What’s a Reverse Budget and Why Use One?

(MoneyHippo.com) – Perhaps you already have a budget set up to list your income and bills so you can track where your money goes each month. Unfortunately, traditional budgets can keep you from reaching your ultimate goals because the focus is on paying the bills and not reaching your life’s desires — enter reverse budgeting. Instead of simply having a goal to pay the bills and maybe have a bit left over, plan out your financial goals first and work on your budget to help you get there.

To set up a reverse budget, you need to define your saving goals clearly. Do you want to save to buy a house, car, or vacation? Once you determine your focus, write down your income and all essential expenses, leaving out any extras you don’t actually need to live. Subtract your expenses from your income, which is the amount you have to work with to allocate toward your goals.

Next, calculate how much you need to save for each goal and how much you want to put aside each month. Automatically move those savings amounts somewhere other than your checking account each time you receive a paycheck. Better yet, have the bank move it for you. In essence, you pay yourself first, then take care of your obligations, and you can play with any leftover funds.

The advantage to using a reverse budgeting method is it shifts your goals into a high-priority position to ensure you reach your financial milestones.