Do you spend your days dreaming of what you could be doing if it weren’t for your pesky job? Would you travel more? Stay at home to raise your kids? Stay in your PJs until noon and enjoy being stress-free? The possibilities are endless.
If your goal is to have more freedom in life, you’ll want to know how to budget backwards to plan your monthly spending.
In this post, I’ll share with you the importance of creating a backwards budget to meet your personal goals and how to budget for the most freedom.
What is a Backwards Budget?
Conventional budgeting advice suggests you begin your budget with your monthly income and allocate your income to various spending categories. When deciding how much you should budget for each category, you ask yourself: “How much can I afford to spend?” before making your allocations.
A backwards budget flips this idea around. With backwards budgeting, you calculate the least amount of money you need to live each month. Instead of asking, “How much can I afford to spend?” backwards budgeting requires you to ask, “How little can I get away with spending?”
Why Backwards Budget?
Your monthly backwards budget total shows you how much money you need to survive each month. Anyone with a job is susceptible to an unexpected job loss. Backwards budgeting will help make a scary potential loss of income a little less terrifying. You’ll know exactly how much you need each month to survive.
Backwards budgeting is especially important for people who want a big life change. If you are someone who:
- Wishes to stay home with your kids,
- Desires the freedom to travel more,
- Wants to cut back their working hours,
- Is considering moving to a lower-paying job to lessen the stress in your life,
you need to create a backwards budget.
Everyone needs to budget in reverse. Even if you don’t plan to make a change in your working situation, you need to know the least amount of money you need to keep on keepin’ on in this world.
How to Budget Backwards
To budget backwards, download my backwards budget planner sheet below:
You can also create your own on a blank sheet of paper. Divide your paper into two sections: essentials & extras. At the top, answer the question:
How do I wish I could spend my days?
Think about what you value the most in life. If you could choose how you spend your days, what would your life look like?
Gather all records of your spending in for the past month. Print all bank or credit card statements and try to recall any cash you’ve spent. Compile a quick list of irregular expenses – insurance you pay every six months, yearly taxes, etc. Break these irregular expenses down into a monthly amount by dividing the cost by how often the expense occurs. For example, car insurance that costs $300 every six months would be a $50 monthly expense.
In the essentials column of your budget, list the expenses that you cannot live without. Common essential expenses include: mortgage or rent, food, utilities, transportation costs, and insurance. Also include any monthly debt repayment (student loans, credit cars, car payments) and contracts that are difficult to break (cell phone, cable television).
Any monthly expense that you could live without will go into the extras column of your budget. Extras often include things like dinners out, clothing, entertainment, hobbies, travel expenses.
Be completely honest with yourself when completing this exercise. Your responses are yours alone. What is essential for one person/family is not essential for others.
For each item, answer these questions:
Is this expense worth the ability to choose how I spend my days? Would I rather have this item than my goal in life?
Categorize each expense into essentials or extras based on your answers to these questions. There are items in your budget that start as essentials but quickly turn into extras (think food and clothing). For these items, ask yourself:
What is the least I could spend on this each month?
Once you’ve finished categorizing ever expense into essentials and extras, add up the total amount for each column.
Your total in the essentials column is the least amount of money you need to make each month to keep current on your bills and support the life you want to live. If your income changes, you’ll have to bring at least this amount home each month to survive (& and avoid debt collectors).
Your total extras are those things you can add back in as money allows. These are NOT things you need to survive. You can rest easy knowing that if you fall on hard times, or decide to make a drastic life change, you can immediately cut these expenses from your budget.
Change Your Life
If the life you dream of involves less income, you need to do whatever you can to decrease your essential expenses. Some ideas for how to do this include:
The more expenses you can move from essentials to extras, the more freedom you have to live your life as you choose to live it.
If you’re serious about making a big change in your life, plan to live with just your essential expenses for a few months before making the change (if possible). It’s a good idea to add-on a buffer of around 10-20% to cover unexpected monthly expenses (and there are always unexpected expenses in life).
Budgeting backwards will give you a clear picture of how much money you need each month to survive. You can use this information to change your spending habits. Since money is time, the less money you need each month to survive, the more freedom you have to change your life.
After budgeting backwards, my family discovered that we can survive on just $2,500 each month. After calculating this number, we chose to have my husband leave his stressful full-time job and we live on my work-from-home income alone. We’re both able to spend our all our days together with our daughter. Life is a lot simpler, but a lot more joyful.
Now, get to work reducing your essential expenses so you can live your life how you want to live it!