Budgeting is all about planning and saving for the future, right? Perhaps. Real Simple offers a way to approach budgeting that goes in the opposite direction in “Why Backward Budgeting is the Key to Making a Money Plan You Can Actually Stick To“.
Years ago, financial experts advised to examine all of their receipts for a week to track their spending and see where their money was going but they may not have been advised to take the extra step to create a budget afterwards. (Plus, these days many people can examine online statements so there is no need to gather receipts.)
With backward budgeting, you can look at your past expenses for a week, a month or even half a year to figure out how much money you need to set aside for different expenses. In a study where some participants budgeted forward (planned ahead) and others budgeted backwards, the backward budgeters were more realistic about expenses because they planned with past unexpected expenses in mind. They were also able to see where they had overspent (ex. dining out). However, backward budgeters spent more than some forward budgeters who optimistically budgeted less.
And of course, no one is bound to a specific kind of budgeting. Real Simple notes that forward budgeting is good when want something to spur you on to reach certain financial goals. Backward budgeting is useful when you are trying to decide if you can afford to make a certain purchase or add on a certain recurring expense.
The article concludes, “Forward budgeters use their budgets like vision boards, while backward budgeters use their budgets like roadmaps: Either way, as long as the budget helps you head in the right direction, you’ll have something to celebrate.”
If you want the objective help work with budgeting and financial planning, you can work with a Fee-Only financial planner.