Master the Art of Reverse Budgeting

In this enlightening video, Matt Blocki challenges traditional budgeting methods, advocating for the revolutionary concept of “Reverse Budgeting.” Drawing from personal experiences and behavioral insights, Matt discusses the pitfalls of conventional budgeting, emphasizing the importance of understanding one’s unique “money temperature.” He introduces a practical approach by recommending the segmentation of income into fixed and variable accounts, along with a money market account for strategic savings. Matt’s method alleviates decision fatigue, automates significant expenses, and establishes a clear financial roadmap, fostering a stress-free and regret-free financial journey. With relatable anecdotes and practical advice, Matt Blocki guides viewers towards implementing reverse budgeting for a more secure financial future.

Video Transcript

I am a big proponent in not budgeting. The reason for this is I find a lot of people get really caught up in Excel spreadsheets. A lot of people will argue as spouses over who overspent in what category. So what I recommend to do is something instead called reverse budgeting. I believe everyone has a money temperature. The more you earn, the more likely you are to spend. Some people refer to this as lifestyle inflation, some people refer to as lifestyle creep. The way to control this before it controls you is a technique called reverse budgeting. What is reverse budgeting? So, let’s just say, hypothetically, someone has an income of $300,000. They have, after taxes, federal, state, local, in Pennsylvania, Medicare, everything like that. Then they, after taxes, max out the roth.

 

Four hundred and one k in two thousand and twenty three, that’d be 2500. So, hypothetically, this person is bringing home $14,000 a month out of their paycheck, after taxes, 401, some benefit deductions, et cetera. So, out of that, we would recommend to actually have that automatically deposited into two separate bank accounts. So one bank account, we would recommend labeling it as the fixed bank account. And then the second one we would recommend to do what’s called a variable account. And then the third thing is, we would recommend to put some money into what’s called a money market account at a reputable custodian. Let’s say, hypothetically, that’s fidelity. So what is the fixed account?

 

So, first of all, what most people do is they’ll take this money, it’ll go into one bank account, their mortgage goes out, their student loan goes out, their car payment goes out, the daycare cost goes out for their kids, and before you know it, Amazon purchases, dining out. Where did all the money go? Now we’re behind on our credit card bills. So I want to take you back to a coach about ten years ago for me, helping me get into a daily routine, and it all starts out in the morning. So I was having trouble with hitting the snooze button. 530 snooze for ten minutes, 540 snooze for ten minutes. And the decision fatigue on a morning basis was out of control. I never got out of bed at 530. So what this coach told me to do is actually to pre program.

 

This is before cure rigs, and I had an actual traditional coffee pot. I program it to go off at 05:35 a.m. Five minutes after my alarm clock went off. And the night before, the agreement was I had to leave the coffee pot off of the coffee maker. So if I did not get up out of my bed downstairs by 05:35 a.m. Five minutes after that first alarm, the coffee would start going and would spill all over the counter. So this was a forced accountability to get me up out of bed. And the coffee pot analogy still holds true to this day. So how do we apply this to money? Well, putting all your money in one bank account and then waiting to see what’s left, that would be similar to hitting the snooze button in the financial plan.

 

So how we create that coffee pot in a financial plan is we pre allocate to these three accounts and this makes all the decision fatigue go away completely. Let me describe how. So the fixed account. The job description would be hypothetically, let’s say to get half of this money. So the 7000 a month would go here. This would be designed to pay all your fixed bills, such as your house, put your utilities on a budget, put your car payments, automated student loans if applicable, daycare cost. If you have kids, all of these costs you have to pay no matter what. So add those up and just put enough to cover those cost. And then you don’t even have to worry about this account anymore because the first part of your paycheck goes there, the bills automatically come out. And next month, rinse and repeat.

 

Rinse and repeat. So there is absolutely no decision fatigue. We’ve now automated the big ticket items on our financial plan. From an expense standpoint, the variable account is really designed to every time you swipe a card. So this would be any variable purchase, Amazon purchases, anytime you’re dining out, anytime you’re out with friends, anytime you’re on vacation, the money would go here first. So let’s just say hypothetically, that’s $4,000 a month. So if you’re married, we would have potentially a credit card account, a credit card for spouse number one, a credit card for spouse number two. And this account is the only account that’s eligible to pay these off. Now, if your balances are going about 4000 a month, then I would recommend for a couple of months get rid of the credit cards, spend until it’s gone.

 

And that’s a meant to be spent account and get into the habit and the money temperature of just limiting yourself to that 4000 a month. We do recommend using credit cards for all those variable purchases, for points, for protection on purchases, for fraud, et cetera. But the most important part of reverse budgeting is automating and setting the temperature of your money before it sends the temperature for you, which will do continuously go up. And once you’re up, it’s really hard to come back down. And this is the coffee pot really comes into play. The third deposit. So if we have 7000 there, 4000 here, remember, we’re already maxing out our want 3000 a month going in this money market account. And this is all just as an example. But the 3000 a month would then be allocated to short term savings.

 

Anything in the next five years, such as a down payment, a vacation home, et cetera. Midterm goals would be things like 529s, brokerage accounts for college, et cetera. And then the third thing would be long term financial independence planning. Now, we already have the 401k that’s getting taken out of our paycheck here, but then also brokerage accounts, Roth Iras, et cetera. If you have 1099 income, maybe another 401k. Hypothetically, this is fidelity. The money goes here and then we can automate the deposits going in the short term, midterm and long term account. This immediately sets up instead of tracking wherever expense goes. All that matters is what you save. All that matters is that you’re living stress free, knowing you’re within your budget without actually keeping a spreadsheet.

 

The essence of a financial plan is securing the future without sacrificing, maximizing your present today, living stress free today, and then also in the future, living without regret. And I strongly believe a traditional budget that you put in Excel spreadsheet does not achieve the goals. But if you reverse this, it forces the goals to automatically be on track and the human behavior. It’s now up to you to get up, go put that coffee bot, or else there’s going to be a lot of spillage that occurs and coffee on a counter you can clean up. A financial plan not allocated properly can be devastating to your family and your children. I would recommend implement reverse budgeting today if you haven’t already close.

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