For anyone who dislikes budgeting (ourselves included), this episode provides a great alternative – the reverse budget. By switching your focus from tracking monthly expenses to hitting specific savings targets, it makes it easier to stay on track with your financial goals while at the same time reducing the legwork involved along the way. In this episode, we explain how to implement the reverse budget using a four-step process and how to periodically review your progress over time. Hopefully, this helps you keep on pace with your savings while also allowing you to enjoy any leftover money “guilt-free.”
Outline of this episode
- What is reverse budgeting? [1:43]
- Step 1: Reviewing your goals and having an idea of what’s important to you [4:23]
- Step 2: Assessing where you're at today [5:13]
- Step 3: Assessing whether or not you're on track to meet your goals [5:46]
- Step 4: Understanding your trade-offs [6:48]
- You still need to check in [8:38]
- The review doesn’t have to be exhaustive [10:01]
- You don’t get extra credit for doing things you don’t like [12:03]
Steps One and Two: Where are you now and where are you going?
The first step is reviewing your goals and having a rough idea of what's important to you. How important is it to fully fund college costs for your kids? Do you want to retire and be financially independent at age 50, or do you want to work until age 65? Are you in your forever house or not? These goals don't have to be set in stone or done in a precise manner, but it's always the starting point because if you don't have an idea of what you're aiming for, it's impossible to measure whether you're on track or not.
Step two is assessing where you're at today, both in terms of what you saved up for your various goals and your current annual savings towards each of those goals. This entails looking at your most recent account balances, your 401k, 403b, IRAs, 529 plans for college, and also what you're saving toward each of those goals. When reviewing what you’re saving, it's important to consider not only what you’re saving, but also factor in any contributions or benefits from your employer.
Step Three: Are you on track to reach your goals?
Step three is assessing whether or not you're on track with meeting your goals based on your current path. This involves projecting out into the future and making assumptions. While we use financial software that incorporates factors like inflation, taxes, and the variability of investment returns, we know not everyone has access to these tools but there are some free tools and calculators available online that can at least give you a ballpark estimate. When looking at your projections, there are only two options. Are you on track or not? And you can fall on any end of the spectrum from being incredibly far behind or incredibly far ahead.
Step Four: The give and take to get where you want to be.
Step four is all about understanding your trade-offs. If you run projections and realize you're behind schedule you have three options.
1) Increase your income so you can save more to meet your goals
2) Lower your spending
3) Decide to change your goals
For example, retire one or two years later, spend less in retirement, or have your kids pay for some of college. A constant theme from us is that there is no one right answer. Everyone is different. Each person values different things differently. For some people, retirement at 50 may be non-negotiable. Other people might rather take an extra family vacation each year even if it means they'll have to work a little bit longer. The goal of step four is to understand the trade-offs involved so that you can make an intentional decision on what's most important to you and adjusting (or not) what you're currently doing today.
Resources & People Mentioned
- Download our guide: The Toolkit for Optimizing Your Finances as an Employed Physician
- Download our guide: The Financial Checkup