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Welcome to the 28th edition of the Tech Financial Planning (TFP) newsletter.
Most of us, myself included have tried and failed with traditional budgeting.
If pouring over spreadsheets isn’t for you, meet reverse budgeting.
In this newsletter we will discuss why reverse budgeting may be the solution for those who struggle with traditional budgeting, and how it can help you take control of your finances.
TL;DR
Traditional budgeting works for some, but for most people it can be time-consuming and ridgid
With reverse budgeting, you focus on your saving and investing first, then spending what’s left
Reverse budgeting + automation is a superpower, giving you more freedom in your day-to-day spending
A Quick Note On Budgeting
Budgeting gets a bad wrap, but it works for some people.
Particularly for more detailed, number oriented people.
They like tracking expenses and updating spreadsheets.
Clearly it works for enough people - there are whole businesses like Mint and You Need A Budget (YNAB).
If that’s you, keep it up.
But this newsletter isn’t for you.
For people who are allergic to budgeting, let’s explore a different way.
But first, a story.
Our journey
I got married in April of 2017 to my wonderful wife Carly.
Early on in our marriage, our main source of conflict was money.
Long story short, I’m more of a saver (shocking) and she’s more of a spender.
It was so obvious to me that we should be saving more, and it was so obvious to her that we should have some fun (I’m exaggerating, but you get my point).
I was so used to following a plan that worked for me while I was single, and we never brought up money proactively.
But I would review our finances and get frustrated that we spent too much on groceries or eating out or [pick anything].
Which wasn’t fair to Carly, because we had never sat down and agreed to anything.
I was putting my expectations on her, without communicating them - I was expecting her to magically understand what was the right amount, and what was too much.
Our marriage was never in jeopardy, but there certainly was more disagreement and tension than there needed to be.
My better half
We ended up working with a financial coach (I’d call him more of a financial therapist) and he was super helpful for Carly and I to have better conversations about money and understand where each other were coming from.
Part of the process was setting up a spending plan (slightly different, but similar to a budget) and tracking spending closely.
The goal was to give each dollar a job and save proactively for future expenses like car insurance and Christmas gifts so there weren’t big surprises.
And it worked really well, at least for the first year.
It helped us get in touch with where our money was going and get on the same page.
And since then, our money fights are down dramatically.
But long term we fell off.
It got really time intensive to track every expense and categorize it, particularly with online expenses like Amazon and Target.
But most of all, it felt super rigid.
I would get frustrated if we went over in a certain category.
For example - laundry.
But what were we supposed to do - do less laundry?
It was ridiculous, and maybe I wasn’t doing it right but there wasn’t the freedom / flexibility I needed.
A note from carly
If you’ve heard that money is one of the top sources of conflict in a relationship, that’s absolutely true.
If you can’t have healthy conversations about finances, it might make sense to meet with someone who can mediate those conversations.
It’s going to be tough to apply any of these tips if you can’t have conversations around money.
PS from Joe - Every couple does it differently.
I work with families who are all over the spectrum, from couples who have everything shared to couples who split expenses and don’t know how much the other person makes, and everything in between.
There isn’t a right way - it’s what works for you.
A better approach
Enter reverse budgeting
Traditional budgeting focuses on expenses first, then finding what you can save and invest. Reverse budgeting focuses on saving and investing first, then spending what’s left.
It’s a subtle shift, but meaningful.
And let me take a step back.
Reverse budgeting is about taking care of the big items first.
Mortgage / rent
Saving / Investing
Paying off debt
Giving (if that is something you do regularly)
Taxes (particularly if your company doesn’t withhold enough during the year)
And then living on the rest.
The key - automate as much as you can.
We’ll jump into an example, because that will make it more applicable.
But this has worked wonders for Carly and me.
There is so much more freedom.
Each month everything is automated.
Our rent
Our giving
Our car payment
Our investing
Because I know we have those set up automatically (and they are in line with our goals), I don’t really care what we spend our money on.
I can order all the coffees guilt free.
Carly can order sushi to the house.
It doesn’t matter.
Provided we don’t bring our bank account into the negative.
Note: this is where budgeting, at least for a couple months, can be helpful.
By having a rough idea of your spending through the rhythms of life, you can set more realistic targets.
An example
Enter Bob and Sue, our fictional couple.
They are 38 & 36 respectively, and they have two young kids, 4&2.
They both do quite well and combined they make close to $500,000 between their salary, bonus, RSUs, and real estate.
Off the top we have their known expenses:
Mortgage - $6,000 / month or $72,000 / year
Taxes - $191,000 / year
So right off the top, we subtract $263,000, leaving them with $227,000 to split up between saving/investing, goals, and living expenses.
One possible way we could approach this:
401k - $45,000 (max out for both Bob and Sue)
ESPP - $42,000 (close to maxing out for both)
Education - $12,000
Saving for a big trip - $8,000
In this case, they would save $107,000, or close to 22% of their income.
Because I like simple math, this leaves them with $120,000, or $10,000/month, in living expenses.
They can spend it on whatever they’d like because they took care of the big things first.
The best part - almost all of this is automated:
Both the 401k and the ESPP are payroll deductions.
Their mortgage is an auto payment
There are auto transfers to the 529 account and to a separate savings account for their big trip.
Putting It All Together
If traditional budgeting doesn’t work, give reverse budgeting a try.
It’s been a game changer for me personally, as well as many of my clients.
Last year I met with a client who was worrying that she was spending too much because she wasn’t saving a lot of money from her paycheck each month.
But she was automatically putting away 10% into her 401k and 15% into her company ESPP.
So she was automatically saving 25%, which is great!
The art is that it’s different for each family.
The recently married couple in their 30s saving for a down payment should manage their cash differently than the family in their 40s thinking about kids' education.
But as I wrote last year, nailing your cash flow is what sets you up for financial freedom, both now and in retirement.
Here’s to getting it right!