The key to financial security is budgeting money on a low income. Even if you don’t make much money, you can reach your financial goals by creating a plan that allows you to do so.
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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 to set aside money 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, which is even more critical for reaching 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 healthier lifestyle with less financial stress and greater financial peace.
The 3 Types of Budgets
There are different budgeting methods to use to help you stay on track. Here are some common methods.
50/30/20 Budget
The 50/30/20 budget is the most common because it’s easy to follow. In this budget, you allocate 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.
Zero-Based Budget
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. Regularly save a portion of this amount so you have money set aside for the unexpected or irregular.
Envelope Budget
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 put cash in physical envelopes for each category. For example, you’d have housing, utilities, groceries, car payments, gas, and dining-out envelopes.
You use the cash in the envelope each month for the intended category. When you use all the money, you no longer spend in that category. The hope is that you’ll be more mindful about where you spend the cash.
You can also use a hybrid version of this budgeting method, keeping only physical envelopes for cash spending, such as groceries, dining out, entertainment, and shopping.
Is it Possible to Budget Money For Low Income?
You might think it’s impossible to budget money on a low income. You may think you are forced to ‘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
The key to starting a budget for low-income people is knowing how to create one. Here are the steps to follow.
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 your income monthly or break it into smaller timeframes depending on how you get paid. You can also budget weekly or bi-weekly.
The key is to choose the method you’ll use consistently.
Some people prefer a weekly budget to stay ahead of their bills and avoid being overwhelmed.
Others prefer a monthly budget so they can 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.
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. You must have enough income to cover these regular monthly expenses.
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 periodic expenses in your budget, break them down into monthly expenses. For example, if your car insurance costs $800 a year or $400 every six months, you should set aside $66.67 monthly for 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 to see how they add 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:
- Vacations
- Down payment for a house
- Purchasing a car
- Retirement
- Paying for college
4. Determine your ‘Wants’
Your ‘wants’ are essential to include in your budget, but they shouldn’t come first. Prioritizing your necessities, such as your house, car, utilities, and food would be best.
Wants to include entertainment, shopping for things outside of 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.
First, cover your basic expenses, such as 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 specific categories. If this happens, return to the categories you overspent and rework the numbers.
Determine if there are categories you underspent and if you can take money from those categories to balance your funds.
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 prevent 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
- Reduce spending in unnecessary categories until you can control your budget, pay your bills, and save money as needed.
Final Thoughts
Learning to budget money on a low income is a key to reaching your financial goals. Even if it takes longer, the key is to see regular progress 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 make adjustments to ensure everything works.
Additional reading:
- Why Budgeting is Important
- What To Do 6 Months Before Retirement
- Ways To Improve Your Financial Situation
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