It’s easy to budget money when you earn a six-figure digit, but how do you budget when living on a low-income budget?
The US Census Bureau estimated the median income of people living in the US in 2018 was $63,179.
If your income is below that median, you might find it difficult to budget. However, budgeting – even on a smaller income – is possible with a little creativity.
Living on a Low Income ‘Irrelevant’ Tips
If you live on a small income, you know almost no one tells you how to budget money with a low income. Most budgeting advisers out there assume you have enough money to cover your essentials.
Some tips like ‘stop eating out and save $150 a month’ sounds like a slap in the face when you can’t pay rent on time, and you scrape by every day.
This article is about to change that.
How to Live on a Budget and Save money (Major Challenges)
When your income is low, spending is usually not the problem. Income is the problem. You don’t live above your means; you just don’t have the means to live.
You have no idea how to budget on your low income.
It feels terrible looking your kids in the eye and feeling like you’ve failed them. You do not want to repeat the old cycles of your childhood, but here you are.
You’re struggling to work so hard, but you have no idea how to increase your income. You have a job, but you don’t qualify for anything better.
Learning a new trade or going back to school seems impossible. If you can’t pay your bills now, how will you live on less while you go to school?
You’re discouraged from never being able to get ahead or even believe it is possible. You probably don’t know anything else, and it feels pointless to try.
You know you want a different life, but for so long you just don’t know how to get there.
Budgeting Tips for Low-Income Earners
Step 1: Assess your financial situation.
The first step is always to know your current financial situation. Acknowledging what you earn and spend helps you strategize how to budget and by what method.
Write down all your income sources and expenses. It’ll help you understand the full breadth of the situation and exact numbers to work with when drawing your strategy.
While also making a list of your monthly financial expenses on utilities, car payments, and food, include your sources of income.
Step 2: Gather All Your Financial Statements
Collect every document that reflects your monthly income and expenses, including credit card, bank statements, investment accounts, paycheck stubs, electronic payments, and benefit statements.
Capture all categories you typically spend money, by checking three months of credit and debit card charges.
You may realize some spending items or income varies from month to month, irregular or reflect one-time. But gathering a paper trail is the best way to get a bird’s eye view of your income and monthly expenses.
Now, it’s time to start drilling down into the nitty-gritty of creating a budget that puts your house on a firm foundation.
Step 3: Calculate your monthly income.
When it comes to low-income budgeting, take-home income is the only income that matters (not the pre-tax income).
Include other regular sources such as social security, disability, child support, pension, regular interest, dividend earnings, and alimony.
Here is how to calculate your monthly take-home income;
- If you’re paid by- weekly: Take one weekly paycheck, multiply your take-home pay by the number of paychecks in a year (26). Then divide the number by 12 to get your monthly income.
- If you’re paid weekly: Take your weekly pay and multiply it by the number of weeks in a year (52). Divide that amount by 12 to get your monthly pay.
- If Your Pay Fluctuates: Maybe your pay depends on fluctuating tips, commissions, or varying hours. You can still estimate your monthly income by adding up three month’s income then divide by 3.
Step 4: List and categorize all your monthly expenses.
Once you have all your financial statements and other documents, you can confidently calculate your monthly expenses from a mortgage to utility bills, groceries, and many others.
Without debit or credit card statements because you pay everything in cash, then chances are the records of your spending will also not be accurate.
So start tracking every dime you spend for the next three months and do it electronically. If you don’t like credit cards, then use debit cards – it’s basically like cash.
Ensure to capture all your expenses and know what categories your spending is most on.
Remember to account for irregular bills such as annual or semi-annual payments like car registration, property taxes, or insurance fees.
Categorize all your expenses such as; cell phone, debt repayment, eating out, education and childcare, entertainment, groceries, health expenses, helping others, utilities, pets, transport, and others.
Tracking your spending in different categories helps you get a better sense of which areas you consume significant chunks of your income
To help you categorize your expenses and track them efficiently, find a FREE spending tracker checklist in our low-income budget planner bundle PLUS the entire FREE resource library
It gives you various expense categories and week by week expense tracker to simplify the process.
Step 5: Categorize all your fixed and variable expenses.
To determine how much room you have to adjust your budget to meet your specific financial goals, you need to figure out your fixed and variable expenses.
Fixed expenses are relatively consistent from month to month. They are often ‘needs’ rather than ‘wants’ even though some categories fall in grey areas.
The more the fixed expenses you have on your budget, the less flexible it will be to adjust. Some changes may be as drastic as selling your car, moving to a city with a lower cost of living, or taking on a roommate.
Fixed expenses include; rent/mortgage, health insurance, car payment, utility bills, internet, cell phone services, and TV.
Variable expenses differ significantly every month based on your lifestyle. They are basically ‘wants,’ and you can adjust them quickly depending on your financial goals.
Your individual goals could be to pay off debts, save for a big-ticket purchase, or build up your emergency fund.
Variable expenses include; dining, travel, entertainment, etc.
Step 6: Add up your incomes and expenses column
After documenting all your expenses and income, it’s time to add up each column and face the music.
If your income exceeds your expenses, then deploy the excess cash to savings or paying off debt. But chances are your expenses exceed your low income.
But don’t let that discourage you. You have taken the most critical step of creating a budget, and that’ll allow you to sing a happy song eventually.
Step 7: Evaluate your results and adjust accordingly.
Getting a bird’s eye view of income and expenses is an eye-opener, humbling, and an empowering experience. You’ll discover you’re in a better position to save and reach your long-term goal of a new home, car, or holiday.
