Reverse Budgeting and Building a Case for Opportunity

*NOTE: This is part 8 of a series on budgeting.*

If you have missed the previous articles in this series, I encourage you to read them before moving forward – they are in linear order for the reader’s sake:

1. Budgeting 101
2. Living Below Your Means
3. Avoiding Lifestyle Inflation
4. Reevaluating Your Budget
5. Tightening Your Financial Belt
6. Introducing Finances to Your Children
7. Tips to Help You Budget Better
8. Reverse Budgeting and Building a Case for Opportunity
9. What Do You REALLY Need To Live?

This post is going to be one of a few in a mini-series on budgeting. The concept of budgeting gets a bad rap; it isn’t some mystic process where you have to perform mantras and practice voodoo. It’s actually pretty straightforward – recall the definition from my Budgeting 101 article that NerdWallet provides: “A budget is a spending plan based on income and expenses.”

THAT”S ALL THERE IS TO IT. Money in, money out.

With that in mind, I actually want to explore the concept of reverse budgeting and build a case for opportunity. I will explain what I mean, why I am doing this, and how it can be applied to your own life. Let’s get started.

Reverse Budgeting

Nothing mystical about budgets – even reverse ones

Normal budgeting starts with the amount of money coming in (income) and ends with the amount of money going out (expenses). With reverse budgeting, we are flipping that around. We will start with estimated expenses (money going out) and build a case for how much money you need to actually live (how much income you need).

It really is that simple.

What’s the Reason for this?

You need to know the reason why you do something

Currently, I am doing this very thing with someone and thought I’d share it with others. For reasons unexplained, Gen Z seems to be a bit disconnected from financial principles and initiative – and by reverse budgeting, you can, on paper, show someone just how much money they need to live. With that explained, you can then build a case for pursuing opportunity – opportunity that will provide the type of living people would like to have. It’s a great way to get past the veil of “I can do anything I want” and show hard numbers and facts instead.

You see, what I am doing here is demonstrating to others the principle of passion vs opportunity via money. There are scores of people out there that have been lied to their whole life. They’ve been told they need to go to college to get a good job – lie. They’ve been told they can do whatever they want – another lie. Then there is the “follow your passion – don’t give up on your dreams” mantra that is touted from stages. What they don’t tell you is that for every ONE person who makes it, there are 100,000 or more who don’t.

All of the above are lies the generation has been told and they aren’t easily dismantled. I surmise it will take a combination of numbers on paper, the right opportunities, and some tough love – which is the principle of being uncomfortable – another post coming soon (especially if they are your kids).

From what I can tell, a healthy dose of “here is the reality of the situation” is needed. Enter reverse budgeting.

I am using the Federal Trade Commission at consumer.gov and the fillable form located here. I used this same sheet for Budgeting 101 and I like the layout and flow. The main difference is that we are going to look at the expenses, fill them out for what we think we will spend/want to spend/plan to spend to see just how much money we need to make – and clearly demonstrate there are some jobs that just will not cut it.

*CAVEAT: Gen Z isn’t the only generation whose financial prowess is limited and lacks budgetary knowledge – millennials also are on board this train, too. It seems to me, though, that millennials have passed on their dysfunction of finances to another generation – compounding the problem. Couple that with not using the principle of being uncomfortable and you have a series of problems not easily addressed. *

Explanation of the Expenses

I don’t have an explanation of why hundreds of locks were on this gate

Redfin has a study where the average rent surpassed $2,000 for the first time. For this reverse budget, I selected $1,500 for this area. Utilities are what I believe are average, too. CNBC has Gen z with over 1,000 in credit card debt – hence the $100 payment. Over at youneedabudget.com, they cite the Bureau of Labor Statistics where the average household spends $3,500 a year eating out. That comes out to be around $290 a month – a number that isn’t too unrealistic. I went ahead and put it at $200 for this exercise. I was generous with the health insurance and kept it at $0.00 because young people can stay on their parent’s insurance until they are 26. Childcare costs are exorbitant, too. While Bankrate had the average childcare costs at $800 a month, I put it at $600 (I’ve heard this figure more than most others in my area). While it’s true some young people do not have kids, it’s also true this is a more promiscuous generation – and the more promiscuous you are, the more likely you are to have a kid. The rest of the selections are fairly obvious.

The results

Just like last time, I used the budget from consumer.gov which I think is sufficient for most of what we will talk about. Here is what it looks like:

Surprise surprise – using the reverse budgeting principle, a person needs $4,650 a MONTH. For those of you who live in the fantasy realm of spending whatever/whenever – welcome to reality. Life costs.

When we do the math, $4,650/160 (40 hours a week – 4 weeks a month) we come to $29.06 an hour. With the expenses we estimated with reverse budgeting, a person would have to make $29.06 an hour to afford to live. Those barista jobs aren’t cutting it.

