Without a doubt, the most difficult part of the move process has been the finances.  What sounds like a simple question: “How much will it cost to live in Lewes, DE?” – is actually more complicated when you start working with real numbers.  Adding even more uncertainty to the equation is a vastly different job market, raising the question “Can we even do this?” come up more than any other.

A method that I learned about first in the Four Hour Work Week is what I’ve come to describe as a “reverse budget.”  (Also covered at the Five Cent Nickel.)  Normally, budgeting begins by identifying a pool of funds (income or revenue,) then determining what can be acquired with that pool and at what priority.  If you don’t have enough money to buy that Maserati, you’re not getting it.  However, if you do have enough, it’s not happening until there are groceries and a roof over your head.

DISCLAIMER: I’m not an accountant of any kind!  The idea is for you to get some ideas on how you might be able to apply this to your own lifestyle design projects, but everything in the blog is a part of our own experiment.  You should know that blindly doing whatever the Internet tells you is probably a bad idea.

So, what’s this “reverse budget?”  In all deference to Tim Ferriss, the main idea is to start by writing down the things you need – and want – to buy/pay for/spend on.  In our case, we took a full and complete categorization of all expenses we’ve got in DC, then determined which we would want or need to keep in Lewes.  After this part, we came up with a list something like:

• Groceries
• Mortgage (P&I and Escrow for Insurance and taxes)
• HOA fees
• Roth and/or Traditional IRA contributions for both Marie and I
• Childcare for each of the kids
• Dining Out
• Utilities (Gas/Water/Electric, Cable TV, Internet, Mobile Phones)
• Fuel for cars

There were a few other small categories, but the idea is that we were as complete as we could be – covering all known theoretical expenses.  We used actual DC costs for anything we could easily identify: groceries, utilities, etc.  Then we used best-guesses or external data sources for things like property taxes and childcare.  Finally, we ran a few mortgage estimations for the rough ballpark for the types of homes that we had been considering.  That total value went into the spreadsheet as well.

Finally, we calculated tax breaks such as mortgage interest (since the Lewes house will be our primary residence), childcare (since both of us will be working), medical insurance, and IRA contributions.  After taking the total estimated taxable income, we calculated the tax bracket, and added the estimated taxes that you’ll pay (Federal, Social Security, Medicare, State, possibly more.)  With that addition, we arrived at a magic figure of our “required gross income.”  We did the calculations on a per-month basis, then bumped it to an annual salary requirement.  This big picture gave us the flexibility to quickly adapt to unexpected costs without really blinking an eye: as long as we stay within the costs we established, we can still make things work out financially.

This was all done inside a Google Spreadsheet, so it was easy to collaborate on the document, and change figures to either increase accuracy, or to play “what-if” with the model.  If you’re interested in seeing the calculation, let me know in the comments and I’ll try to redact our actuals to something suitable for public consumption.

Taking this approach lets you calculate the impact of a new wanted/needed expense on your overall financial picture.  As a real-world example from our home builder, we were given the chance to install a geothermal of HVAC system that costs a lot to install but virtually eliminates the recurring (and wildly varying) cost of heating fuel and electricity for air conditioning.  Of course it’s not “free,” but the system would drop utility costs by around $200/mo, while increasing the mortgage by just $150/mo.  The traditional mode of thinking would be to consider whether the $30,000+ increase in the home cost “broke the budget,”, but the reverse-budget model quickly proved it would actually save money – the first month we’re there!!

This might sound like common sense, but when you know your bottom line cost boundaries, it’s kind of fun to move costs between budget items, and see what combination saves you the most while still getting what you really want.  This process results in dropping your required income/revenue, which is the ultimate end goal of a reverse budget.  The more you drop your costs, the less income you need to cover, freeing any extra funds for emergency savings or other goals.

It’s a pretty simple process, once you get the hang of it.  As with any simple tools, it all makes much more sense when you give it a try a few times – go ahead and let us know your thoughts or questions in the comment section!

Additional notes:

• It should go without saying, but estimate all expenses HIGH, and all income LOW.  This is the only safe/sane way to keep yourself out of unintended debt.  When you learn actual future costs – childcare, for example – plug those in.  Until then, though, it will pay to stay on the safe side.
• We also created expense lines for “slushes,” or deliberate set-asides for future expenses that tend to be unplanned.  Kind of like self-managed insurance.  In our case, we have two – one for auto repairs and one for pet medical care.  For these, we will create new savings accounts and automatically move funds there for future use.  If the car needs a new air conditioner, we can pull from the appropriate slush account.  These slushes are above and beyond the “rainy day” savings account with 3-6 months of living expenses.

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