Money is an essential part of life, but the paradox is no one wants to talk about it. A study conducted by Wells Fargo revealed that personal finance (44%) was more difficult of a topic to discuss than death (38%), politics (35%), religion (32%), taxes (21%), and personal health (20%).
One explanation for this phenomenon is that money can bring up powerful feelings of guilt and shame. Especially when the topic of budgeting is mentioned. As soon as the “B” word gets thrown into a conversation, negative feelings arise for most people.
Our society tends to make successful budgeting difficult, which compounds into other personal finance issues. Your cash flow plan is the foundation of your finances, and there is a way to build your house on a rock instead of the sand. It’s called Inverse Budgeting, and it can change your life, especially if this is a pain point for you. Let’s first explore why conventional budgeting doesn’t work.
- It’s tedious, boring, and requires a lot of time tracking every dime.
- It is incredibly easy to have situations come up that require more money than you had allocated. Expenses fluctuate from month to month for everyone.
- It requires an enormous amount of self-control at all times. Most people around you are not successfully budgeting either, and having to say “no” all the time is incredibly difficult for most.
- A large number of people experience a strong sense of guilt when it comes to spending any disposable income. Past mistakes haunt us, wondering if we’ll ever meet our goals weighs on us, and the future can be scary.
A traditional budget calls for someone to track all of their expenditures into detailed categories, then focus on where you can cut back. This traditional path forces you to think about spending first, then save what’s left over. But it’s very easy to find ways for the leftover funds to leave your account. Everyone needs to be doing the opposite!
Inverse budgeting removes all of these common issues, by circumventing them completely. If someone knew the exact dollar amount they needed each month to accomplish their goals on time, and had that amount set aside at the beginning of each month, they would already be set before life had a chance to ruin the budget. Focusing on saving the exact amount for your goals, and then living on what’s left over is the path of least resistance. Let’s dive deeper into the details.
- Determine the exact savings amount necessary to accomplish your goals. You’ll need to figure out if that number needs to be earning compound interest or if it is a straight cash savings goal. If you’re having trouble determining this number, we can help with that. A good baby step is to figure out your highest priority goal and start the process with that one in mind.
- Set up the necessary savings amount as an automatic transfer. This applies if the savings amount is staying as cash in your bank account or involves your investment accounts. All major banks have this feature, and you can also set up the same situation with an asset management account.
- Enjoy spending and living on the rest of your income guilt free. Your goals are being met first, so everything else can be enjoyed!
That third step is the real beauty of this strategy. If your goals are being met, then the rest of the spending throughout the month is irreproachable. Inverse budgeting sounds simple, and it is! The simplicity of it is what makes a painful situation painless. But remember…what is simple to do, is also simple not to do! The magic here is following through with this concept.