Why Backward Budgeting Is the Key to Making a Money Plan You Can Stick To

"Forward budgeters" use their budgets like vision boards, while "backward budgeters" use their budgets like roadmaps.

You've probably heard it before: Making a budget can help you accomplish just about any financial goal, whether that's saving for retirement, paying down debt, helping kids through college, buying a house, or starting a business.

But budgeting can be easier said than done. It can be hard to figure out how to get started, and even harder to stay on track. Maybe you've remembered to budget for your kids' sports registration fees, but not their uniforms—or maybe you've budgeted for gas, but not to replace your windshield's glass when it cracks. That's where backward budgeting comes in. It's a technique that economists say is the best way to make a realistic budget.

two different types of charts
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Backward Budgeting

Researchers at the University of St. Andrews ran an experiment where they divided people into two groups. Half of the participants—the "forward budgeters"—were asked to come up with a budget for the week ahead. The other half of participants—the "backward budgeters"—were asked to try to remember everything they spent money on in the past week, and then make a budget for the week ahead.

The backward budgeters ended up remembering all sorts of little things that can come up that the forward budgeters forgot about. It might be replacing the water filter in the refrigerator, or buying your kid a new lunchbox after they left it on the school bus for the millionth time. The list of unexpected, small expenses adds up. As a result, the backward budgeters budgeted an average of $255 for the week ahead, compared to the forward budgeters, who only budgeted $189 on average. And guess which group would end up better prepared for their financial reality? Yep, the backward budgeters.

How to Make Backward Budgeting Work

To get started with a backward budget, take a look at your spending from the past month by pulling together all your bank and credit card statements. Start by making a budget that reflects the actual amount you spent over the last month, divided up into categories. Then, start thinking about what you could do differently to reduce your spending. Take out a highlighter, and highlight the purchases you could have avoided. (Or start comparison-shopping to see if you can get a better deal on big recurring expenses, such as your internet bill or insurance.)

Once you've gotten a handle on the past, you can start thinking about the future. When you make your new budget, many of the categories will probably match what you actually spent last month. For the categories that are different, you'll already have a game plan in place, because you've thought about the actual rhythm of your daily life.

If you have the time, try looking at all your purchases from the past six months or the past year, since some bills happen only occasionally. You might only pay to enroll your kid in sports once per season, or pay your car insurance bill once every six months, for example.

Focusing on just a few categories can still add up to big savings. "We started using a journal method at home for our highest variable spending categories a year ago: grocery shopping and eating out," said Maria Victoria Colón, a certified public accountant who created the social media campaign Hablemos de Dinero en Español to share money advice with other Latinos in the United States. "Before the journaling, we were spending $1,000 in groceries and $700 eating out. As a family of four, we made adjustments to set a budget of $700 and $300 respectively and have been able to mostly stick to it."

Forward Budgeting

So should you skip forward budgeting altogether? Not necessarily. Forward budgeting has its place, too: The forward budgeters in the study started with a clean slate when they were thinking about the future. Although the forward budgeters ended up completely blowing their budgets and exceeded their overly optimistic spending estimates, they did end up spending $124 less per week than the backward budgeters did. When researchers went back and checked, they found something interesting: The less realistic the budget a person set, the more effective it was as a tool to change behavior.

It goes to show that there are two ways to think about a budget: Is it realistic? Or is it aspirational?

Backward budgeting is a better idea if you're relying on your budget to help you decide whether or not you can afford to make a certain purchase or lifestyle change, such as deciding whether you can afford to shift to part-time work to pursue a passion project, or whether you've got the funds needed to move into a larger home.

Forward budgeting, by comparison, works great for people who want a big burst of motivation to accomplish a goal quickly. Have you ever heard the expression, "shoot for the moon; even if you miss, you'll land among the stars"? That's the idea with forward budgeting: By setting an aspirational, albeit probably unrealistic goal, you'll look for more opportunities to spend a little less or save a little more. Forward budgeters make more dramatic financial changes.

Whether you decide to become a forward budgeter or a backward budgeter, the key is not to get too discouraged when things don't go according to plan. If you end up blowing your budget, Lauren Anastasio, a certified financial planner (CFP) at SoFi suggests that you "sit down and take a deep breath. Before you look at any of your accounts, or start making financial decisions, make sure you're in a calm state of mind."

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.

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