Stop trying to budget
How to Reverse Budget: 1) Define what you’re saving for. Step 2) Nickname your savings accounts to help remind you what you’re working toward. Step 3) take the total cost of what you’re saving for and divide it by the time you have between now and when you’d like to make the purchase. Set up an automatic transfer from your checking account to move the amount needed to the proper savings account on the day the funds hit your checking account. Step 4) Blow the rest guilt-free.
Budgeting makes perfect sense. In theory. But a budget rarely works. They are time-consuming to set up, tedious to manage, and - like dieting - usually result in feelings of deprivation, then a little binging, then a little guilt. And by a little, we mean a lot. Don’t worry, you’ll do better next month (maybe).
Budgets leave little to no room for the unexpected. And we could all use a little more breathing room when it comes to the unexpected. People say to us all the time, “I think I need a budget”. Conventional wisdom says that if you’re trying to save, you need to limit what you spend in order to have something left over to save. But is that really the best way to get what you want out of what you already have? Nope. There’s a better way.
The reverse budget
The Reverse Budget was born when we realized that no one actually wants to track their spending. Also, life is unpredictable. We want to enjoy our money and not have to think twice when we spend it. By setting up the Reverse Budget, you save first so you can blow the rest. It’s a concept we call…
Responsibly reckless
The quick and dirty: figure out what you’re saving for, automate it, and then blow what’s left in your checking account – guilt-free. Studies show that saving for the sake of saving almost never works. Why? Because without a purpose in mind for your savings, it’s easy to justify using that money for something else – something more instantly gratifying.
Why the reverse budget works
At the end of the day, there’s no such thing as a typical month. One of our clients told us that as they were sorting through their monthly expenses, they noticed that no month was ever “a typical month”. They kept trying to figure out what a typical month meant for their groceries, or transportation, or gifts.
Sh*t happens
A rainy month means more Ubers. A holiday month means a higher credit card bill. A month when friends visit means restaurant expenses are through the roof. They couldn’t figure out how much they could “afford” to spend in each category consistently – let alone manage a realistic savings number - because they always “needed that money”.
So, if we’re still trying to solve the most common problem (rigidity around atypical spending months), the most common solution offered (a budget) doesn’t feel like much of a solution at all. The problem is still here. The better solution is the Reverse Budget.
How to implement the reverse budget
Step 1: Define what are you saving for
Start by thinking about what you’re saving for. Break it down into small, tangible goals: travel, a new couch, a downpayment, holiday gifts, a designer handbag.
Step 2: Use an online bank
Once you’ve decided what you’re saving for, don’t keep your savings at a brick and mortar bank. Use an online bank like American Express, Marcus by Goldman Sachs, CapitalOne360, or Ally. These are places where your savings will earn a higher interest (aka work harder for you).
How is the interest rate higher? Online banks don’t have to pay for things like real estate. Or those vacuum tubes. Or in-person tellers. Because they are not covering these costs, they are able to pass along some of the savings to their clients.
Nickname your accounts
After you’ve moved your funds over to an online high-interest bank, nickname your savings account(s). If travel is your thing, set up an account called “Travel”, or be more specific, call it <The Bungalow with the Fish Underneath in the Maldives> or <Palm Springs Weekend>.
When you are invited to a night out with the potential for a monster bar tab, but have blown through your cash for the month, you’ll be much less tempted to tap your savings when you know you’re taking from your Palm Springs trip. We’ve seen buckets for Emergency Funds, Travel, Holiday Gifts, Donations/Charitable Giving, Emergency Pet Care, Baby Fund (if you’re trying to get pregnant in the next 6-12 months). What will yours be?
Step 3: Automate
Decide how much you want to save for each account. Take the total cost of what you want to be able to buy and divide it by the time you have between now and when you’d like to accomplish that goal. Let’s say you want to travel with a group of friends over the holidays this time next year. You have a dog at home and want to bring gifts for those friends on the trip.
Travel: $1500 (that’s $125 per month or $62.50 per pay period)
Pet Care: $300 (that’s $25 per month or $12.50 per pay period)
Holidays Gifts: $1000 (that’s $83 per month or $41.50 per pay period)
Set up an automatic transfer from your checking account to move the amount needed to the proper savings account on the day the funds hit your checking account (payday or a lot of our clients do it the next day – just in case). This way, it’s gone before you have a chance to spend it.
Step 4: Blow the rest
After you’ve set up and automated your savings, whatever’s left in your checking account is yours to spend, guilt-free. You have the ability to do this because all of the things you really want to spend your money on are taken care of first. After those costs are removed, you have a number to work with that allows you to have fun with the money you’ve earned. Spend it like you earned it [because you did].
The Wrap Up
After hearing how the Reverse Budget works, you might be thinking, “What if there’s nothing left over?” Well. Then you’re probably saving for a life you can’t afford or you are a victim of lifestyle creep. Also, if you’re not willing to adjust your lifestyle to accommodate a savings goal, maybe you don’t really care about it and don’t need to be saving up to spend on it in the first place? Someone had to say it. Most people feel like there’s no extra wiggle room in their situation, but for all of the HENRYs™ we’ve worked with, that’s almost never been the case. Start small with your savings goals and build from there – because starting small is better than not starting at all.
Boxes? Checked.
So before you decide that it won’t work for you – give it a try. You’ve got the quickest fix covered after reading this post, but what about when it comes to long term savings goals - like retirement or the house you want to buy in 10 years? Make sure all of your boxes are checked, even the ones you assume are currently covered, with a second set of eyes.
The Stash Plan® helps you to have those bigger conversations. Book a call or take the HENRY Quiz™ to see if you qualify as a HENRY - then you’ll know if you’re eligible for the Stash Plan.
Stash Wealth provides financial plans designed to assist high earning young professionals build and manage their wealth.
Stash Wealth offers a pragmatic approach to financial planning and wealth management. Whether saving up for Tahiti or a Tesla, we help you achieve your short-term and long-term goals.
Written by Priya Malani
Stash Wealth, Founder & CEO
Priya is a force in the personal finance space. As an industry disruptor, she specializes in bringing the unapproachable world of money to young professionals across the country.
