Knowing how to budget is ESSENTIAL to living within your means. There is usually one common denominator I see amongst those struggling financially. They don’t know how to budget.
When you’re not feeling well, especially over a period of time, you go to a doctor to figure out what’s causing your symptoms. The goal is to treat the root cause of the problem so the symptoms dissipate.
The same applies to your finances. Financial struggles are generally a symptom of bad budgeting.
There are many different methods of budgeting. Ultimately, you should pick the method that’s easiest for you to stick with. Here I discuss how to budget backwards but before I do that let’s cover the basics.
What is Backwards Budgeting?
Backwards budgeting or reverse budgeting is a strategy where you build your budget around your savings goal. Essentially it teaches you to pay yourself first.
Most budgets are built around your expenses, but reverse budgeting is the complete opposite. I’m not saying one is better than the other. It really comes down to what works for you.
I have tried both methods and I find both work extremely well. If you’re more into traditional budgets, check out my post on How To Create A Budget That Actually Works.
How To Budget Backwards
1. Set Savings Goal
Determine a realistic amount you would like to save. I like the 50/30/20 method approach. This method allocates 50% of your monthly NET income towards necessities, 30% towards wants, & 20% towards savings and debt repayment.
For example, if your monthly NET income is $2000, your savings goal should be $400.
If your debt payments take up 20% or more of your monthly net income I would recommend working on paying off your credit card debt first.
If your credit card debt is overwhelming and unmanageable, LightStream offers a credit card debt consolidation loan with great terms.
I also want to clarify that a mortgage debt would not fall into the debt repayment category. A mortgage would fall into necessities.
Keep in mind that it’s okay to be conservative when it comes to saving. If you don’t feel like saving 20% of your monthly net income is feasible, start low. You can always increase that number later.
2. Assess Your Spending
Knowing your current spending habits is crucial to creating a successful budget. The best way to do this is by gathering your credit card and bank statements. Determine what you spend in each category on a monthly basis.
You will only need to look at one month’s statements for fixed expenses since those don’t tend to change. For variable expenses, I recommend looking at 2 to 3 months’ worth of spending and averaging that number out.
For example, if you’re looking at dining out, add up what you’ve spent on that over 2 months and divide that number by 2.
3. Create Your Budget
The Next Step is to create your budget!
Take your net income, deduct the amount you decided you want to save monthly. That figure is what you have to work with.
After that, you want to deduct your fixed expenses and debt payments from that number. Then necessary variable expenses such as gas.
Whatever is left after all deductions is what you have left to spend on unnecessary variable expenses such as dining out and entertainment. These would fall into the want category.
4. Modify and Update
Remember that no budget is set in stone. You will constantly have to modify and update your budget to line up with changes in your expenses and financial goals. Or even a change in your income.
Evaluate your budget on a weekly or monthly basis and update as necessary. If you can’t meet the 20% savings goal then start to look for ways to cut expenses.
Knowing how to budget successfully takes time and effort. However, with practice, patience and consistency you will get there! I promise!