How to Budget Money on a Low Income

Is this what you’re up against? In one direction, you see the molehill of your monthly income. In the other direction, you see a mountain of monthly expenses, and that mountain is sizing up your molehill with bad intent.

The prospect isn’t pretty. But it also isn’t impossible. You need a budget.

The beauty of a budget is that it matches your income to your expenses in a way that improves your finances and relieves some of the stress they cause, even when your earnings have you barely surviving from paycheck to paycheck. Your mountain shrinks and your molehill grows until they finally see eye to eye.

How to make a budget that accomplishes that when you aren’t bringing much in the way of earnings to the table? By using the same principles that apply to any budget, including patience, diligence, and hard but necessary decision-making about your spending. When you’re living payday to payday, those principles are even more important because unexpected financial inconveniences such as a medical bill or a major car repair are harder to overcome. But you can do it.

To make a budget work, regardless of your income level, you need a rock-solid financial plan to which you can stick. Let’s look at the steps it takes to stand your earnings face to face with your expenses.

1. Understand Your Financial Situation

You already know the nitty-gritty of your dilemma: Your bills are bigger than your bucks. But you might not realize how you got into this mess. Figuring that out is the first step in fixing it.

How?

Detail exactly where your earnings come from over the course of a month and how much is being generated from each of those sources, and then do the same with where and how you spend that money.

When you calculate your monthly income, start with the obvious: your regular paycheck. Then add whatever you make from a side gig and what you get from other sources such as child support, social security, disability, interest dividends and the like. Your budget will account only for your disposable income, so make sure you use after-tax monthly sums when you put it all together.

Next up? Expenses.

Begin with the basics: mortgage or rent, food, car payments and gas or public transportation, and utilities such as your water and electricity bills. Your monthly bank and credit card statements should tell you how much you regularly spend on those things. Then list the other necessities of your everyday life such as health and car insurance, loan payments, childcare or child support and whatever else your financial statements reveal in the way of critical expenses.

Finally, itemize the costs of the non-essentials that suck the bucks out of your wallet over the course of a month, including streaming services, concert tickets, movie nights, new clothes, coffee on the way to work, lunch out while you’re at work, drinks after work, and every other thing, big and small, on which you spend money.

You don’t need to be a math whiz to add them up. There are plenty of online financial tools and budgeting apps that will do that work for you to give you a clear picture of where your money is going.

At the end of this first step, you’ll have an income total, an expense total, and a much better grasp of the scope of your problem.

2. Create a Realistic Budget

The key word here is “realistic.” When budgets don’t work, it’s often because they were created with pie-in-the-sky expectations that are next to impossible to pull off. It’s discouraging when you don’t, or can’t, meet those expectations month after month, so why bother trying to stick to that budget?

To make your budget work for you, start by setting some realistic financial goals that take the size of your income into account. In many cases, that requires the patience to understand that your budget won’t work its magic overnight.

If you want to start building up your bank account, don’t over-estimate how quickly you’ll get happy with your savings. If you want to reduce the size of your debt load, be satisfied with chipping away at it in small increments. If your goal is to move into a bigger or better apartment, realize it’ll take some time to free up the money to cover the higher rent.

The hardest part of making almost any budget successful is reducing expenses, and it’s especially difficult when you’re trying to meet those expenses with limited resources. Again, you’ll need to be realistic about deciding where to cut back. (We’ll discuss some strategies for that in the next section.) For example, many of your essential expenses such as housing, healthcare, insurance, car payments, and utilities will be fixed, meaning it might be difficult to reduce them, at least in the early going. Your budget should prioritize them before you move on to your non-essential expenses, which is where you’ll face most of the tough decisions about how to rein in what you spend.

One approach that might help you organize your spending is the 50/30/20 rule, which breaks your household expenses into three categories: needs (50%), wants (30%) and debt/savings (20%). The idea is to keep your spending on the essentials to 50% or less of your available income. That leaves 30% of it subject to your hard decision-making about less critical expenses such as entertainment, vacations, and restaurants, and the final 20% can be put toward paying off your debt, creating an emergency fund and saving for retirement.

Those percentages can change depending on your unique financial situation. One budgeting method suggests a 70/20/10 allocation of your spendable income, which provides more room for necessities and requires more extreme cuts to discretionary spending. You can tailor the formula to a budget that will be realistic in relation to your income and expenses.

Whatever method you use, it’s important to stay on top of how your budget is working. You might need to tweak it from time to time, so regularly reviewing it and staying flexible is vital.

