Increase Your Savings Account by Overbudgeting

I’ve stressed before how important it is to have a budget. Well, now I’m adding one more reason why it’s a good idea to have a budget. Do you struggle saving money, like most millennials? According to CNBC, 72% of young millennials (ages 18-24) have less than $1,000 in their savings accounts and 31% have nothing at all in their savings account. Older millennials (ages 25-34) aren’t much better. 67% have less than $1,000 in their savings accounts, 33% have $0, but 15% have over $10,000. Those are some scary statistics! I’m here to help you get into that 15% group (even if you fall outside of the relevant age group) by overbudgeting to increase your savings. Wait, what?

First, you need to have a budget. Find whatever method works best for you. My husband and I personally prefer excel for budgeting because it provides the most flexibility for us to tailor it to our needs. However, there are several apps out there that work just as well, such as Mint, Personal Capital, YNAB and more. Once you have a budget you can plan to increasing your savings.

Now the conventional way that people save money utilizing a budget is simply to plan to move $X into their savings account each month. This is actually how my husband and I typically determine our savings. We have built into our budget the amount we will transfer each month into each of our IRAs (separate from our employer-sponsored plans), our vacation account and our “personal escrow” account (this is the account we use to save for annual and semi-annual bills). Most of these are automatic transfers for us, but we include them in our budget to help us manage our finances accurately.

I want to talk to you about overbudgeting to increase your savings, though. Generally speaking, overbudgeting is not a good idea because you don’t want to spend more than you should on anything really. What I mean when I talk about overbudgeting, though, is setting your budget amount to the maximum you are comfortable spending on each line item for the month, but making it a goal to spend UNDER that amount. You’re probably thinking to yourself “okay, so I’ll be ‘saving’ money in theory, but how does that increase my savings?”

When you budget properly, you have an allocation for every single dollar of your income each month. I want you to make sure you properly allocate your income to all your expenses, but just aim to spend less. Then the difference between your budgeted number (aka your overbudgeted number) and what you actually spend is your savings, and I want you turn your theoretical savings into a real transfer into your actual savings account. This probably sounds more complicated than it is, so I’m going to provide you with some examples.

Let’s say you budget $200 for your Verizon bill, which is inclusive of phone, cable and internet. Our Verizon bill varies month to month depending on how many movies we rent, so some months the bill would be $186 and other months it would be $198. We recently were due to renew our contract with Verizon and, after some negotiations, we were able to knock about $60 off per month. Rather than decreasing our budgeted number, we left it at the $200 per month. The past 2 months our bill has come in at $132 and $126. The difference between our overbudgeted number and our actual expense is approximately $80. This $80 is now transferred to our savings.

Let’s look at another example. Say you budget $500 for going out to eat each month. This $500 includes both going to restaurants with your spouse and buying lunch during the workweek. You’ve decided to set a goal to bring lunch at least 3 out of the 5 work days each week, which is a savings of approximately $100 per month. One month, you go out to eat at reasonably priced restaurants and stick to your workweek goal, so you end the month with $300 actual expenses for going out to eat. This means you’ll transfer $200 into your savings account for the month. The next month, however, you do well with your workweek goal, but it’s your spouse’s birthday, so you decide to eat at a fancy restaurant for the occasion, which puts you at $500 even. You won’t have anything to transfer to your savings account from this category for the month, then.

Last example is a car payment. A car payment is a fixed cost over the life of the car loan, such as 5 years. We’ll assume that your car payment is $300 per months for 5 years. You create a line item in your budget for the $300 car payment each month. Let’s say you have now reached the end of your 5 years and your car is officially paid off (woohoo!). Rather than shifting that $300 to another line item in your budget, leave it built into your budget and set up an automatic transfer to your savings account in place of the automatic payment you previously had for the car each month.

This concept can also be applied to one-time purchases, as well. If you are looking to purchase a piece of furniture for your house or a new outfit for a special occasion or a new computer, budget the maximum amount you are willing to spend for the perfect item and then aim to spend lower by making the purchase during a sale or when you have a coupon. Then take the amount you “saved” and put it into your savings account.

Rather than transfering each of these amounts to your savings account individually, it is probably easier to transfer your total “underbudget” amount each month just once. This total would be the accumulation of all of your savings from the various categories you overbudgeted for during the month.

Please make sure to take note of the following if/when you apply this method to build your savings:

  • A “savings account” can be anything you want it to be: an online savings account, an emergency fund, a retirement account or another investment account
  • This concept does not work if you are charging more than you can afford on credit cards because you will be “saving” money that should really be allocated to paying bills
  • You should still have a line in your budget specifically for savings every month, that way if you end up spending the maximum amount you allotted you are still building your savings account

What do you think about overbudgeting to increase your savings? Is this something you would do?

11 thoughts on “Increase Your Savings Account by Overbudgeting

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  1. I like this idea a lot! I used to do this, although I never had a name for it. Over time, I realized that if I budgeted too much for my monthly expenses, I wouldn’t have anything extra to transfer to savings.
    I’ve now transitioned into doing the opposite of overbudgeting. My current budget is essentially a minimal budget. I’ve allocated an amount for each category which is reasonable but moderately low. This way, I’m transferring a greater amount into my savings accounts automatically every month. If the amount I’ve budgeted isn’t enough, then I’ll transfer some money out of my savings. Because of the 2-3 day transfer lag between banks, I know not to spend outside my means. It’s worked well for me, but only because I’m a chronic overspender, and I have to trick myself into spending less.
    Overbudgeting is definitely a good savings strategy; it’s all about setting yourself up for financial success, in whatever way works best for you.

    1. Thanks, Jane! It definitely depends on the type of person you are. This method (as well as any other method really) may not work for everyone. I know some people that think of money they have leftover from their budget as “free money” to spend, so really they’d benefit best from an automatic transfer!

      I’m glad to see you’ve found a method that works best for you 🙂

  2. This is a great idea. I wrote on my blog awhile back about how you could actually “overpay” for certain bills, thereby building in a buffer so that you can live off last months income.

    So if your electric bill is $150, you pay $175, get a credit on your account, but continue to pay the same amount each month. Over time, your credit will basically prepay your bill. Yes, this is an interest-free loan to a utility company, but you wouldn’t be earning any interest by keeping the money in your checking account anyway.

    My only concern with this method – do you reconcile your budget at the end of each month so that you know how much you spent on each category? Or do you even care to do that?

    As long as you are saving and spending less than you earn, I suppose it doesn’t matter.

    Great article.

    1. Thanks! Yes, it still calls for reconciling your budget each month or else you wouldn’t know how much you’d be moving to savings (or not if you’re actually over budget).

      That sounds like a really intriguing idea! I’ll have to check out the post

  3. I never knew there was a name for this! HA. I love this principle. For our fixed expenses we have basically cut all the fat out of the budget. However for things like groceries, this works amazing. Just because it was budgeted doesnt mean it needs to be spent…

    1. Not sure if this is the official term, but it’s what I’ve decided to call it! haha.

      Yes, fixed costs makes it harder to do because you know exactly how much it will (or should) be each month.

    1. Even if you don’t do it on purpose and just transfer any amount you’ve “saved” by being under-budget in some categories, it still works. I think the problem is that so many people tend to budget for less than what they actually spend rather than being the most realistic

  4. Great idea! We kind of over budget in a sense that some of my budget line items have a $25 or $50 buffer/reserve. We usually don’t go over, but once in a while when we do (e.g., tax free week that just went by and school clothes for the little one) then that reserve kicks in. Otherwise, yes the unused funds are transferred to savings. 🙂

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