reverse budgeting and a new finance app

A change is as good as a rest, as they say.

We’re trying two new tactics with our budgeting and debt reduction:

  • New tracking app: the previous app I was using, Budget, didn’t have an easy solution for sharing the data. Not great for a couple with shared finances. Chris did some recon work and we’ve moved over to Smart Budget. So far we really like it. It doesn’t do any fancy interfacing with online bank accounts but we don’t need that. We just want to track and review our spending by date and category. And we want to work off of one account. Bonus: you can change the currency.
  • Reverse Budgeting: we’re moving to a reverse budgeting system to pay down the rest of our debt. Most people use this system for savings, and we’ll be doing that too once we’re out of debt. With this system we set aside a set amount of our monthly income for debt repayment. We then work with our remaining funds for the rest of our spending and expenses. This means that if we have higher expenses in one area we cut back in another.

Along with a set amount for debt repayment each month, we are also saving for travel and continuing with Henry’s education fund.

When will we be out of non-consumer debt? We actually have the funds in our account right now but we’re still not sure about buying a car. Our debt is also at 0% interest until February of 2012 so we have time to wait on it. We’ll probably pull the trigger and send the money home in November or December.

June has been a great month for tracking and I’ll have a breakdown in early July on our savings and expenses.

Anyone else use reverse budgeting? Interested to hear from savers that have had success with this method. I think it will challenge us to work on our frugality while still giving us room for unexpected expenses and maybe even a date night.

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  • Hi Rachel,

    I save 20% of my income the day after my salary comes in and live on the rest. It works really well for me! I don’t have any debt besides my student loan, and the interest on that (1,5%) is lower than on my savings account (2,7%), so right now it doesn’t make sense to make early payments.

    Have you ever read All Your Worth by Elizabeth Warren? I really liked it and is has helped me a lot with budgeting and allowing myself some fun while still making my savings goals.

    Good luck on paying off your last debt!

    • Haven’t heard of that book but making a note of it.

      Our savings should be around 30% total of take home income but that will include saving for travel and our son’s education fund. We should have a very clear idea of numbers by the end of July.

      Makes sense to save if you are getting a better rate than what you are paying on student loans. 1.5% is very low – are they government funded? Mine were at 4.5% before we paid them off last fall.

      • Yes, they are government funded. Lately our government has been saying that students lend too much. I wouldn’t be surprised if they raised the interest rate next year to discourage students taking on loans, but until that time I’m not paying back extra. It will take me one more year to get my law degree, and by that time I hope to have enough money saved to pay off my student loans at once.

        • That’s impressive savings. And what a relief to be starting your career with no debt.

          I wish I had been more proactive about paying mine off. I made minimum payments for a long time and even went on interest relief for a few years when I was trying to make the Olympic team in rowing (meaning I had almost no income).

  • I hadn’t heard of reverse budgeting. I think the hard part with that for me to work out is our bills are all scattered throughout the month, and being a teacher, I only get ONE paycheck a month, too. My husband gets a check every week. My student loans are insane, and that’s the largest chunk of debt we have. There is a program, that after 120 payments, government can forgive up to a certain amount that’s left if you’re a public service worker (including teaches) and I teach in a low-income/high poverty elementary school. My loans are fixed interest, but something like 6.5% interest. :( I don’t get how the government can discourage people from taking loans–no one would be able to afford college.

    • We’re now a one paycheck a month family (whatever I make is quite negligible and erratic). We’re lucky because other than the rent, our bills are quite small and the next biggest expense is groceries. So, a week after my husband gets his salary the rent is out of the account and we have transferred to our savings accounts. There is a good visual of what we have left to work with until his next pay check.

      Also, we didn’t ask for it but it’s standard to have an overdraft on your account with our bank. I don’t think we’ll ever use it but it’s a bit of security in case we have an outrageous gas bill or something come up.

  • We used reverse budgeting to aggressively pay off our mortgage in 7 years. It felt like we were always broke, but let me tell you, it worked. We continue to use the same process to pay ourselves first in the savings department and live off what’s left. We’re living on as much as we did as university students, even though that was over 12 years ago and we now have two kids! Our furniture isn’t as “grown-up” as some of our friends, but everything we own is all ours and we don’t care so much for appearances anyway. :) Good luck!

