In principle, budgeting sounds fairly easy. You start with your income, keep track of your expenses, and set aside savings toward your goals.

Unfortunately, it’s easier said than done. Budgeting requires two things that many don’t seem to have a lot of these days — time and discipline.

Let’s be honest here. As human beings, we’re hard-wired to repeat activities we take pleasure in, as Freud pointed out many years ago. We also tend to avoid activities that are not enjoyable.

Therefore, finding a budgeting system that works for you is important.

It has to be effective enough so that your finances work for you. At the same time, it must be easy enough to do so that you actually, well, do it regularly.

This is where backwards, or reverse, budgeting comes in. Especially during periods of your life where you are pressed for time.

For example, maybe when you’re newly hired, and you find yourself giving your 100% effort towards your job. Or maybe you just had a baby and the hours of your day are caught up with childcare.

In situations such as these, you can opt to use a simpler, no-nonsense form of budgeting.

How backwards budgeting works

A change of perspective is needed with backwards budgeting. In the more traditional method, first you track expenditures into specific categories. Then you look at how to adjust your spending in order to save more.

In other words, considering what you spend takes first priority when you budget, right? And whatever remains after all your expenses is what you save.

With backwards budgeting, you do things in reverse. This budgeting method changes your priorities — because with it, you prioritise saving before expenses.

This causes you to adjust your spending rather than your savings. It also ensures that you are keeping yourself on track towards fulfilling your financial goals.

Financial planner Ken Robinson explains it this way: “Instead of figuring out ‘Where do I cut back and therefore how much can I save?’, just make a decision about how much you’re going to save. The ‘where to cut back’ takes care of itself.”

But what are you saving for? With traditional budgeting, you start with expenses. With backwards budgeting, you start with your goals.

Keep in mind that it’s best to include your emergency fund and retirement fund as part of your goals.

This is important no matter how young, or old, you are. Aside from these two, start dreaming. What do you want? A car? A trip to Europe? To open your own business?

Again, we go back to human nature, having a dream motivates us to work for it. And in this case, work means putting aside savings and living within an allotted budget.

The backwards budgeting formula

The formula for backwards budgeting is simple:

Net income (salary after taxes) – savings = living expenses

You might be saying to yourself right now, how much should I be saving? Why not use the 50/30/20 method where half of your budget goes to necessities?

You’re left with 30% for discretionary spending and then 20% for savings. We write all about it here, “Simplify Your Budget With the 50-30-20 Rule.”

Therefore, if you make RM5,900 a month, the 20% for your savings would be RM1,180, that you’ll put away for your wedding, a vacation, or a new car— whatever your long or short-term goals are.

Of course, if you’re still building up your emergency fund, as everyone should, then set aside half toward your emergency fund first and the other half toward your other goals.

That means you have RM4,720 a month to live on, and so you adjust your lifestyle accordingly.

Now, if you are paying off a loan or perhaps some credit card debt, it’s wiser, of course, to get these paid up before saving towards your dream.

While realising our dreams are an important part of our lives, women must be financially responsible.

Don’t be afraid to start small and keep things simple

Keep the amount you allot for savings realistic. If you need to start small — just a few hundred dollars a month, that’s fine.

Better to start small and add to your savings next month than to realise you put too much money away and cannot make ends meet. Remember, this is supposed to simplify your life, not make things more difficult.

Pro-tip: Automation can be your close ally when it comes to backwards budgeting.

Set up an automatic withdrawal of 20% from your paycheck to be transferred to another account. This way you won’t even see it in your regular account. If you don’t see it, you won’t spend it.

The beauty of this method is that you don’t have to be meticulous about keeping track of individual expenses. If you stay within your budget and you are putting aside your savings regularly, that’s pretty much it.

You free yourself from no small degree of busywork. This method is particularly useful during times in your life when your plate is already full.

Because, if you think about it, what is the purpose of budgeting anyway? It is not about tracing the last cent of your paycheck.

As Patrick Brewster writes, “The real purpose of budgeting should be about tracking where your money is going so you can make better decisions with it. When you save enough for your goals, then you gain the financial freedom to spend the rest of your money on anything you please.”

This article first appeared in thenewsavvy.com

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