I love budgeting. And spreadsheets. But I know that I’m in the minority. Don’t worry if you don’t love this stuff. I still got you.
I always say one of the first things to do when you get your first job is to create your budget. This way, you are setting yourself up to meet your financial goals from your very first paycheck and it’s easier to progress from there. I also recommend revisiting that budget whenever you get a new job or are expecting a significant lifestyle change.
If you are past this point in your life (probably), then the best time to create a budget is now. Like right now. Ok, maybe later tonight if you are that busy.
My goal is always to develop an as-simple-as-possible, set-it-and-forget-it budget, with periodic check-ins and revisiting. (Bonus points if you remember that rotisserie oven infomercial. Iconic.) In my opinion, reverse budgeting is it.
Here’s a quick explanation.
In a traditional budget, you figure out how much you need for your needs, how much you need for your wants, and then you save whatever’s leftover. Usually nothing or very little, right? This is how most people end up having a hard time saving each month to make even the tiniest dent in their financial goals. If you can throw only leftovers at your financial wellness, where does that leave you? You (and future you) deserve better than casserole status.
With reverse budgeting, you start with your goals.
How much do you want to have in your retirement? Think about yourself in a year, 5 years, 10 years, 30 years, and at retirement. How much do you want to have saved looking back? If you’d like to buy a house in the foreseeable future, how much is a 20% down payment in your area in dollars? Throw out different monetary goals and check what feels good to you. Which one resonates with and motivates you? Take that and put a time frame on it, then figure out how much money that means per paycheck or per month.
Next, list out your requirements, i.e., needs, in dollar amounts. Estimates and averages are fine. Rent, utilities, car payments, insurance, gas, etc.
Next, list out your wants, nice-to-haves, and habitual/usual spending, in dollar amounts. Many underestimate here, so take a look back at your transactions to make sure you’re being realistic in capturing it all.
Now, take your salary and subtract out all your taxes. (Side note: make sure your withholdings are appropriate. It’s best for budgeting purposes to withhold just as much as you owe in taxes when you file. Maybe a bit more so that you can have some padding or around a $200-500 annual tax refund.)
Are you covered? If yes, congratulations!* (You can skip the next couple paragraphs and find the section that starts with a single asterisk.) But….probably no, right? Don’t worry, that’s most of us. Here’s where you look at each of the 3 categories and begin the negotiating process.
Here are some questions to ask yourself:
How much do you need to trim? But more importantly, from where?
Are you willing to stretch out your goals by another year or two? Give it up entirely? How would that make you feel?
Can you pare down on your housing and utility costs?
How much of your habitual fun spending actually adds to your wellness, whether physical, mental, social, or otherwise? Are there less costly alternatives that would meet the same need or even just make do?
Be honest and realistic in your assessments. This is the tricky part, because only you know what you can live with.
Check your values.** Do your goals and spending align with what’s important to you? You can calculate each expense as a percentage of your income to more easily figure this out. For example, if I’m spending 30% of my income on costs to live in a house that I will eventually own, that feels right in line with my value of independence. However, if I find out I’m spending 10% of my income on fast food, that wouldn’t sit right with me personally and I’d need to explore practical alternatives. Keep playing around with this until you find your happy balance.
*Once you do, set everything on auto-pilot. Set up auto-pay on all your bills (requirements), set up a recurring transfer into your retirement/brokerage/savings accounts (goals), and the rest is yours to do whatever you wish without guilt (play). You can choose to put it toward something that helps you build one of your dimensions of wellness, or not. If you accumulate a bit in your play money, feel free to throw it against your goals as a bonus to yourself. That’s extra credit. If you find that you’re accumulating extra quite often, think about upping your goals.
Check monthly for the first 6 months to 1 year to make sure the budget you created covered everything. If not, make adjustments. Either in your budget or in your habits. Make sure your balances are adequate and don’t default on any payments or overdraft any accounts. After a year, you should feel like you’re cruising. At this point, you can feel confident enough that you only need to check-in quarterly or even just at tax time each year (since tax laws do change and can affect your plans).
One bonus of reverse budgeting is helpful for those who feel guilty spending money. (Looking at you, my fellow children of refugees/immigrants!) This gives you freedom to spend paired with confidence in knowing that you are meeting your goals and planning responsibly.
Personally, I spend 30 minutes to 1 hour each month to double-check that my accounts, paychecks, and transfers cover all bills, transfers, and other expenses. I probably don’t have to, but it makes me feel better. I set up a spreadsheet (of course) so that all I need to do is plug in a few numbers. It turns green if I’m good or red if I need to take action. I figured out the best day of the month to do this (when all my statements are in) so that I can handle it all in one shot.
I know budgeting can seem daunting, but I promise it is well worth the time and effort. Money is a complicated idea and you may find the topic off-putting, but I cannot emphasize enough how important it is to have a strong financial foundation for your present and your future (and your family’s as well if you have one). Financial wellness impacts every other dimension of wellness and every level in the hierarchy of needs, not to mention every part of life.
Financial wellness is wellness. Taking care of your finances is taking care of yourself.
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