Even if I took off the $600 a month in child care, you still have $4,050/160 which comes out to be $25.31 an hour. For many careers, it takes a few years to get to the point where you are earning that amount of money.

What’s more, the typical thing people do to reduce their costs is to rent a place with others. Let’s say we have 2 other people renting with you at $1,500 a month (hope you like them). That reduces your rent to $500. If we take the expense amount without childcare – $4,050 and subtract $500 from it – we have $3,550. $3,550/160 gives us $22.18. You’d now have to make $22.18 an hour AND work full-time, to afford to live.

 

*Some notable things I did NOT include were retirement savings and future health care costs – both of which are important and should be factored in your expenses down the line. Nor did we include hobbies – we just did a super simple reverse budget.*

Reverse Budgeting to Opportunity

We should evaluate the opportunities that will allow us the lifestyle we want to live

By now, we can tell the numbers don’t lie: they are what they are. Yes, we can tweak them to be closer to our own personal expenses but the picture is still pretty clear – life is expensive and we would do well to plan accordingly.

Now we take a look at what career options are out there that will afford us the type of life we hope to live. Are there options out there for us – ones that will allow us to enjoy a decent standard of living? Definitely.

The skilled trades have the ability to provide a quality wage many other industries cannot. Moreover, the shortage of people entering drives up the amount people get paid, too. There are not enough people entering to replace those retiring – not to mention the growth that’s happening. The number of mega projects along with infrastructure work is astounding. In short, the OPPORTUNITY is here.

Furthermore, the opportunity is greater also by joining a union. If you are working at a company that is non-union, you can always organize for better conditions, too – including more pay. As detailed in Budgeting 101, there are retirement vehicles, as well as health insurance, already built in as well as getting paid to go through a registered apprenticeship. There are several other benefits, too – but the point is understood. If you need more information, feel free to reach out and I can get you in touch with the appropriate connections to help you better your conditions.

By now I think the point is made though: using a reverse budget is a great way to help someone with clarity. For my money, I KNOW there are people out there who have relatives (probably kids) or friends who think they can do whatever they want. Coupled with unrealistic expectations and comfort, we have a recipe for failing to launch into adulthood. Far better for them to learn financial principles (the earlier the better), to gain a better understanding of budgets – and the end result? A greater appreciation of what it actually takes to be successful in the world today.

Oh, while it may not be on the topic of reverse budgeting, I’ll digress for a second and say this: parents and adults are quick to criticize their kids and young people for any number of things, but you have to stop and think – who raised them?

If they (the youth) lack ambition, could it be parents are making them too comfortable? If they lack discipline, can we not look to their parents or other adults who have not fostered an environment of discipline – including self-discipline? And If they are poor at budgeting, I’m willing to bet their parents are, too.

You see, it’s likely that people reading this – and others who are not – could benefit from this series. After all, if the majority of Americans do not have a budget, it’s not hard to make the connection. While some may not feel it’s right to lay the blame this way, I don’t think we do it enough. For the most part – and especially financial literacy – it’s largely learned behavior. And since we have already established the majority of Americans do not even use/have/work a budget, how can they blame others for being sloppy in their finances? In the iconic words of Woody from Toy Story: If. The. Boot. Fits.

I think you get the point here: it’s hypocritical to judge finances when yours are in disorder – and it’s especially heinous when they weren’t taught financial literacy. Have a measure of grace – and if need be, learn the same financial principles the youth themselves need. Here’s an idea: learn them when they are! You’re never too old to learn something new.

End of rant.

Conclusion

So, where do we go from here? By now, I hope that you not only understand the value of a budget – as demonstrated with this post and Budgeting 101 – but also a reverse budget. It’s a great tool to use to enlighten, educate, and drive people toward the right kind of opportunities they need to live the kind of lifestyle desired. It’s a wake-up call done by interrupting daydreams with realism and pragmatism.

If you know someone who needs to know this, feel free to share this and develop your own approach. It doesn’t have to be the exact sheet I used or even the same parameters; the abject lesson, however, remains the same. It’s a valuable tool and a wake-up call for many.

And, as always, if you found this helpful, drop a line and let me know – it adds fuel to the fire. Happy reverse budgeting everyone!

 

 

*NOTE: This is part 8 of a series on budgeting.*

If you have missed the previous articles in this series, I encourage you to read them before moving forward – they are in linear order for the reader’s sake:

1. Budgeting 101
2. Living Below Your Means
3. Avoiding Lifestyle Inflation
4. Reevaluating Your Budget
5. Tightening Your Financial Belt
6. Introducing Finances to Your Children
7. Tips to Help You Budget Better
8. Reverse Budgeting and Building a Case for Opportunity
9. What Do You REALLY Need To Live?