Reverse Budgeting: A strategy to spend more, without guilt
You’re walking around the local mall and notice Lululemon just released a new seasonal color of your favorite shirt. You immediately start justifying why you need it - the other colors you have are getting worn out, you will be excited to continue hitting the gym with a new fit, etc. You take a peek at the price tag and realize inflation is impacting gym shirts (that were already selling at a premium) too. Regardless, you’re “financially stable” and therefore decide to make the purchase. At the same time, there is a slight sense of guilt or buyer’s remorse - did I really need another $100 gym shirt? Compounding this feeling is the fact it’s not the first purchase you made at the mall today or even this week - in other words, this happens often. You’re making a lot of money and spending a decent amount too. In reality, this emotion is stemming from a lack of clarity on total spending and no solid plan for the future. A solution to alleviate this unfulfilled state is called Reverse Budgeting. See below for a step by step process on how to implement, so you can embrace impulse purchases that otherwise bring you joy.
Step 1 - Create goals that embody your values and beliefs.
Have an open/honest conversation and reflect about what’s most important to you.
Do you care about retiring early?
How about traveling - is this something you prioritize now or in the future?
If you have kids, how do you feel about college savings?
Do you want to own a second or third home?
Step 2 - Develop a savings plan to bring your goals to life.
Open different types of accounts for each goal and utilize available tax benefits to our advantage.
For example:
College - 529 plan
Retirement - 401k, (Roth) IRA, HSA
2nd Home - Brokerage
Schedule automatic monthly transfers (savings) to each account.
Using a present value of money calculation we estimate how much you need to save to hit targets for each goal (incorporating compounding interest).
Invest the savings according to your risk tolerance and time horizon, so balances grow efficiently over time - accelerating our progress.
Monitor the plan and fine tune over time, if needed.
Step 3 - Exercise the fun part.
Spend any money that is left over if/when the opportunity comes up!
The end result… It is now virtually impossible to feel guilty when you indulge in a spontaneous purchase. You’ve done the work to put together a thought out plan that gives you confidence in reaching your mid/long term goals. More importantly, you know these goals embody your core values and beliefs. The next time you are strolling through the mall, browsing a popular social media brand’s website or thinking about what cut of steak to buy at Whole Foods - you don’t have to overthink it. You can spend more of your money now and feel good about it too - goodbye buyer’s remorse.