As we graduated and entered the workforce, a recurring piece of advice we received from friends and family was to budget. The version they were imagining involved setting aside a set amount of money each month into different buckets of expenses. Two hundred dollars for the gas bill, eight hundred dollars for groceries, two hundred and fifty dollars a month for unexpected car trouble, etc. This dollar-first approach was tough for me to envision and even harder for me to implement in practice. I had difficulty reliably predicting just how much money we were spending from month to month, and found that my estimates for some of these categories were simply too wide. So we decided to approach things in a simpler way, commonly referred to as the reverse budget.
Instead of setting aside money for all of our expenses first, we decided to set aside money for all of our investments and assets first. I think this approach works particularly well for relatively high-earning dual-income households.
I had the goal of maxing out my workplace retirement accounts. This includes my 403(b) as well as our family HSA. My wife is on board and maxes out her company’s 401(k) as well. These accounts are particularly nice because the money comes directly out of our paychecks. It never really even hits our checking account. Annually, this allows our investments to increase by nearly $65,000 when employer matches are included. Fortunately, things have gone well, and we have treated this as a set-it-and-forget-it approach. We can always scale back if an emergency arises.
This next part overlaps with traditional budgeting. We have an affordable home with a 15-year mortgage at a 6.5% interest rate. We intentionally bought a home that was about $100,000 below what we were comfortable paying for on a 30-year mortgage, then chose the 15-year option instead. This is our only loan, and it is nice to see our equity increase month after month. To speed up the payoff, we make biweekly mortgage payments with an additional $250 principal payment each time. This essentially locks in a guaranteed 6.5% saving on future interest, and we consider it non-negotiable. If money ever gets tight during a particular month, we pick up an extra shift and cut back in other areas. I view this as a low-risk way to build net worth.
By automating our mortgage payments and investments this way, we have already completed about 80% of the work on the front end. Then we try to optimize the other expenses that come along the way. When our car insurance bill arrives at the beginning of the year, we pay it in full. I don’t like having recurring monthly bills hanging over us. If I notice our checking account floating one or two thousand dollars higher than usual, I send the excess to the mortgage as a principal-only payment. When we book a trip several months in advance, we pay for it in full immediately. Our philosophy is simple: if we constantly pay down expenses in full and well ahead of time, we will never be fooled by the appearance of an unusually large checking account balance. An unnecessary $400 purchase is much easier to justify when there is $10,000 sitting in checking than when there is only $3,000.
As we prepare to add a 529 plan, a taxable brokerage account, and a backdoor Roth IRA in 2027, I am making sure automatic contributions to a high-yield savings account are already in place. That way, when the new year starts, the cash is ready and we can fund those accounts immediately.
This process is not always mathematically optimal, but we aren’t robots. I know I would spend more if I saw more available cash. This system keeps us honest. It keeps us frugal.
The other thing that happens is that the discretionary spending we do enjoy feels a whole lot better. I know that if we prioritize the process outlined above, our net worth will increase by roughly $50,000 a year even in relatively poor market conditions, usually its quite a bit more. That means the extra date night, the weekend trip, or the new pair of shoes doesn’t feel like a setback. It feels like we’ve earned the freedom to spend on those things because the important financial decisions have already been made.