3. Cut Unnecessary Expenses

One person’s unnecessary expense is another person’s can’t-live-without-it, so everyone’s decision-making when it comes to cutting back on spending will be different. But regardless of how and where the cuts are made, every successful budget depends on those difficult choices. Let’s not delude ourselves, though. Those decisions are even tougher when you’re trying to make ends meet on a low income.

Probably the best (and maybe the only effective) way to get where you need to be in the process of cutting expenses is to ask yourself this simple question about each of the ways in which you spend your money:

Is this a need or a want?

If your honest answer is that it’s a ‘want,’ then try to eliminate it or at least scale down how much you spend on it.

What might that look like in real-world terms? It might look like baking a meatloaf at home rather than ordering off the Outback Steakhouse menu. It might look like dropping your ad-free Netflix subscription and giving Freevee or Roku a try. It might look like taking a day or two for second thoughts about that must-have sweater on the SHEIN website instead of moving it to your cart and clicking ‘Checkout Now’ right this very instant.

The shopaholic in you might disagree, but those are ‘wants’ that can be cut.

Even some of the expenses you classify as ‘needs’ can be reduced. Talk to your insurance agent about the possibility of a lower rate to cover your car or your home. Think about downsizing to another apartment to save on rent. Rather than filling up your gas-guzzler’s tank again, walk or bike when you can.

4. Increase Your Income

The adjustments you make when you budget don’t all have to be on the expenses side of the ledger. And yes, we understand you think you’re already working as hard as you can, but there might be ways to bump up your income during those rare non-working hours in your day.

Maybe there’s a way to capitalize on a hobby that already has your interest. Do you knit? Draw? Bake? Brew at home? Take photos? Mess around with websites? Write poetry? (OK, forget that last one; it isn’t much of a money-maker.) Have you tried selling the things you make? Or charging for services you might supply such as web development or photography? There are flea markets and online platforms where you can sell your products, and job sites for freelancers looking to make some extra dough.

It might be worth looking into a continuous learning program that will help you develop skills you already have or expand on the knowledge you can use to improve your employability and supplement your income.

Are there side jobs that might suit you? Maybe you have enough spare time to take on a part-time job as a babysitter, a dog walker, or a delivery driver, or maybe you can provide a ride service through Uber or Lyft. Many part-time jobs allow you to name your hours, so you work only when it’s convenient for you.

And don’t forget eBay and Facebook Marketplace. Look in the attic or your garage for stuff with which you could part. You might be surprised at the market for those old golf clubs or Cabbage Patch Kids.

5. Save and Build an Emergency Fund

The latest data from the Federal Reserve shows that only 54% of adults, including all income levels, in the U.S. have enough emergency savings to last three months. That isn’t good. And there’s a strong case to be made that an emergency fund is even more important for people with limited resources.

Here’s why: Unexpected medical bills or car repairs or a job loss can have a greater negative impact on low-income earners. When an emergency happens for which they haven’t prepared, they’re more likely to have to turn to their credit cards or take out high-interest loans to cover the damage. In the long run, that will only make the state of their finances more dire. They’ll be deeper in debt.

In a perfect world, personal finance experts recommend contributing as much as 10% of your salary to an emergency fund, and that isn’t realistic for many low-income earners. But the right budget will allow you to manage your cash flow in a way that creates enough breathing room for small steps toward emergency savings. If you’re patient, those small steps will pay off; every little bit will move you closer to financial security. Then, on those irregular occasions when you get a bigger-than-usual chunk of money such as a tax refund or a holiday cash gift, you can use some of it to bump up your emergency savings.

Using automatic savings can help you be consistent with your contributions to an emergency fund. If, for example, your paycheck is direct deposited, you can designate a portion of it to go straight into a separate savings account for emergencies.

Investigate smartphone apps such as Mint, Acorns, Qapital and others that either automatically round up the price of every purchase to the nearest dollar and direct the difference to a savings fund, or automatically move a predetermined amount to your emergency fund every time you buy something at a specific store. Some banks also offer spare change apps; it’s worth checking to see if yours does.

One other tip: You might give some structure to your self-motivation by setting up a savings challenge. Put some goals in place about cutting back on expenses – can you go a weekend without spending anything? – and when you meet them, move what you didn’t spend into your emergency fund.

6. Manage Debt Wisely

Not all debt is created equal. You likely have several different types of debt that drag your finances down to different degrees. For that reason, your budget should be built to address the most damaging debts first.

