The key to financial security is knowing how to budget money on a low income. Even if you don’t make much money, you can reach your financial goals. The key is creating a plan that allows you to reach them.
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What is a Budget?
A budget is a plan for your money. You earn a paycheck, and you must plan how you use it. That’s a budget.
Without a budget, you could mindlessly spend and not have enough money to cover your bills or save for your goals. Budgets aren’t restricting; they are a smart way to handle your money so you can manage your financial responsibilities.
Believe it or not, a budget allows you to spend money, even thoughtlessly, such as an impulse buy.
The key is having money set aside for such times so you don’t have to stress about every penny you spend. A budget ensures all bases are covered while providing some freedom.
Who Needs a Budget?
You might think you don’t need a budget because you have a low income. Here’s the truth.
Everyone needs a budget. The key is understanding how to budget money on a low income. It’s even more critical for you so that you can reach your financial goals. You have limited funds and must know how to spread them out for the greatest good.
When you know how to spread your money across all obligations and wants, you can ensure a happier, healthier lifestyle with less financial stress and greater financial peace.
Is it Possible to Budget Money on Low Income?
You might think it’s not possible to budget money on low income. You may think you are forced to just ‘get by’ and cannot worry about budgeting for bills or saving.
That’s not the case.
Everyone can and should budget. With the proper steps, you can create a workable budget that leaves you with money to cover your financial responsibilities, save for financial goals, and even have fun, spending money how you want.
6 Steps to Create a Budget on Low Income
Knowing how to create a budget for low income is the key to starting. Here are the steps to take to create your budget.
1. Calculate your Income
First, determine how much money you bring into the home monthly. Include all income sources such as your 9 to 5 job, side gigs, alimony, child support, or any other sources of income you receive.
You can total the income monthly or break it into smaller timeframes if you prefer to budget weekly or bi-weekly according to how you get paid. The key is to choose the method you’ll use consistently.
Some people prefer a weekly budget so they get ahead of their bills and don’t get overwhelmed. Others prefer a monthly budget so they spend less time worrying about money and more time doing what they love.
2. Track your Expenses
Tracking your expenses may take a little time because you must know your monthly and periodic expenses to budget correctly. To start, pull your bank and credit card statements for the last 6 to 12 months.
First, write down your monthly expenses, such as rent/mortgage, auto payments, utilities, insurance, phone, internet, and groceries. Include any expenses you pay regularly. These are your regular monthly expenses that you must have enough income to cover every month.
Next, write down any other expenses that may not be as regular. For example, if you pay your car insurance every six months or your real estate taxes annually, you should include them in your budget. Also, consider periodic expenses, such as holiday or birthday gifts, or other times of the year you have higher expenses.
To include your periodic expenses in your budget, break them down into monthly expenses. For example, if your car insurance is $800 a year/$400 every six months, you should set aside $66.67 monthly to have the total amount needed when it’s due.
3. Set Savings Goals
Savings goals are important, especially for those on low incomes. Everyone has different savings goals, and you should break them down into achievable monthly amounts so you see the amounts adding up to what you need.
Everyone should save an emergency fund. This is money set aside for unexpected occurrences, such as unexpected car repairs, a medical emergency, or job loss. Ideally, you should have three to six months of monthly expenses, which takes time. Baby steps are the key to saving a healthy emergency fund.
Other common savings goals include:
- Down payment for a house
- Purchasing a car
- Paying for college
4. Determine your ‘Wants’
Your ‘wants’ are important to include in your budget but shouldn’t come first. You should take care of your necessities first, such as your house, car, utilities, and food.
Wants to include entertainment, shopping for things outside of basic necessities, vacations, and household items that aren’t necessary to live.
Include these items in your budget, but only where they fit. They should come last after determining how much you need to cover your expenses and saving at least a little money monthly.
5. Divide Your Income into Categories
Now that you have a clear picture of where your money must go, it’s time to create your budget.
Cover your basic expenses first, housing, utilities, car, and food, and then spread the funds across your other categories to see where you stand.
If you don’t have enough income to cover everything, revisit each category to determine where you can cut back or re-prioritize the categories so you cover the most important things first and work your way up to the others.
6. Review your Progress Monthly
The key to making budgets work is to review how you did. Initially, you may find that you go over budget in certain categories. If this happens, return to the categories you overspent and rework the numbers. Determine if there are categories you underspent and can take money from those categories to balance your funds.
3 Types of Budgets
There are different budgeting methods to use to help you stay on track. Here are some common methods.
The 50/30/20 budget is the most common budget because it’s easy to follow. You assign 50% of your income to fixed (regular) expenses, 30% to wants and flexible spending, and 20% to savings.
The 50/30/20 budget gives you exact percentages to guide your budgeting, making it easier to decide how to spend it best.
The Zero-Based budget takes a little more work because you must give every dollar a specific ‘job.’ The goal is to make every dollar work, whether paying a bill, covering a want, or being saved.
The key to making this budget work is carefully considering your ‘other expenses’ that don’t happen monthly. Make saving a portion of this amount a regular part of your budget so you have money set aside for the unexpected or irregular.
If you prefer to work with cash or need a visual on how and where you spend your money, the envelope budget is a good option.
This budget works similarly to the others, except you have physical envelopes that you put the cash in for each category. For example, you’d have housing, utilities, groceries, car payments, gas, and dining-out envelopes.
Each month, you use the cash in the envelope for the intended category. When you use all the money, you no longer spend in that category. The hope is that you’re more mindful about where you spend the cash.
You can also do a hybrid version of this budgeting method, only keeping physical envelopes for cash spending, such as groceries, dining out, entertainment, and shopping.
Tips to Make Your Budget Work
If you’re wondering how to budget money on low income, here are some tips to help you stay the course:
- Start with small goals and work your way up as you see progress; don’t try to do it all at once, as it’s easier to make mistakes
- Set up automatic payments to avoid late payment fees on bills
- Set up automatic transfers to savings to avoid forgetting to save for your goals
- Check your progress weekly, and readjust as necessary
- Revisit your budget monthly, communicating with your spouse or partner if more than one person has a say in your budget
- Cut back on spending in unnecessary categories until you can get your budget under control and cover your bills, and save money as needed.
Learning to budget money on low income is a key to reaching your financial goals. Even if it takes longer to reach your goals, the key is to see regular progress to reach your goals and realize financial security.
Budgeting doesn’t have to feel restrictive or time-consuming. After creating the initial budget, it should only take a little time to revisit areas you’re struggling with and to make adjustments to your budget to ensure everything works.