Free for 90 days: Sign up now and get 90 days managed free after your first deposit. See offer details

<title>Dismiss</title>

Fighting Financial Guilt In The Era Of Latte Shaming

Don’t let provocative news cycles make you feel bad about buying coffee every morning. You can have your $5 latte and still meet your financial goals, using reverse budgeting.

Articles by sherrillstgermain

By Sherrill St. Germain
Financial Columnist, Betterment  |  Published: July 18, 2019

Despite a healthy economy, some Americans are drowning in a sea of money anxiety.

All this worrying accomplishes little—and may even divert us further from our financial goals. Getting hung up on the small expenses that make up our spending only exacerbates the problem.

To help build financial security without all the hand-wringing, try reverse budgeting instead.

In the good old days, people would often blame a case of the jitters on their morning coffee. Then came the “latte factor,” which popularized the notion that this ritual could mean the difference between prosperity and financial ruin. Ever since, the average $5 daily price of a cup has probably caused more coffee-induced anxiety than the 150 mg of caffeine itself.

Unfortunately, no amount of worrying about spending will fund retirement. Worse, it can take a toll on quality of life and mental health.

So, is there a way to ditch the financial guilt without suffering eternal caffeine withdrawal? Reverse budgeting could be just the solution.

Financial Stress Hurts

Money is the leading cause of stress for Americans, according to a recent study. Never mind that the U.S. is experiencing its second longest economic expansion in history. Half those surveyed consistently experience anxiety, insecurity, or fear about their finances. Healthcare costs and unexpected emergencies topped the list of concerns, with income, savings, and debt not far behind.

All this angst is adding up to something bigger, too. About 40% of respondents cited money-related problems with spouses, family, and their larger social network. More than 1 in 4 reported experiencing mental illness at least monthly.

With the cost of treating such disorders so high, financial stress sets up a vicious cycle, draining resources and peace of mind.

As you can see, there’s little upside to financial stress. But if demands for your cash always seem to exceed supply, how can you not worry? That’s where reverse budgeting comes in.

Reverse Budgeting Can Help

Reverse budgeting takes the “little things mean a lot” emphasis of the latte factor and flips it on its head. Rather than asking you to deny yourself that iced coffee, it takes a top-down approach that focuses on big-ticket items and paying yourself first.

Step One: Make conscious choices about how much to allocate to large, recurring priorities. That typically includes savings, housing, car, tuition, etc.

Step Two: Do the math to determine how much is left for everything else.

Step Three: Stop spending until the next paycheck once that money is gone.

Essentially, reverse budgeting lets you have your cake and eat (at least some of) it too. That might sound too good to be true, but here’s why it can work.

  • It uses systems to safeguard long term goals.
  • It sanctions a particular level of spending on current lifestyle.  That means fewer of the binge/purge cycles that often accompany austerity measures.
  • Spending decisions that match desired behavior are effectively pre-made. This reduces the decision fatigue that encourages budget-busting impulse buys.
  • It adjusts to your changing tastes. After all, what difference does it make if you spend on lattes in March, yoga in April, and a Spotify subscription in May?
  • It allows for extenuating circumstances. If your best friend is visiting for the first time in years, you might skip the month’s spa treatment for a night on the town.
  • It reins in lifestyle creep by requiring the extra manual step of transferring money.

In short, reverse budgeting minimizes the mental bandwidth needed to manage your money according to your values.

Invest with Betterment!

Systematizing Is Key

Reverse budgeting manually is a great start, but automation is what can really make it an effective strategy. The idea is to set up a system that automatically performs repetitive tasks and pushes you to make good spending choices.

An efficient reverse budgeting system contains several key components, many of which you may already have in place. In that case, you simply need to modify the way you use them to support your new money management model.

Dedicated Accounts

Central to this system is using your checking account for big ticket items. Don’t forget to seed your account with a cash cushion large enough to prevent overdrafts. Some reverse budgeters like to keep this amount small to act as a check on spending.

Managing your finances with a partner? Consider keeping separate “everything else” accounts to minimize coordination of efforts. Side benefit: it might also increase marital harmony by skirting disagreements over spending.

Automated Transactions

Next, you’ll need to set things up so that money moves where it needs to go with no intervention on your part. That includes:

  • direct deposit of paychecks into your checking account,
  • automatic transfer of predetermined amounts from there into your savings, investments, and
  • automatic payment of big ticket items and other recurring expenses.

You can earn even more over time by automatically shifting surplus cash to vehicles with better expected rates of return. If your financial institution supports it, have the excess cash in spending accounts swept into a higher yield account. Better yet, automatically invest funds to ensure you dollar-cost average rather than trying to time the market, often a detriment to returns.

Push Notifications

The final step is setting up daily alerts to keep you abreast of how many more lattes your “everything else” accounts can support this month.

With that, you’ve outsourced the bulk of your money management to technology, a resource perfectly suited to the task.

All that’s left for you to do is periodically tweak the system as your personal financial situation evolves.

Leave Your Guilt In The Past

Don’t let those latte shamers get to you. Reverse budgeting is a simple, elegant method for building long term financial security without constant hand-wringing over daily spending.

It strikes and maintains just the right balance between long term financial goals, priority expenses, and life’s little indulgences–per your family’s priorities. Now, all that’s left for you to do is relax, sit back, and enjoy the elixir of your choice.

Recommended Content

View All Resources
Displaying Performance to Shape Better Investor Behavior

Displaying Performance to Shape Better Investor Behavior

Understanding your accounts’ performance can feel complicated. We’re advancing how we display performance to help answer your questions and make stronger investment decisions.

How Much Money Should You Keep In Your Checking Account?

How Much Money Should You Keep In Your Checking Account?

How much money should you keep in your checking account so you can make the most of your finances? Here’s how you can calculate the right number for you.

Investing in Your 20s: 4 Major Financial Questions Answered

Investing in Your 20s: 4 Major Financial Questions Answered

When you're in your 20s, you may be starting to invest or you might have some existing assets you need to take better care of. Pay attention to these major issues.

Explore your first goal

Cash Reserve

Our high-yield account built to help you earn more on every dollar you save.

Safety Net

This is a great place to start—an emergency fund for life's unplanned hiccups. A safety net is a conservative portfolio.

Retirement

Whether it's a long way off or just around the corner, we'll help you save for the retirement you deserve.

General Investing

If you want to invest and build wealth over time, then this is the goal for you. This is an excellent goal type for unknown future needs or money you plan to pass to future generations.

See details and disclosure for Betterment's articles and FAQs.