    • That’s the term I kept forgetting: paying yourself first. So true.

      I’m still so inspired that you have paid off your mortgage so early. We’re hoping to knock some years off of ours soon.

    • We really like it. One of the reasons it’s working well for us too is that we don’t have a ‘real’ credit card here. We have one of those Visa check cards. Because we’re either spending cash or using the check card, we always have a current balance to our account on the app.

      I also really enjoy checking in our monthly spending by category. We stayed close to our budget in June but our grocery spending was way higher than I thought it would be.

  • I’m wondering if anyone uses everydayminimalist/fabulouslybroke’s Budgeting & Analysis Tool?

    Is it worth the money?

    • I’ve been tempted a couple of times by it. But… I’m not sure I need that much analysis at this point. We’ve been tracking our spending on and off for over a year now. Our spending habits and weak points are pretty obvious.

      If you do end up buying it and using it, I would love to read a review.

  • I like to know how much money we have exactly, and as long as our income was steady I have always known how much we spent on everything – without a budgeting tool. Now with a steady and a variable income (which can be $O sometimes) it is a lot harder to know; I have resorted back to planning on one income, so far it have worked. Reverse budgeting is and interesting idea, I think it requires LOTS of discipline. On the second thought, I love numbers, maybe I will be tempted to try this method.

    • Variable income can be challenging. We’ve been living with variable income all of our married life. Now that my husband has a ‘regular’ job and, I’m doing a bit of freelance work, we have mostly steady income. Less exciting but far less stressful.

      If we go back to variable income, which we probably will someday, I would like to be in a position to live off the previous months income. The dream scenario would be to save 3-6 months income, average it, and then pay ourselves from that each month.

      We’ve given ourselves room with this budget so that if something comes up, which it always does, we have room for it. As long as we don’t buy anything big or, go on an unexpected trip, we have room for little day trips around the island, getting a takeaway with friends and one or two date nights with a babysitter. Small but worthwhile luxuries to us.

  • I have been using reverse budgeting, but didn’t know there was a name for it! I use Quicken for budgeting and accounting. Basically, when my paychecks come in, I put them in “holding” that’s “hidden” in our checking account. I then budget out to all the separate categories (starting with the emergency savings fund, which gives me the biggest boost!). As I put things into future savings goals categories like “kids school supplies” or “next month utilities” or “health savings”, I “hide” it in Quicken. It shows up under these categories but not in the account total. What’s left that I can see is the food/household supplies budget. As we spend, I liberate as needed, for example when I buy garden seeds I liberate those $ from the home/garden savings goal fund (where we set aside $20/monthly). It’s a little contrived but it works for me and keeps me accountable, plus I can see what I don’t spend adding up, which is motivating!

    We are lucky not to have consumer debt. Our priorities are to build a 6-month emergency fund, save for retirement, pay down the mortgage and save for kids’ college (can it really only be 4 years away–eek!)But I think this is a great system no matter what your goals. Keeping track is so helpful.

    • Thanks for explaining your system. Working off of Quicken is new to me. This sounds like a great way to keep funds separated without actually having multiple bank accounts. Hmmmm… you are giving me a lot to think about. ING doesn’t offer savings accounts to Isle of Man and I was hoping to have multiple accounts like you have listed.

      This is a very detailed way to attack savings and monitor spending. Might be the next level of financial control for us.

      Thanks for sharing =)

      PS. I can’t wait to start our Emergency Savings fund – we’re so close.

  • Well, there you go. My budgeting system has a name.
    I started out tracking every dollar I spent, but it was too stressful, so I set up direct debits with money to cover the mortgage, bills, savings for school, and savings for things like house maintenance and trips to visit family that we know are coming up but don’t know how much they will be. Then there is money to spend each week on whatever we happen to spend it on. I feel so much freer not having to write down what category the money was spent in! And i don’t feel guilty if I’ve bought something I wasn’t expecting, it just means I can’t buy something else later.
    I do however, keep very good track of any money we withdraw from our account (there is only a set amount of money left over to spend after bills and savings!) and how much bills etc have been, so that I know how much to put aside for the next one. I’m a little bit nerdy about my budget tracking.

