Pay yourself first before meeting expenses: Here's why

Dubai: We may have read or heard of a lot of different budgeting options. While some avenues center on using envelopes to budget better, others are focused on earmarking percentages of your income based on your spending habits.

However, to find a budget that works for you can get tricky if you choose an increasingly stringent budget with less wiggle room for those once-in-a-while splurges or other leisurely spends. Eventually, you may find yourself losing interest in managing your money altogether.

Is budgeting hard? ‘Reverse budgeting’ can help

So if creating a budget and sticking to it has turned increasingly tedious mostly because how time consuming and restrictive it has become, here’s where a non-traditional budgeting method known as ‘reverse budgeting’ can come handy.

“When it comes to managing money and routine expenses, one possible budgeting solution is ‘reverse budgeting’, which is simply paying yourself first and figuring out the rest of your budget with what’s leftover,” said Melanie Aguste, a financial planner based in Abu Dhabi.

With ‘reverse budgeting’, you first put your money in savings and investments, and then you pay your bills

- Melanie Aguste

“Essentially, you first put your money in savings and investments. Then you pay your bills, and you can use whatever is left over for your basic spending needs. It’s about making investing and savings a priority before anything else. But that doesn’t mean sacrificing basics like housing and food.”

How would you benefit with ‘reverse budgeting’?

‘Reverse budgeting’ can put you at ease because the method focuses on saving, because the logic is you can’t spend what you don’t have. Also, while increasing the amount you save naturally reduces the amount you spend, it also forces you to prioritise your expenditures.

“With this money management method, you don’t sideline routine or recurring expenses, and this is important because most people find that gradually saving more allows them to cut spending,” Aguste added. “Best of all, reverse budgeting requires very little maintenance.

“A traditional budget requires weekly or monthly reconciliation of financial transactions. Once a ‘reverse budget’ is set up, the entire thing can be automated. The lack of ongoing time commitment makes it much more likely you will stick to a reverse budget.”

Key downside to the ‘reverse budgeting’ method?

While it can be easier on yourself as ‘reverse budgeting’ involves less rigorous budgeting, Dubai-based financial advisor Mohammad Shaan explains that if you have a lot of debt or overspend every month no matter how hard you try not to, you’ll need a stricter budgeting tool.

“To ensure you’re not leaving yourself too little to cover all your expenses, you can also roughly follow the ‘50-30-20 rule’, which dictates that 50 per cent of your income goes towards necessities, 30 per cent towards discretionary spending and 20 per cent towards saving,” added Shaan.

“While making sure you’re not putting more than 50 per cent of income toward necessities like rent, utilities and other bills, you could also switch the remaining two categories, so that you put 30 per cent of your income into savings and aim to spend no more 20 per cent on discretionary expenses.”

Also, you can treat usual budgeting categories like saving, investing and contributing to retirement accounts as a fixed cost, and add these to your list of fixed costs for the month to determine about how much you’ll have left over.

The reason ‘reverse budgeting’ is a favourite among many is because once you’ve figured out that number (your fixed expenses), you’re free to spend it however you wish

- Mohammad Shaan

Why is this budgeting alternative proven to work?

“The reason ‘reverse budgeting’ is a favourite among many is because once you’ve figured out that number (your fixed expenses), you’re free to spend it however you wish. The fluidity allows you to edit your priorities as you go, instead of fretting over overspending in a certain category,” he said.

“You can splurge on a meal out and make up for it by taking advantage of free activities over the weekend. If you keep your grocery bill low, you can go see a movie or take a cab home. As long as you stay within the limit you set, it doesn’t matter if you’re buying groceries, gifts or new clothes.”

This strategy of ‘paying yourself first’ ensure you are no longer stressed or guilty about not staying inside the lines of a rigid budget or arbitrary budgeting categories. By paying yourself first, you’re forced to stay within your limits, but what you do inside that boundary is totally up to you.

Bottom line?

Even if you feel meticulously tracking your expenses is not something you want to stress over currently, having a general estimate of how much you’re spending can be useful to make sure you’re meeting your financial goals, like paying off credit card debt or saving for retirement.

Because ‘reverse budgeting’ is a budgeting system that focuses on you paying yourself first, when you put your investing and savings goals ahead of everything else, it’s easy to get ahead. However, it might not be for everyone, especially those deep in debt or often find themselves overspending.

Also, being flexible and leaving room in your budget for when you have periods of higher spending, helps. So you don’t necessarily have to create a detailed budget that allocates money for each category that fits your spending patterns.

Instead, simply commit to paying yourself first, meaning whenever you earn money set aside a portion for your future self. As long as you establish how much you need to save each month for retirement, your emergency fund and any other big, future purchases, and you actually set that amount aside, you don’t have to budget for anything else at all.