Start with your high-interest credit cards (that’s almost all of them!) and whatever personal loans you might have taken out from predatory lenders, especially if it’s a payday loan that requires you to pay it back as soon as you get your next paycheck. Prioritize them as you re-think how you utilize your resources.

One way to streamline your payments and relieve some of the pressure on your budget is debt consolidation, which combines multiple balances into a single account with one monthly payment that is less than the sum of the individual bills with which you’ve been rasslin’.

The new, single balance should also come with a lower interest rate. You’ll need a decent credit score to get a debt consolidation loan or a balance transfer credit card that combines your payments, but at the end of the day, debt consolidation can save you money and get you out of debt faster.

If you’re so far in arrears that a collection agency is hounding you, negotiating with debt collectors is a possibility. It isn’t always successful, but it’s worth the effort. Make sure you understand what your budget will allow you to pay, and then ask the collection agency if it’s open to a different payment plan or a partial payment that will work for you. The creditor might prefer to get something from you rather than nothing.

There is professional financial advice available to help with any of these options for managing your debt wisely. Nonprofit credit counseling agencies offer a free introductory session to discuss the ins and outs of possible solutions to your debt problem, tailored to your specific financial situation. A counselor from a nonprofit agency can even help you put your budget together.

7. Utilize Community Resources

We just mentioned that financial advice is a phone call or office visit away. But don’t overlook the assistance you can find through support programs offered in your county, your town, and even your neighborhood. They can help you keep your budget on course both by reducing your expenses and supplementing your income.

If you’re having difficulty sticking to your food budget, for example, see what a local food bank or Community Action Agency (CAA) might have that could ease the strain on your grocery shopping. CAAs are local private and public nonprofit organizations that offer a variety of services in addition to food, including job training and assistance with utility bills, for people with low incomes. Don’t be afraid to take advantage of them.

You can find local free or low-cost educational programs and workshops, too, that can help you develop the skills and knowledge to advance your career or open doors to a part-time job or side gig. Most local colleges and community centers offer in-person and online classes in subjects such as healthcare, social work, education, counseling and more.

8. Utilize Government Resources

Help is available as well from the government for almost every corner of your budget – food, utilities, healthcare, housing, and more. The government can even help with your internet and phone bills.

Some government programs worth investigating include:

• Supplemental Nutrition Assistance Program (SNAP), which provides food benefits to low-income families to augment their grocery budget.
• Medicaid, which provides free or low-cost healthcare to eligible low-income adults and children.
• Low Income Home Energy Assistance Program (LIHEAP), which provides help in reducing the costs of home energy bills, energy crises, weatherization, and minor energy-related home repairs.
• Housing, through various programs that help those in need purchase a home, find emergency housing, make repairs or improvements to an existing home, prevent eviction or foreclosure, and even file a complaint against a landlord.
• Temporary Assistance for Needy Families (TANF), which helps families through financial challenges. This program is also known as welfare.
• Lifeline, which helps individuals with a low income get discounted telephone or internet service.

There are others. There is no reason not to reach out for the government’s help when you’re having trouble making ends meet.

Budgeting for a Brighter Future

You know now what your brand-new budget can do for you. It can show you where your money goes. It can show you how to save. It can get you through financial emergencies. It can put you in a position to buy a new car or a new home or to take a long-overdue vacation. It can put your children through college. It can set you up for retirement.

It can give you a road map to better days than the ones you’re struggling through now as a low-income earner.

It can do all that, if …

If you’re patient.

If you’re diligent.

If you’re willing to make hard decisions about your spending and stick with them.

Remember, your budget doesn’t have to be etched in stone. It can change. It should change, in fact, along with changes to your financial situation. That’s why it’s important to continuously monitor your budget and adjust it as needed as your income grows or shrinks, or you cut back further on your spending, or you meet the goals you set for it when you created it. Give your budget the tender loving care it deserves.

Remember, too, to ask for help when you need it. Know there are strategies available to address every complication with your finances. A nonprofit credit counselor, for example, can talk you through the benefits and disadvantages of steps such as:

• Debt management, which can lower your credit card interest rates and monthly payments through agreements a nonprofit credit counseling agency has with card companies.
• Debt consolidation, which can reduce your monthly payments to one and smooth the way to paying off credit card debt.
• Debt settlement, which can reduce the amount you owe on a debt.

All of it, though, starts with your budget. That’s the beginning of the process that will bring the mountain of your expenses in line with the molehill of your income.