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    How to Budget Money on Low Income
    How to Budget Money on Low Income

    Disclaimer: Penny Calling Penny is an affiliate website. This means that we get a small commission when you click some of the links in this article. Don’t worry – we’ll never recommend anything we wouldn’t use ourselves.

    F iguring out how to budget money is challenging, especially if you’re working with a low income. But creating and following a spending plan becomes especially important when finances are tight. 

    Not only do you want to avoid going in the red, but you also want to break the paycheck-to-paycheck cycle and have some money left over at the end of every month to funnel into savings. 

    By following these 13 tips, you can learn how to budget money on a low income so you’re in control of your money, rather than having it control you. 

    13 tips to budget money on a low income 

    1. Track your income and expenses 

    Before you can take control of your money, you need to know exactly what you’re working with. That’s why your first step is to take a bird’s-eye view of your monthly income and expenses. 

    Start by recording exactly how much money you make every month. If your paycheck has automatic withdrawals for a 401(k), add that amount in so you have the full picture of your earnings. 

    Next, make a list of your fixed expenses that you pay every month, such as, 

    • Mortgage or rent payment 
    • Car payment 
    • Utility costs 
    • Cell phone bill 
    • Subscription services 

    Finally, list your variable expenses, such as clothes shopping trips or eating out at restaurants. When recording your income and expenses, you could use a simple spreadsheet, a planner, or a budgeting app, such as You Need a Budget (YNAB) or Mint

    2. Use the 50/30/20 rule of budgeting 

    Once you have the full picture of your income and expenses, it’s time to set some budgeting goals. One popular method is the 50/30/20 rule of budgeting. This approach involves using, 

    • 50% of your income on needs
    • 30% of your income on wants 
    • 20% of your income on debt repayment and savings 

    Here are some examples of expenses that would fall into the “needs” category: 

    • Mortgage or rent payments 
    • Groceries 
    • Utilities 
    • Transportation 
    • Insurance 
    • Child care 
    • Loan payments 

    The “wants” category, on the other hand, could involve entertainment, clothes, or travel. Although the line between a need and a want can sometimes be murky, try your best to sort your expenses into these categories. 

    The remaining 20% of your take-home pay is earmarked for savings and making extra payments on debt. The 50/30/20 strategy is a form of zero-sum budgeting, since every dollar you take home is accounted for. 

    Here’s an example of what your budget could look like with a monthly income of $2,600:

    Expense CategoryExpenseCost 
    Needs (50%)Rent and utilities $700
    Groceries $300
    Insurance $100
    Student loans $100
    Car payment and gas $100
    Wants (30%)Restaurants $280
    Clothing $250
    Entertainment $250
    Savings (20%)Emergency fund  $270
    Retirement savings $250
    Amount left: $0

    While the 50/30/20 rule is a useful benchmark, you don’t have to follow it to the letter. If you can reduce the spending in your “wants” category, you’ll have more money left over for needs, savings, or paying off debt. 

    3. Try the cash envelope method 

    The ease of swiping a credit card can work against your best efforts when you’re trying to figure out how to budget on a low income. If you’re prone to overspending with plastic, consider switching to cash. 

    With the cash envelope method of budgeting, you withdraw cash from your bank account every month. Then you set that cash aside into envelopes, each one earmarked for a specific purpose.

    This tactile approach to budgeting can help you see exactly how much you have to work with each month and prevent you from overspending. Because you can see and touch your cash, you might become more cautious about how you’re spending it. 

    Before you use the cash envelope method, however, note that there are a couple of potential downsides. For one, you’ll have to take more frequent trips to the ATM, so you want to be careful not to rack up ATM fees with out-of-network machines. And second, holding on to large sums of cash could leave you at risk of theft (or accidentally losing the envelopes). 

    However, if you’re new to budgeting or tend to impulse shop with credit cards, the envelope system can be an effective way to budget on a low income. 

    4. Target your major spending categories 

    When you start tracking your budget, you might discover that you’re spending beyond your means. If you need to make a big reduction in your spending, start by targeting your major spending categories:

    • Housing: If your rent payment is breaking the bank, consider moving to a less expensive place. Moving to a less pricey neighborhood or getting a roommate or two could save you hundreds or even thousands of dollars each month. And if you’re a homeowner struggling to pay your mortgage, you’ll need to address the situation quickly to avoid falling behind and risking foreclosure. 
    • Food: Cooking at home can be a much cheaper option than going out to eat in restaurants. If you’re spending too much on dining out and delivery, focus on coming up with a grocery budget and sticking to it. Look into meal prepping low-cost meals that will last you throughout the week. 
    • Car: You might be able to reduce a pricey car payment by refinancing or trading in your car for a less expensive version. It might be worth comparing alternative options for car insurance, too, if your bills are high. 
    • Utilities: Depending on where you live, you might be able to get a free energy assessment that will save you money on electricity and heating throughout the year. 

