How to budget money on low income?

Budgeting on a low income can be challenging, but it is essential for financial stability and peace of mind.

Budgeting your money will help you pay off loans on time and prevent financial stress arising from multiple debts or any uncertain expenses.

According to the U.S. Bureau of Labor Statistics, low-income households spend approximately 82% of their income on necessities (housing, food, transportation), 12% on discretionary items (entertainment, dining out), and 6% on savings and insurance.

For low-income households, saving can be more challenging, but even a small percentage can add up over time.

What budget techniques should you follow?

There are various budgeting techniques such as the 50/30/20 rule, Zero-Based Budgeting, Envelope System, and Automated Savings. However, before you make a budget, you need a personal financial goal that determines the amount you need as savings.

This rule, popularized by Elizabeth Warren in her book “All Your Worth,” helps ensure that essential expenses are covered while still allowing room for discretionary spending and future savings

How to budget money with a 50-30-20 rule?

The 50-30-20 rule is a simple and effective budgeting method that divides your after-tax income into three categories: needs, wants, and savings/debt repayment.

Here’s how you can budget your money with a 50-30-20 rule:

1. Calculate your after-tax income and determine your total monthly after-tax income.
2. Allocate 50% to ‘Needs’ such as daily living, such as housing, utilities, groceries, transportation, insurance, and minimum debt payments.
3. Allocate 30% to ‘Wants’ such as non-essential expenses that improve your quality of life, such as dining out, entertainment, hobbies, vacations, and luxury items.
4. Allocate 20% to Savings and Debt Repayment. This includes contributions to emergency funds, retirement accounts, investments, and paying off debt faster than required.

Let us help you to determine your financial budget.

Zero-based budgeting

This method involves assigning every dollar of your income to a specific purpose until you reach zero. This ensures you account for every expense and prioritize your spending.

To do a zero-based budgeting, you need to:

• List all sources of income
• List all expenses (fixed and variable)
• Subtract expenses from income until you reach zero

Zero-based budgeting requires accounting for every dollar, offering detailed insight into your finances and helping to identify unnecessary expenses. This method ensures control over spending, prioritizing essential expenses and savings to prevent overspending. It’s adaptable to income changes, allowing for reallocation of funds as needed.

However, it can be time-consuming to create and requires consistent monitoring, potentially leading to over-complication. It leaves little room for spontaneous expenses and demands strong financial discipline, which can be challenging for low earners.

Envelope system budgeting for the low-earners

An envelope system cash-based budgeting method helps control spending by using physical envelopes for different expense categories.

To do this, you need to:

• Allocate cash for each spending category
• Place the cash in labeled envelopes
• Spend only what’s in the envelope for each category

However, keeping hard cash in an envelope will always be risky as there is a chance of theft and accidents. Such money may not be accessible if you are traveling somewhere and find anything urgent.

Automated Savings

Automated savings refers to setting a formal instruction with your bank to deduct a particular sum of money each month so that you can build savings to support financial urgencies.

Automated budgeting simplifies the budgeting process by automatically tracking and categorizing expenses. This convenience saves time and effort compared to manual tracking, allowing you to focus on other financial tasks or personal activities.

Automated budgeting tools often provide real-time updates on your spending and account balances. This immediate feedback helps you stay on top of your finances and make informed decisions promptly.

Moreover, automation reduces the risk of human error in tracking and recording transactions. Accurate data helps in maintaining a precise budget and ensures that financial decisions are based on reliable information.

Notably, many automated budgeting tools offer insights and analytics, such as spending trends, cash flow analysis, and budget forecasts. These insights help you understand your financial habits and identify areas for improvement.

However, many automated budgeting tools require a subscription or purchase fee. The cost can be a barrier, especially for those on a tight budget or who are hesitant to pay for financial management services.

Also, using automated budgeting tools requires sharing sensitive financial information. There is always a risk of data breaches or privacy issues, which can be concerning for users wary of sharing their financial data online.

Follow these tips to strengthen your budget

Budgeting money requires dedication and financial discipline. It also needs continuous monitoring and re-adjustment if necessary.