  • Wow Rachel! That’s fantastic that you could theoretically payoff all of your remaining consumer debts right if you were so inclined.

    We use a reverse budgeting system also. Our savings, debt repayment and fixed expenses come off the top of our income and then we give ourselves a set allowance each week for groceries, gas, entertainments, etc. If we run low before the end of the week, we stop spending. :)

    To make sure it’s easy to track our spending, we transfer our “spending money” to a separate checking account each week. We use the debit card from that account to purchase any non-fixed expenses.

    It’s working really well for us. It’s easy and effective.

  • Hi, just found your blog and have been poking around some posts. I am in the process of purging, though honestly, we don’t have a lot to purge…I just can’t stand clutter. Anyway, I have always done our finances this way. My Dad had me read The Richest Man in Babylon (fast, easy ready) when I was in high school or college (both a long time ago, so can’t remember exactly) and the whole point of it is the concept of “Pay Yourself First”. So, I’ve always done that and found it easy to save. Admittedly, I a lot easier when you make decent money, but even saving a little something is better than nothing, no matter how much it is…right? Good luck!

  • I have been using Quicken for 10 yrs. I find it very easy to use. Accessing internet accounts is also fast and easy. Something I might add is that no matter what app you have, 90% is the commitment to do the “job”.

    My husband first introduced it to me 10 yrs ago and he basically was doing all that financial stuff once a month, so it was chaos and really was not helping. I took over and tried to do it often so not also the data in the app was up to date, but also for tracking purposes and show us our budget progress.

    Anyway, I am still working hard to keep us on track, it is hard when a baby is at home and so much is going on.

    Good luck!

  • Weirdly enough, we just started doing this this month and I had no idea that it was called reverse budgeting.

    How we did it is we took my husband’s income, took out all the “bills” (anything that’s monthly recurring, including money into our savings and debts) and what’s left over is what we have to spend for the rest of the month. In our situation that ends up being $400 which has been really tough, but it seems to be working so far. I’m tired of constantly trying to figure out how to budget what amount to where and then going over by little bits in different areas and it throwing the whole month off. It was just too stressful. We still keep track of where it’s going by category, but it’s just to see where it goes.

    • I had the same problem. It was too hard to have a high grocery month or unexpected bill and then balance it all out. Now we just know, when it’s gone, it’s gone. We don’t use a credit card, only cash or debit, and with the app we use we have a constant monitor on what’s left for the month. I love it. It keeps us honest. And we know that if we order take out at the beginning of the month there won’t be $ for it later. Makes us pause before purchases.

      Congrats on making the switch!

  • I didn’t know it, but apparently we’ve been doing a sort of reverse budgeting for several years now, and it’s working great – at least I think so!

    We have one checking account that each of us puts our income into. At the end of every month I fill in an excel spreadsheet with the income we’ve made That Month – we get to spend it during the Next Month. So, we’re always only spending money that we already have. There’s a column of my income and a column of his income, which we keep separate for the time being.

    Then I have columns for expenses. Some of these we share (rent, electricity, health insurance, his student loan, groceries) so we just split down the middle and each pay half. Others, one of us pays more – for instance, I’m the one who wanted the fancy smartphones with internet access for us both, so I pay a higher portion of that bill. Then there are some expenses that only he has and some that only I have, and we each pay from our own incomes for that.

    I also take out 10% of each of our incomes for savings and 10% for tithe to our church.

    Whatever is left at the bottom of each of our columns is what we each get to spend that month on whatever we need or want – including eating out, entertainment, clothes, treats, gifts for friends & family – that sort of stuff. We each keep careful track of what we spend for the whole month.

    Our income has been variable over the years – sometimes one of us was making more, and during those times the one who made more graciously shifted some of their spending money over to the other so we could both enjoy dinners out, treats, etc.

    Oh, and one final thing, I often have little “funds” going. If there’s a bigger expense that I want, like a new computer, I’ll set aside a little of my spending money for a few months until I have enough to get it. Right now I’ve got a “baby fund” going for our baby that’s due in October – we’re both contributing to that one. :)

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