What is Reverse Budgeting?
It’s when you allocate the most important priorities and values in your life and put the money in those categories first.
When you put the bulk of your money where you want it to go before you begin spending on anything else, it’s reverse of how society spends – impulse first.
Sad Truth: Money is finite. Time is finite. There is not enough for everything you want to do, so if you don’t put your most important ones first, you won’t get to them.
I think the best way to determine your priorities is to sit in a few moments of quiet and really think about what is the most important to you. Day dream a little bit, and then think ahead to what you want to be remembered for and what memories you want to have to look back on.
Jot them all down, and then group them into categories.
Review with your spouse if you are married, or your partner if you have one. Being on the same page with your values is key to being able to live out your intentions. You may need to compromise on some of these, but now is the time to determine the compromise.
Having a plan laid out helps when impulse comes around and one of you – or both – of you are ready to jump on something. When that happens, you can agree to a cooling off period of a few days and a review of your priorities to see if it is in line with your values.
To make it visual, group your categories and fill in the pyramid we talked about last week in Reviewing Your Expenditures.
The base of the pyramid is what you determine sets the tone for all else in your life. In other words, if these key things are in place, all else is right with the world. You may want other things, but you don’t need them, and having them in place makes it possible to do all other things.
The peak of the pyramid is the top of the mountain, if you have made it here, you are feeling on top of the world. Being here means that you have not only achieved your financial goals, but that you have reached deep and came out victorious. You have accomplished great things personally and professionally to be able to afford yourself these luxuries. You are proud of these things, you deserve a little reward for all of your effort, and you have no reason to feel guilty for enjoying the fruits of your labor.
The middle of the pyramid is somewhere in between these two spectrum. Work your way up the ladder.
Financial_Hierarchy_Blank << Download FREE blank hierarchy pyramid so you can create your own.
I love this quiz for determining what YOUR financial priorities are. List all the things that are most important to you when it comes to how to spend your income. The options will be automatically generated against one another until your priorities are prioritized for you based on your responses. I did this several years back and it was a real eye-opener, plus it helped me to focus with intensity on one or two things, accomplish those goals first, and then get to the other less important items.
Once you have these details hammered out, it may be helpful for you to prioritize your budget categories in the budget to match.
Fill in the Budget with the Bottom section of the pyramid coming first. Do nothing else with your money for the month before this money is allocated.
Work your way up the pyramid, going down the list.
When money comes in all of the most important categories get filled first, then work your way down. I’m not saying that you won’t enjoy anything frivolous in the meantime, just that if you put the most important items first, and splurge with what is left you will make your goals a reality over time and you will have built a stable financial life for the future.
I did this, and it was an important exercise, in what comes first, but as a full disclaimer, I like my old budget category layout better. However, I still feel this exercise forces you to choose how you spend your money in what order comes first in your priorities, and if the budget is tight and you can’t get to all of it, I think this could be a helpful layout. Print it out and keep it with your pyramid worksheet as a visual reminder.
The purpose of this financial journey is to do what works for YOU. I did this, it didn’t feel like a good work flow for my monthly budget, so I took the insights I gained and went back to my old categories.
Let me know how it feels to you! I’d love to hear from you.
ACTIONABLE STEP: Download the free Financial_Hierarchy blank copy to guide yourself through your financial priorities, sit down with your spouse and determine now how the money will be spent as it comes in the door. Use this worksheet to talk to your kids about wants versus needs. Set up your budgeting categories based on your hierarchy of financial needs – just be sure to save a copy of your working budget so that you can go back to it later if you prefer. Take the financial priorities quiz!
I’m still offering online Zoom sessions with anyone who wants to go over their budget categories so hit me up for that if you are interested. What’s my angle? I want to know what works well for other people. I already know what works for ME, but I am always interested in guiding you on a path that works and learning new tidbits along the way.