Pay yourself: The virtues of reverse budgeting

Image source: totaladvice.com.au

Typically, when we plan budgets, we try to squeeze as much of our income to cover bills, debts, food, and taxes, with whatever’s left being used for savings or small everyday luxuries. Sounds logical, of course, but it’s also … not very effective at amassing savings effectively in the long run. 

One of the most effective strategies for setting aside savings is reverse budgeting, wherein we treat savings as just another bill we have to pay. 

Image source: pllc.ca

You know how, back when you were a kid, you’d set aside money for that thing you want? That’s basically the principle at play.  Reverse budgeting involves setting aside a steady monthly stream of cash that can be saved and stored for a rainy day and invested for the long run.  Essentially, you set aside money to pay yourself.

The remaining budget, meanwhile, is drawn from the cash that’s left. Planning the budget around the money that’s set aside can be useful for both eliminating unnecessary expenses and prioritizing important ones. 

The money you pay yourself can, in turn, be divided according to your needs and goals.  Parts of your savings, for instance, could go to investments for retirement and other long-haul things, while the rest is partitioned into emergency funds, debt payments, and savings for whatever cool thing you’ve always wanted to own. 

Michelle L. Marquez, college student and aspiring financial adviser. For more on my newbie tips on everyday finance, follow me on Twitter.