Money is tight. You may think that it’s impossible to both pay the bills and save money for your future. Not so fast! In this article, I’ll share my personal experience of how I learned how to budget on a low income. Thanks to my strategy, I went from being over $20,000 in debt and saving less than 10% of my income to becoming debt-free and saving over 50% of my after-tax income. With some practical budgeting, mindful spending practices, and frugal living, it’s possible to live a satisfying life while balancing both your current and future needs.
Read on to learn about how to budget on a low income.
Is It Possible to Budget on a Low Income?
Budgeting on a Low Income is Possible for Many
Before I get into my top tips on budgeting on a low income – is it even possible? Absolutely – to a certain degree. It’s important to remember that you need to be making a certain amount of money to cover your basic living expenses. This article is directed towards those who actually have the means to still cover expenses on a low income. I need to address the fact that millions of people live in poverty and simply cannot cover basic expenses – this article doesn’t apply to those in this category. However, with a bit of careful planning, many out there can live on a tight budget while remaining happy through frugal living, smart budgeting and upgrading skills.
*I am not a financial advisor nor do I provide specific financial advice – before making any changes to your saving and investing strategies, be sure to speak with a licensed professional.
Why Learn How to Budget on a Low Income?
When you hear the word ‘budgeting,’ what comes to mind? How do you feel? If you’re like me when I first started, I immediately lost interest and even felt a little bit overwhelmed. “I’m barely making any money, why should I even bother budgeting?”, I said. If this resonates with you, I completely understand! However, there are several reasons why you should budget your hard-earned income:
- Getting into the habit for the future – when you start budgeting early on in life, you’ll become used to this practice. As your income increases, you’ll probably have more financial obligations such as a car payment, mortgage or higher long-term investing goals.
- Feeling a sense of accomplishment – personally, there’s no better feeling than having an extra couple hundred dollars left over at the end of the month for treating myself and investing in my future. Even if it’s just an extra $50, you’ll feel great knowing that you intentionally reduced expenses and/or increased your income. Go you!
The Step-by-Step Guide to Budgeting on a Low Income
So you’ve decided you want to budget on a low income – great! Now, let’s get into my ultimate step-by-step guide on how to do so.
Planning Steps
1. Understand Your Current Financial Situation
Understanding your current financial situation is the first step in creating a concrete plan for budgeting when living on a low income. When you know exactly how much money you make before and after tax (or your average monthly earnings if you are self-employed), you’ll be able to understand if you make enough money to both cover financial obligations and save in the first place. Those living on one income will likely need to plan more carefully for emergency expenses as opposed to those living on a dual income.
2. Make a Commitment to Track Your Spending
Before I tracked my spending, I struggled to save any money at all. I was getting paid by the hour and my income fluctuated month by month. In my mind, as long as I paid my bills on time, I was all good. However, this is a dangerous mentality to have! When I didn’t track how much money was leaving my wallet, the $5 or $10 I spent on coffee or a treat here and there added up to having $0 saved at the end of the month. Occasionally, my checking account balance was even lower than the previous month!
After I committed to track every single cost I incurred, I started saving money. Why? When I realized how much money I was spending on unnecessary stuff, I was able to drastically reduce these costs and begin spending more intentionally. Instead of buying takeout coffee twice a day, I committed to making my own coffee at home 6 days a week. One day a week, I treat myself to a specialty coffee such as a latte. Alternatively, invest in your own milk frother so you can make your own specialty beverages at home. No matter which option you choose, you’ll be saving money!
Practical Steps
1. Identify Your Biggest Expenses and Distinguish Between Needs vs Wants
Identifying Your Expenses
Firstly, which costs are taking up a large portion of your monthly expenses? For most, housing, food and transportation are the largest expenses. Grab a pen and paper and write down all your expenses for the month. Next, find the three largest expenses.
Next, determine whether or not these expenses are ‘needs’ or ‘wants.’ Generally, most of us will categorize these expenses as such:
- Needs – shelter, food, clothing, transportation
- Wants – subscriptions, dining out, takeout food and coffee, non-essential clothing, vacations
Use a tool such as reading my article on the 12 essential budgeting categories to help you determine yours’. After you’ve categorized your expenses, calculate the average amount of money you’ve spent on each over the past 3 months. For more one-off purchases such as vacations or annual life insurance payments, I divide the average of each expense over 12 months.
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Understand Your Struggle to Save and Identify Areas for Improvement
Now that you have an idea of a. your expenses and b. the approximate cost of each per month, you have a general picture of how much you spend per month on the stuff you don’t need. Take some time to think about how much money you spend per month on non-essentials. Do you really need to spend $200 a month on takeout? You’ve identified how much you spend on something you don’t need for survival and know that even if you reduce this expense by 50%, you can save $100.
On the other hand, if you spend the vast majority of your paycheck on essentials, you’ll need to look into the other way to save money: increasing your income. There’s no shame in getting help, either: understanding your inability to save money stemming from a low income could mean an opportunity to apply for government programs.
2. Cut Down on Expenses and Practice Frugality
Cut Down on Non-Essential Expenses
In an ideal world, you would completely cut out non-essential expenses. For someone who is living on a low income and is looking to save as much money as possible, this sounds appealing, doesn’t it? However, that just isn’t sustainable! Instead, commit to reducing your spending on one or two categories.
If the prospect of doing that for a long period of time sounds overwhelming, start with a low buy or no buy month. For a low-spend month, reduce your non-essential spending on, say, takeout or clothing by 50% or more. If you’re feeling ambitious, try cutting out all non-essential spending on a certain category for an entire month.
