.
Pete Ryan
Key takeaways
- Reverse budgeting prioritizes saving first, then uses remaining money for spending.
- Automating deposits can help build savings without tracking every purchase.
- The approach may not fit people with tight budgets, variable income or high-interest debt.
The problem with budgeting is that while it sounds great in theory, many of us aren’t very good at putting it into practice. Like dieting or joining a gym, our New Year’s resolutions to stick to a budget tend to fall apart by Valentine’s Day.
Tracking your spending — a key aspect of traditional budgeting — is easier than ever with budgeting apps. But logging every grocery bill and insurance payment can quickly become tedious, and many people abandon the task after a few weeks.
More Ways to Benefit
- Related Benefit 1
- Related Benefit 2
- Related Benefit 3
- Related Benefit 4
- Related Benefit 5
Technology and social media have also increased the likelihood of succumbing to budget-busting impulse purchases. Buy a pair of pants online, and you’ll almost immediately be hit with ads for other types of pants, along with shoes and accessories to match. I never much liked going to malls (except to meet up with friends when I was younger), but now I don’t have to: Everything I could possibly want to buy is available with a few clicks. It’s convenient, but also hard to resist.
Even if you’re living within your means, your spending habits can prevent you from saving as much as you need to afford a comfortable retirement. And if you’re retired, many financial advisers recommend setting aside enough money in a low-risk savings account to cover three to five years of living expenses. Otherwise, if the stock market goes into a prolonged downturn, you could be forced to sell stocks or mutual funds at a loss to pay expenses, which increases the risk that you’ll run out of money in retirement.
The solution to this problem is an increasingly popular savings hack known as “reverse budgeting.” With this strategy, you set aside funds for savings or investing first, then use what’s left over to cover your expenses and discretionary spending.
If you contribute to a 401(k) or other employer-provided tax-deferred plan, you’re already doing this, because the money is taken out of your paycheck before you have a chance to spend it. But you can use reverse budgeting to set aside money for other goals, such as a down payment for a car. If you’re retired, you can use reverse budgeting to funnel funds from your Social Security benefits and other sources of income to interest-accruing vehicles, such as a high-yield savings account.
Reverse budgeting isn’t for everyone. If you’re living paycheck to paycheck, siphoning money from your income or retirement benefits to invest in a savings account could leave you without sufficient funds to pay for groceries, utilities or other essentials. In addition, it may not work for people with high-interest debt or variable income, which is common among many self-employed workers.
Reverse budgeting 101
If you decide you want to give reverse budgeting a try, here are a few pointers.
Use your recent credit card and bank statements to determine your monthly cash flow. This step is important because if you save too much, you could end up tapping your savings account to pay the bills, which defeats the purpose. At the same time, you want to save as much as possible, so use this exercise to look for expenses you could cut, such as subscriptions you no longer use.
Shop around for a high-yield savings account. Make your money work for you by investing in a bank or credit union account that pays a competitive interest rate. Some institutions are currently paying 4 percent or more. You can search for high-yield accounts at comparison websites like Bankrate, DepositAccounts or NerdWallet.
Automate your savings. One of the reasons 401(k) plans have been so successful is that the money comes out of your paycheck before you have a chance to spend it. You can adopt the same strategy with reverse budgeting. If your employer allows it, split direct deposit from your paycheck into a checking account, which you’ll use to pay for monthly bills and discretionary expenses, and your high-yield savings account. If you’re retired, you can arrange to have funds from your checking account automatically deposited into a savings account each month.
Stay flexible. While the beauty of reverse budgeting is that it allows you to put your savings on autopilot, you may need to make adjustments along the way. If you find yourself coming up short each month when it comes time to pay bills, you’ll need to reduce the amount you’re stashing in savings. Conversely, if you determine you have a lot of money left over at the end of the month or receive a raise, you’ll want to increase the amount deposited into your savings account.
AARP Membership
Join AARP for only $15 per year with automatic renewal. Get instant access to members-only products and hundreds of benefits, a free second membership, and a subscription to AARP The Magazine.
You Might Also Like
Should I Buy Flood Insurance?
Many homeowners don’t realize they need coverage until their home is flooded
What Is Zombie Debt?
Collectors may come after you for money you no longer owe
How to Achieve a Perfect Credit Score
Only a fraction of consumers have flawless credit. Find out how they got there