How to Budget With a Low Income

How to Budget With a Low Income

A budget is a plan for how you'll spend your money. It's based on your after-tax income, your recurring expenses and your financial goals, like saving for retirement or paying off debt. When you're financially struggling, it might be challenging to cover all of your expenses while also saving for those goals.

So how do you budget money on low income? Here are some guidelines to get you started.

1. Total Your Monthly Income

Determine how much you bring home each month, including payments from all sources, such as your regular income, government assistance and odd jobs. Leave out monetary gifts, like cash from a relative, unless it's a recurring gift.

If your income fluctuates, you have two options:

• Use income from the past three to six months to come up with an average amount.
• Use the lowest-income month as your benchmark, which ensures you won't budget for more expenses than you can cover in your leanest months.

2. Calculate Your Monthly Expenses

Make a list of your recurring bills and other expenses to see where your money typically goes each month. If you have a bank account or credit card, reviewing your statements from the past few months can help with this part.

Break down your expenses into categories such as rent, groceries, transportation, child care, debt payments and discretionary spending, which includes nonessential expenses like dining out.

Learn more: Why You Should Track Your Spending

3. Subtract Expenses from Income

Add up all of the money you spend on monthly expenses and subtract that number from your take-home pay. If you have money left over each month, you could direct the funds toward a financial goal like paying off your debts or building an emergency fund. But if you're spending more than you take home, you'll need to look for ways to cut costs.

4. Look for Areas to Reduce Spending

If your income doesn't stretch far enough, you think you're overspending or you want to put more money toward your financial goals, look for ways to reduce costs.

You may decide to take small steps, like cutting unnecessary subscriptions and shopping at discount grocery stores, or big steps, like moving into a less-expensive home.

Learn more: Ways to Reduce Expenses

5. Track Your Spending

Now put your budget into action. At the start of the month, look over your budget and make any plans to cover special purchases or save for one of your financial goals. Then track your expenses throughout the month. At the end of the period, you can see if you followed your budget and then plan next month's budget.

Tracking your expenses might get time-consuming or complicated if you use several payment methods or if you make multiple purchases a day. In this case, consider using a budgeting app or software such as You Need a Budget.

Many of these tools link up with your financial accounts and can import your income and transactions into one place. This makes it easier to track and categorize each expense.

What to Do if Your Income Is Less Than Your Expenses

If you're on a very low income, you may find yourself in a situation where your budget is in the negative. If there's not enough money for everything, prioritize your housing, food, utilities, health care and transportation. Then consider expenses you can cut back or eliminate altogether. Here are some ideas:

Cut Unnecessary Expenses

Trimming your nonessential spending frees up more of your income, which allows you to cover more of your crucial expenses.

Here are some options to try:

• Cancel unnecessary subscriptions.
• Make food at home instead of dining out or ordering takeout.
• Similarly, make coffee at home instead of visiting a coffee shop.
• Limit impulse purchases by unsubscribing from marketing emails and committing to a waiting period between seeing something you'd like to have and buying it.
• Avoid bank fees. You could do this by linking your checking account to a savings account so you don't pay overdraft fees, and making sure you have enough money in your account to cover purchases.
• Look for free entertainment options, such as getting movies and music from the library rather than streaming services.
• If you qualify, consider refinancing your home, car, student loans or personal loans to lower your interest rate and save on interest costs.

Tip: You don't have to completely remove fun from your life. It's possible to treat yourself every once in a while without breaking the bank.

Look for Cheaper Options

Get creative when you're looking for cheaper alternatives to food, clothes, entertainment and other purchases.

• Use cheaper forms of transportation—like walking, biking or carpooling—to save on fuel and maintenance expenses.
• Shop at discount grocery stores and plan your meals to save money on food.
• Look for clothes, furniture, household items and other necessities at thrift shops.
• Use fitness apps to exercise at home instead of the gym.
• Plan low-cost vacations.
• Go to budget hair salons or a cosmetology school for low-cost haircuts.

Negotiate Bills

Review your bills regularly to understand the services you're paying for. You may be able to negotiate those bills by calling customer service and talking with a representative.

• Lower your cable, phone and internet bills by downsizing your service plans and using free trials.
• Compare car insurance rates and home insurance rates regularly to see if you can find a better deal on coverage.
• Ask for a lower credit card annual percentage rate (APR), which reduces your rate on future transactions.
• Take steps to lower your rent.

Tip: If you don't want to or don't have the time to negotiate your own bills, consider a service like Experian BillFixer^™, which does the hard work for you.

Bundle Your Services

Bundling means combining multiple services to get a reduced rate compared to purchasing each individually.

For instance, car and home insurance are frequently bundled together for discounts of around 25%. Depending on the insurer, you may also have the option of bundling life insurance, renters insurance, condo insurance or other policies.

You can also look for other bundling options, like your cable, phone and internet bill. Just make sure bundling will save you money, and ask about any associated fees and what happens when you cancel one service.

Look for Ways to Increase Your Income

Reducing your spending is just one part of the equation when it comes to budgeting on a low income. Increasing your take-home pay can also help you stick to your budget and get ahead. Consider the following:

• Sell your unused items.
• Start a side business.
• Ask for a raise at work.
• Apply for a new, higher-paying job.

Why You Should Start an Emergency Fund

Taking steps to cut costs and track your spending can help get you on solid financial footing. But don't forget to think about the future. It's important to put some money toward an emergency fund and retirement.

Starting an emergency fund is important because it will help you weather unexpected expenses and stick to the goals set in your budget. Life happens, and when it does, an emergency fund that you keep in a dedicated savings account can help prevent you from relying on debt or falling into the same financial situation you've worked so hard to dig yourself out of.

To make the most money as your emergency fund sits waiting, consider a high-yield savings account. You'll earn more interest than with traditional savings accounts, growing your emergency fund faster.

Having an emergency fund—even a small one that you contribute something to each month—is one of the best ways to avoid future financial disasters and keep your goals on the right track.

Learn more: How Much Money Should You Have in Your Emergency Fund?

The Bottom Line

Even if you're on a very low income, budgeting is worth the effort. It may seem difficult to create a budget and impossible to get in financial shape, but with a little effort, you can improve your financial outlook and work toward achieving your goals.

If you have more money going out than coming in and you're in a situation where you truly can't cover your basic needs like rent or debt payments, you may be able to get help through credit counseling or financial assistance.