Practice Frugality
There’s only so much you can cut out of your budget – you still need to eat, get places and heat your home! Thankfully, there are several different ways you can be frugal. Everyone’s low-income budget looks different, but here are four main ways that anyone can be frugal:
- Meal Planning and Grocery Budgeting – compare prices using an app before going to the grocery store, buy items in bulk, shop at discount stores and always use a grocery list so you avoid buying stuff you don’t need.
- Meal Preparation – make large batches and portion them into containers. This way, you’ll have ready-made meals all set to heat up after a long day. Frugal meal prep takes effort, but it’s well worth it!
- Transportation Costs – get rid of one vehicle and carpool or take the bus. Consider finding a hybrid or fully remote job so you eliminate work commuting costs.
- Fitness – become frugal with your fitness routine. Get rid of your gym membership and work out at home. Find a routine that works for you, whether it be yoga, dancing, weight training or jogging in the park.
3. Tackle Debt
Do you have any debt? Some debt is ‘good’ – for example, a mortgage or student loan debt. Why? This type of debt provides you benefits in the future – a place to live/asset and tools and skills needed to acquire employment.
On the other hand, there are other types of ‘bad’ debt including credit card and interest debt. According to CNBC, nearly 50% of credit card holders carry a balance from month to month. Are you part of this statistic? If you have a low income, it’s a good idea to investigate how you can reduce non-essential expenses and start making payments to reduce your credit card debt. Speak with a financial advisor to create a debt repayment plan that works for you.
4. Build or Top Up Your Emergency Fund
It’s important to have some extra cash stashed away for emergencies. Top up a bank account with 3-6 months’ worth of living expenses in case you are suddenly laid off or lose a large portion of your income. Additionally, consider extra funds for other ’emergencies’ such as an unexpected vehicle repair or emergency medical expense. I have had the most success keeping my emergency funds in a separate savings account. This way, my funds are separate from other funds and won’t be accidentally spent.
5. Increase Your Income
There’s only so much reducing of expenses you can do. If you’ve exhausted all aspects of budgeting, cutting out non-essential expenses and practicing frugal living, move on to the next step: increase your income. Consider undertaking one or all of the following steps to increase your monthly take-home pay:
- Negotiate a pay raise or take on more clients
- Switch employers
- Upgrade your skills and qualifications so you can find higher-paying work or find larger clients
- Take on a side job
6. Take Advantage of the Power of Compound Interest
According to Albert Einstein, compound interest is the 8th wonder of the world. It really is magic how your interest makes money on interest! Start investing your money as early and as frequently as possible so you maximize your time horizon and potential for your savings to benefit from compound interest.
Want to learn more? Read this article by N26 that’s all about how compound interest works.
Other Strategies to Alleviate Money Worries
Tap Into Government Benefits and Assistance Programs In Your Region
If you’ve exhausted all steps in my seven-step guide on how to budget on a low income yet still find yourself short at the end of the month, look into other alternatives.
Find a Community
Whether you’re looking to get in shape, eat more veggies or improve your financial situation, you’ll be a lot more likely to achieve your goals if you go at it with someone else. Find a trusted family member or friend who either:
- Wants to achieve the same or similar goal as you
- Can hold you accountable and help you stay on track to achieve your goals
When I took on my goal of saving 50% of my income, I confided in a trusted friend. While many people out there aren’t comfortable sharing their financial situation with others, I am fortunate to have several friends with whom I can share this information. They don’t judge my situation nor are they closed off to hearing me talk about my progress and goals.
Anyway, back to my friend. Each week, I would meet with my friend for coffee and talk about the practical steps I was taking to start tracking my income and budgeting. My friend would encourage me on my journey and serve as someone to whom I would need to report to. This friend taught me ‘tough love.’ If I missed a goal or overspent that week, she reminded me of the bigger goal I was working towards.
Find a friend or family member with whom you can:
- Share confidential information without fear of judgment or sharing private information with others, and,
- Someone who will give you ‘tough love’ so you keep on track with your goals.
A Final Word on How to Budget on a Low Income
Learning how to budget on a low income takes work, but it’s well worth the effort. Just because you aren’t reeling in six figures a year doesn’t mean you can’t have a satisfying, financially free life! Start with one or two frugal living strategies. Once you’ve mastered them, slowly add more practical saving strategies into your life. Before you know it, you’ll be a money-saving expert!
Additional Resources Regarding How to Budget on a Low Income
- Tips and Tricks to Extreme Frugality by Frugal Fun Finance
- Frugal Grocery Shopping and Cooking Guide by Frugal Fun Finance
- Guide to the Best Side Hustles by Frugal Fun Finance
- Guide on How to Budget Money by NerdWallet
- 5 Smart Budgeting Tips for First-Time Savers by N26
- Saving and Budgeting Tips for Low-Income Families by Quicken
- Tips to Make Your Last $100 of the Month Last by GoBankingRates
- 13 Ways to Save on a Tight Budget by Bankrate
- 25 Ways to Save Money on a Low Income by Skillsyouneed
- Living on a Squeezed Income by MoneyHelper
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Janita is a frugal living expert and owner of Frugal Fun Finance. With over five years of personal experience finding and trying out the best ways to make and save more money, she's eager to share her knowledge. Janita's strategies have helped her save thousands of dollars for funding investments and traveling to over 20 countries.
Janita completed training in personal finance at The University of Western Ontario and McGill University, two prestigious Canadian universities. Her expertise has been shared on GoBankingRates, Yahoo Finance, and NASDAQ.com.
