How to budget money on a lower income
We all know managing money wisely is essential to anyone’s financial plan. It’s easier said than done, though—especially if you aren’t making as much money. Most budgeting tips are geared towards people who earn higher salaries or have dozens of options for storing their money. Can you manage money when you feel like you have nothing? The answer is yes, and we’re here to help. Read on for tips on how to budget money on a lower income.
Analyze your current budget
The easiest way to budget money on a lower income is by analyzing your current budget. By looking at your complete financial picture, you can see where you can cut expenses or what you need to prioritize. Ideally, 6-15% of your net income should go towards transportation costs. If you find you’re overspending in that area, see what solutions you can implement, like refinancing your car loan or negotiating your insurance.
If you don’t have a budget, this is your chance to make one. A common budgeting tactic is the 50/30/20 rule. Divide your after-tax income into three categories: needs, wants, and savings. 50% of your budget should go towards needs like rent/mortgage, groceries, transportation, utilities, and insurance. 30% will go towards wants like dining out, entertainment, gym memberships, or shopping. Lastly, 20% will go towards savings like an emergency fund or a down payment on a house.
Set attainable financial goals
Setting reasonable financial goals will help you stay on track. Ensuring they’re SMART—specific, measurable, achievable, relevant, and time-based—allows you to reach your goal. For example, if student loan debt is overwhelming you, your intent might be to pay off a $10,000 student loan in 36 months. That qualifies as a SMART goal because it is specific, a measurable amount, achievable within your means, relevant, and has a timestamp.
Strategize paying off debt
If you’re struggling with paying off debt, the snowball method is an excellent tool to get it under control and manage money on a lower income. Start by listing your debts from the smallest to the largest dollar amount (not including your mortgage). Take extra money from your budget, apply it to the smallest debt, and then make the minimum payments on your other debt. Once that smallest debt is paid, you’ll move on to the next and continue the process. Another method is the opposite—the avalanche method. Rather than listing your debts from the smallest to largest dollar amount, you pay off debts with the highest interest rates first. This also reduces your overall debt load faster.
The snowball method is more of a motivational boost—paying off debt seems more manageable when you get rid of your lowest debt first. The biggest con, though, is your high-interest debts accumulate more interest when you make only the minimum payment. The avalanche method is a smarter choice financially because you pay less interest overall. However, your smallest debts may be the ones with the highest interest—like credit card debt. In this case, you’ll be practicing both methods at the same time. But, it’s important to choose the method that works best for you.
Cut unnecessary expenses
Did you know the average American spends $237 per month on subscriptions? That’s nearly $3,000 per year! You can use that money to pay off debt, save for a home, or build an emergency fund. If you’re on a tight budget, cutting unnecessary expenses is your ticket to saving big. Canceling unused or unwanted subscriptions is the perfect beginning step. For example, if you have a Spotify and a Pandora subscription, do you need both? Cancel the one you use less frequently. Or maybe getting fit was your New Year’s resolution—but you never go to the gym. See if you can get out of that costly contract.
Create positive spending habits
Budgeting sometimes has a negative connotation. Creating positive spending habits allows you to look differently at how you spend your hard-earned money. Reducing credit card spending is an easy way to start. Credit cards aren’t evil, but bad spending habits can accumulate in the form of credit card debt. Remove stored credit card information from online sites where you find the urge to splurge. Instead, open a savings account for larger purchases.
Impulse buying is another habit to kick to the curb. You may feel happy during the moment, but impulse purchases rack up quickly and take a toll on your finances. If your impulse purchases aren’t monitored, your account can quickly deplete. Before you make an unplanned purchase, wait a day or two. This will give you time to think about whether you need it or not—it also gives you time to shop for a better deal.
It’s possible to break the cycle of living paycheck-to-paycheck and set yourself up for financial success. Despite how difficult it may seem, you can get in financial shape—with some effort. It’s not easy to live on a tight budget, but by following the above tips, you can improve your financial outlook and achieve your goals.