Here are a few tips that will help you to save with low income:

• Track Your Spending using apps like Mint, YNAB (You Need a Budget), or even a simple spreadsheet.
• Prioritize Essential Expenses by focusing on paying for necessities first: housing, utilities, groceries, transportation. Ensure these are covered before spending on non-essentials.
• Reduce Variable Expenses by identifying ways to cut back on variable expenses such as groceries, dining out, and entertainment. Use coupons, buy in bulk, and look for free or low-cost entertainment options.
• Increase Your Income considering side hustles or part-time jobs.
• Always keep emergency funds even on a low income.
• Avoid debt traps.
• Educate yourself regularly.

How to adjust your budget?

To adjust your money budget, start by reviewing your current income and expenses to identify areas where you can cut costs or allocate funds more effectively.

Ensure that your essential expenses are covered first, and then prioritize savings and debt repayment. Regularly track your spending and make adjustments as needed to stay on track with your financial goals.

Here are a few tips to adjust your budget:

• Use budgeting apps or spreadsheets to monitor expenses.
• Look for non-essential expenses to reduce.
• Ensure essentials like housing, utilities, and groceries are covered.
• Set up automatic transfers to savings accounts.
• Reassess your budget monthly or after major life changes.
• Allocate funds for unexpected expenses.
• Define clear short-term and long-term financial goals.
• Contact service providers to lower bills or negotiate better rates.

Why it is hard to stick to a budget?

Sticking to a personal budget can be challenging due to impulsive spending behavior, lack of discipline, irregular income or not taking the budget seriously.

Here is a list that outlines the reason of not sticking to the budget:

• Temptation to buy non-essential items can quickly derail a budget.
• Consistent monitoring and adjustment of spending habits can be tedious.
• Unpredictable earnings make consistent budgeting difficult.
• Emergencies or unplanned costs can disrupt financial plans.
• Peer expectations and social events can strain a budget.
• Pressure to spend on celebrations or appearances can lead to overspending.
• Detailed expense tracking can be overwhelming.
• Insufficient knowledge about budgeting principles.
• Spending triggered by emotions such as stress or happiness.
• Difficulty in prioritizing long-term goals over short-term desires.

Which loans should you ignore for better budgeting?

For low-income earners, avoiding certain types of loans such as payday, multiple credit cards, title loans, subprime loans, and pawn shop loans is crucial to ensure better monetary budgeting and financial stability. These are bad loans, that put you under financial strain, and depreciate your net wealth.

Why should you ignore such loans?

Avoid payday loans; they have high interest rates and short terms, trapping you in a debt cycle. Title loans are risky because you could lose your car if you can’t repay. High-interest credit cards can also lead to unmanageable debt if not paid off monthly.

Subprime loans have high rates and unfavorable terms, increasing financial strain. Similarly, pawn shop loans use your valuables as collateral and have high interest rates, risking your items if you default. Personal loans with high fees can be more costly than they seem. Rent-to-own agreements often end up costing much more due to high interest and fees.

What are the preferred loans for the low earners?

Instead, you can consider credit union loans, secured credit cards, community assistance programs, and employer-based loans so that the budgeting and financial plan does not get hampered.

Credit union loans, secured credit cards, community assistance programs, and employer-based loans are preferred for low-income individuals because they typically offer more favorable terms and lower interest rates compared to traditional loans.

Credit unions are member-owned, often providing lower interest rates and more flexible repayment options, making them accessible and affordable. Secured credit cards require a security deposit, which minimizes risk for the lender and helps individuals build or rebuild credit responsibly without high fees or interest rates.

Community assistance programs and employer-based loans provide additional support tailored to low-income individuals. Community programs often offer grants or low-interest loans for essential needs such as housing, utilities, or education, helping alleviate financial burdens without the risk of high-interest debt.

Employer-based loans, usually repaid through payroll deductions, offer convenient, low-interest borrowing options, reducing financial strain and promoting financial stability. These options collectively support low-income individuals in managing their finances more effectively and avoiding predatory lending practices.

The bottom line

Making a money budget is essential for the low earners who want a steady financial strain-free life. We suggest you follow our 50-30-20 budgeting rule and start saving from today.

For any help, just reach out to us for further guidelines.