    Smaller expenses can add up, too, so take a look at your spending habits for other areas where you can cut back. 

    5. Enjoy free activities in your area 

    Another way to save money is to look for free activities and entertainment in your area. You might have free access to local museums, festivals, or other events. Instead of going out to eat, you could have a picnic in a park. Or you could give up your pricey gym membership in favor of working out from home or outside. 

    Do some research to find free entertainment in your area or fun ideas for activities at home. 

    6. Wait 24 hours before you buy 

    Following a budget isn’t just about doing out the math. You also need to take your own mindset, emotions, and habits into account. 

    For example, you might tend to overspend when you’re feeling sad or bored. Or maybe you’re prone to grabbing an extra item or two as you’re waiting in line to check out. 

    It’s important to identify the patterns behind your spending as you work to create new ones. One way to curb your spending, for example, is the 24-hour rule. 

    Instead of buying something right away, wait 24 hours before you make the purchase. You might discover that the impulse has worn off and you no longer feel like you need the item. 

    7. Try a no-spend week (or month) 

    As you’re learning how to budget on a low income, you might feel motivated to make a drastic change in your spending habits. To accomplish this, consider committing to a no-spend week or month. 

    You can set the exact parameters, but basically you won’t spend any money during this time period beyond basic necessities. Not only might you save a large amount, but this challenge could be the reset you need to take control of your finances. 

    8. Save with coupons and promo codes 

    Before making a purchase, see if you can find a coupon or promo code to score a discount. Apps and browser extensions such as Rakuten, Ibotta and BeFrugal will scour the internet for you to find money-saving promo codes. 

    Alternatively, you can simply Google a store’s name with the words “promo code,” “coupon,” or “discount” to see if anything pops up. Taking the time to track down a discount could save you money whenever you shop. 

    9. Set up automatic savings 

    Building an emergency fund provides a financial cushion for when unexpected expenses pop up. Whether your car breaks down or you get hit with a big medical bill, you’ll be grateful to have savings to fall back on.

    But remembering to save every month is tough, especially if you’re budgeting on a low income. Fortunately, you can let your bank do the heavy lifting for you by setting up automatic savings. 

    Start by creating a separate savings account, and then automatically transfer a set amount from your checking to your savings account every week. Even saving $5 per week can add up over time. 

    And by automating your savings, you won’t spend the money before you can set it aside into your emergency fund.

    10. Tackle your high-interest debt 

    Nothing eats up a budget like debt, especially if it’s got high interest rates attached to it. If you’re dealing with loans and lines of credit, try tackling your high-interest debt first. 

    Note that you should always keep up with the minimum payments on all your loans to avoid falling behind. But if you can afford any extra payments, consider prioritizing your high-interest debt first. 

    If you’re able to pay off a loan completely, you’ll no longer have those high monthly payments and interest charges eating up your budget. 

    11. Negotiate the rates on your loans and lines of credit 

    As you tackle your high-interest debt, it could also be worth trying to lower your interest rates. One way to accomplish this is by refinancing. Depending on your credit, you might score a lower interest rate and more attractive repayment terms. But watch out for any hidden fees or loss of benefits.

    Alternatively, you could try calling your creditors to see if they will lower your interest rate. If you have a history of on-time payments, your lender might be willing to lower your rate, which in turn will save you money. 

    12. Save for retirement 

    Once you have your emergency fund in place, consider redirecting your attention to retirement savings. Building up your nest egg could set you up for future financial security. 

    Plus, investing for retirement pays off the earlier you start, since the effects of compound interest tend to increase over time. 

    If your employer offers a 401(k), consider investing a certain percentage of your income into it every month. If possible, try to max out any 401(k) matching benefit your company offers. 

    You don’t need a 401(k) to save for retirement, though. You can also set up an independent retirement account (IRA) on your own and funnel money into it every month. 

    13. Increase your income 

    While saving money can help you follow your budget, don’t forget about the other side of the coin — increasing your income. If you work for an employer, consider asking for a raise or searching for a new job with a higher salary. 

    You could also make more money with a side hustle, such as driving for Uber, renting out a room on Airbnb, completing tasks on TaskRabbit, or doing freelance work online. According to a Bankrate survey, the average side hustler made an extra $686 per month in 2018.  

    Whether you use this extra income to pay off debt or shore up your savings account, it could go a long way toward helping you follow your budget and achieve your financial goals. 

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    "Think What You Do When You Run in Debt: You Give to Another Power over Your Liberty"

    Benjamin Franklin

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