You may also discover that you spend too much on variable expenses such as expensive clothes or food – which you can trim back to save up for a rainy day.
And if you discover you have been living beyond your means, then the information will help you make better choices necessary to repair your crumbling foundation.
Whatever the results, your job now is to create a budget for your variable and fixed expenses. You’ll also make financial goals that match your monthly income.
Step 8: Time to trim the fat
If that’s not enough, then look for other adjustments on your fixed expenses. Can you check around for cheaper insurance plans?
Cut your cable TV provider or downsize to a cheaper home, apartment, or car.
Still, want more? Here are living on low-income tips
Make a Budget Using the 70% Rule.
What is the 70 20 10 Rule money?
It’s the simplest yet the most effective rule when it comes to budgeting.
The 70% rule is a financial principle that not only works for a moment but works forever. It helps you know exactly how much to spend, save, and invest- no matter your income or level debt.
Here’s how the 70% rule works:
Divide your monthly income in three categories as follows;
- 70% goes towards your monthly expenses
- 20% goes towards savings or a pressing debt
- 10% goes towards tithing/donation/investment/holiday
Why do percentages work?
Here’s the thing. Percentages fluctuate easily based on your income levels, making it easy for you to adjust your budget. You’ll never be lost or confused whether you make $1000 or $10, 000 next month. You can easily find 70% using your calculator.
Another beauty of using percentages is that you’ll always set aside savings, pay off debt, investment, retirement, or even holiday money. You’ll never feel guilty when going for a vacation or worry about how you’ll ever pay off your credit card.
How to make the 70% rule work for you
Maybe you’re not able to live off less than 70%, because you make so little. But let’s not dismiss it just yet. Financial freedom or making and sticking to a budget starts with your discipline. And that’s the discipline I want to help you with this article.
In step 3, you calculate your monthly income. OK! Now on to…
70% of your income goes to expenses
Expenses include everything you spend on including but not limited to utilities, bills, emergencies – everything you listed in step 5.
Let’s assume your take home income is $1,000/month, then 70% of $1000 will be $700 (1,000 x .7 = $700).
So everything you spend money one should add up to $700 or less. That includes; bills, mortgage, insurance, utilities, groceries, etc.
‘What if your current expenses exceed your monthly income? Go back to step 8 and trim the excess. Keep cutting unnecessary costs until you’re within 70%.
What if no matter what you do can’t fit within the 70%. Get real with yourself and make it happen. For example, if you have a car, you can sell it or consider car hire services to earn extra money. Can you move to a cheaper house, cut the cable or get a better paying job or side hustle?
Here’s a detailed and helpful guide on how to cut down on expenses.
20% of your income goes to savings or debt
Keeping with our $1000 example, 20% would be $200. Yes, it may seem high, but yes, savings is that important. You can even do more, especially if you can spend less than 70% of your income on expenses and if you have debts to pay off.
If your current financial situation cannot support setting aside 20% each month towards savings, that’s OK, but pay off pressing debt.
What do I mean by ‘pressing debt’?
It’s that urgent and expensive debt that is hurting your credit score and costing you loads of monthly interest. These are credit cards and loans, but be your own judge to determine a pressing debt.
If you can save at least 20% of your income, put 10% on family savings and 10% towards emergency savings.
Family savings cater to fun stuff like holidays, or entertainment and the emergency savings protect you and your family when the inevitable hits you.
10% of your income goes towards investments/donations/tithe
I understand people have different opinions about tithing, but I believe giving 10% is so little compared to God gives. But I appreciate not everyone is of the same faith.
However, whatever your belief system, here’s what to do with your 10% ( which as per our example, would be $100/month)
- Donate – Find a cause you’re passionate about and commit a solid 10% or whatever you can afford.
- Invest – If donating isn’t your thing, find an opportunity to invest in addition to a 401k.
- Save for college – An easier way to afford your kids’ college by putting aside money each month.
How to make your budget effective
Ensure your budget tracks due dates for bills, so you don’t miss payments and rack up late payment charges or other penalties. Such charges can quickly throw your budget out of whack.
Automate your payments for recurring bills or incorporate a bill calendar into your budget to keep up with your bills.
Get your free bill calendar here in our low-income budget planner bundle.
The 70% principle is SIMPLE and LIFE Changing for low-income earners for these reasons.
- Percentages make budgeting easier when income fluctuates.
- Following the 70% rule ensures you cover all your bases and magically afford anything you have been wanting.
- It leaves you feeling confident, believing it’s possible to get ahead in life and achieve your dreams.
The Bottom Line on How To Budget Money On Low Income (and Save)
You know you’re in rarefied air, right?
Most people who read about how to live on a budget and save money don’t follow through. They want to take control of their finances, and they’ll talk about it nonstop, sure, but they never take action.
Years from now, they’ll still be skimming posts like this one, nodding along with the words, and wishing they dared to make it happen.
But not you.
You’re going to take the steps we’ve outlined above and knock them out one by one. Create a budget, stick to it, and start saving like crazy, real, tangible money.
And you’re not going to wait days, weeks, or months before you get started. You’re going to start tracking your expenses today — right now.
If you have any questions or hiccups, we’re right here to help you.
Are you ready? Sign up below and get your FREE low-income budget planner.
Then let’s do this thing.
Hi, I’m Andia.
An expert personal finance & investment writer and blogger. I help people like you turn your spare time into $1000 per month or more outside of your day job.
I’ll help you identify proven side hustle ideas you can take action right away and make six figures working from home or whenever your schedule allows.