Ever find yourself wondering where all your money went at the end of the month?
You may want to try reverse budgeting, a method that helps you first set aside money for regular, important expenses like rent, bills, and transportation, as well as priorities like retirement. "It's basically an easier form of budgeting where you establish what bills you have to pay and what savings goals you are pursuing," says Bola Sokunbi, author and CEO of Clever Girl Finance.
This method directs your money towards the essentials: Your fixed costs and your savings goals. This way, you can be sure you've taken care of your responsibilities and know that whatever you have left over is yours to spend however you wish.
This method isn't ideal for everyone, she cautions, especially those with more complex money situations. "It's better suited for someone who doesn't have too much going on with their finances," says Sokunbi.
Video by Courtney Stith
Here's a breakdown of how you could make it work.
Figure out how much money you take home after taxes. If you're a freelancer or you earn extra money doing side hustles and your income varies, then it may help to figure out your average weekly or monthly earnings based on your hours worked, overhead spent, expenses, and so on.
Write down what you need to pay towards your fixed costs, including student loans, credit card debt, and all monthly bills or essentials like housing, food, transportation, utilities, and services. Also include your savings goals, like retirement, a home, or a wedding.
Setting up your bills to get paid electronically can help you pay them in full and on time. "Automation is a tool that allows you to get out of your own way," Sokunbi says. "It eliminates the mental battles you have deciding whether to spend or save."
Use direct deposit to your advantage, too. Most employers allow for automatic direct deposit into more accounts than one, so you could split your take-home pay into different checking or savings accounts and schedule automatic credit card payments as well as regular transfers into retirement accounts such as your 401(k) or IRA.
After you've put what's necessary towards covering your fixed costs and towards your future, "what you have left is yours to decide what to do with," says Sokunbi. "Depending on your goals, you can choose to spend, save, or put more money towards debt."
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