How to budget on a low income

When you’re struggling to cover your cost of living with your paycheck, the idea of making a budget may seem overwhelming. But learning to budget money on a low income can actually provide a sense of relief. A thoughtful plan can give you better control over your spending, reduce stress, and help improve your future financial outlook. 

While having a budget can help with money management in nearly any circumstance, making the most of the limited resources you have is especially crucial when funds are tight. If you’re living paycheck to paycheck, are often running out of money each month, or simply find that your income isn’t enough to cover your lifestyle, developing the skills to budget money on a low income can help improve your financial stability.

Here’s what we’ll cover:

• Tracking income and expenses
• Creating your budget
• Prioritizing essentials
• Cutting unnecessary spending
• Increasing your income 
• Building an emergency fund
• Managing and reducing debt
• Using money-saving hacks

Track your income and expenses

Before you can figure out how to budget money on a low income, you’ll need to get the lay of the land. How much money do you really bring in every month? How much are you spending, and where is that money going?

Tally up all your income

Start by calculating exactly how much money you bring in every month. Make a list of all income sources, including after-tax earnings from your job and money you make from any extra jobs or gig work. Be sure to account for any additional income from things like government benefits, child or spousal support, and any periodic earnings like bonuses or gifts you expect. 

Make sure you’re calculating your net income, which is your take-home pay after taxes and other deductions are taken out. If you’re self-employed or work as a contractor, be aware that taxes won’t be taken out of your income, so you’ll need to set aside the money you’ll need to pay those taxes. 

Add up all your regular expenses

Make a list of everything you spend money on each month, as well as periodic expenses that come up less frequently. To be sure you capture everything, review your transactions over the last year; look at your bank and credit card statements, as well as records from digital payment apps. Add up how much you spend, on average, for each expense every month. 

You’ll see that you’ll have both fixed and variable expenses. Fixed expenses that don’t change from month to month should be fairly easy to account for. To understand your monthly spending on expenses that vary each month, you can calculate your average costs by averaging your spending on those categories over the past 12 months.   

Create your budget

Now that you know how much money is coming in and going out, you can start creating a budget. When you’re budgeting money on low income, you’ll likely need to take a close look at various aspects of your finances to set yourself up for an accurate and realistic budget. 

• Compare your income to your expenses: If you’re regularly spending more than you earn, make a note of areas where you might be able to cut back.
• Categorize expenses: Group your expenses into budgeting categories to make the budgeting process less overwhelming. 
• Identify fixed and variable expenses: Note which costs stay the same or vary each month; this helps you locate the variable expenses that may call for extra planning. 
• Distinguish needs from wants: Label expenses as either necessary or non-essential. That way you’ll know which nice-to-haves you could consider cutting from your budget.    

Once you’ve examined your finances and gained insight into the different facets of your expenses, you can start deciding how much of your income you need to allocate to each budget category. 

Choose a budgeting strategy

When you’re making a budget on low income, it can help to find a strategy to guide your approach. There are many budgeting strategies that make it easier to plan how you’ll spend your income based on your priorities and personal circumstances. Here are a few to consider:

Zero-based budgeting

With zero-based budgeting, you assign every single dollar you earn to a specific expense category, with no money unaccounted for. This strategy is popular for people learning how to budget on low income, because it provides tremendous precision and control. The downside is that it can be time-consuming to set up and maintain. 

The 50/30/20 rule

The 50/30/20 rule has long been a popular budgeting strategy because it uses percentages to simplify the process of planning your money management. You allocate 50% of your income to needs, 30% to wants, and 20% to savings. As long as you can cover your basic necessities with half your monthly income, this approach may appeal to you. 

The 60/30/10 budget

When budgeting money on a low income, the 60/30/10 budget might be more realistic. This approach is similar to the 50/30/20 rule, but allocates more of your income to necessities and less to savings. One drawback, however, is that by spending 30% of your income on non-essential expenses, you won’t be putting as much money aside for the future.  

70/20/10 method

How do you budget money on a low income when you have a high cost of living? The 70/20/10 method can help. With this strategy, you spend 70% on necessities, save 20%, and allocate 10% to discretionary spending. This approach can enable you to cover your needs, then prioritize saving for the future while still leaving room for some fun.

The envelope system

With the envelope system, you make a physical envelope for each expense category, fill your envelopes with cash, and spend from them throughout the month. When an envelope is empty, you stop spending on that category for the month. This method can be useful for sticking to your spending limits, as the physical nature of spending cash from envelopes gives you tangible insight into how much you have left. That said, using cash can be inconvenient for some purchases and may be difficult if you’re budgeting as a couple. 

Low-income budgeting tip: Prioritize the essentials

When your income is low compared to your expenses, it’s important to prioritize essential expenses first when making your budget. Allocate money to needs like housing, utilities, groceries, and transportation before spending on non-essentials. To manage and pay essential bills on time, consider setting up automatic payments or reminders. This can help you avoid late fees and service disruptions, making your financial life more manageable.

Low-income budgeting tip: Cut unnecessary discretionary spending

Discretionary spending encompasses all non-essential expenses beyond the basics you need to get by. Discretionary expenses aren’t just luxuries or splurges; they even include smaller things you spend money on for convenience, comfort, or a bit of enjoyment. While eliminating all discretionary spending from your budget is often unsustainable, you may be able to reduce how much you spend on things like dining out, entertainment, and subscriptions. As you plan how to budget money on low income, consider practical tips such as:

• Canceling subscriptions that you don’t use often. Check to see if your local library offers free streaming services instead.
• Dining out less by cooking meals at home. Meal planning and preparing meals ahead for the week can make this easier to achieve. 
• Shopping smarter by using coupons and waiting for sales. Just be sure you don’t let a discount entice you to buy more than you would have otherwise.  
• Choosing free entertainment options. Visit public parks, look for no-cost community events, and take advantage of free-admission days at museums and zoos. 

Low-income budgeting tip: Increase your income sources

It may seem obvious, but when you’re budgeting money on low income, one of the simplest ways to ease the burden is to increase how much you earn. While this isn’t always feasible, consider whether you have the time and energy to bring in extra money by negotiating a raise at work, taking on overtime if your job allows for it, or picking up a side hustle. 

You might also explore whether you qualify for any government programs for low-income households. Federal, state, and city programs can assist with many basic living expenses like food, housing, utility bills, and healthcare. Don’t be afraid to ask for help if you need it; that’s what the social safety net is there for. 

Low-income budgeting tip: Build an emergency fund

When money’s tight, an unexpected expense can quickly derail your carefully-laid financial plans. That’s why creating an emergency fund is especially important when you’re budgeting on a low income. This financial safety net is there to help when you have to deal with an unplanned cost like a car repair, emergency medical bill, or urgent home repair. 

Even if you can’t afford to save much money each month, it may be wise to put whatever you can into your emergency fund; even small amounts will build up over time. Store your emergency fund in a savings account so you can earn interest and avoid accidentally dipping into it. And if you come into a windfall like a tax refund or a bonus, consider putting it into your emergency fund so you’re better prepared to weather the unexpected in the future.

Low-income budgeting tip: Manage and reduce debt

Being in debt can make it hard to budget on a low income now, plus keep you trapped in a vicious cycle of mounting interest payments that may strain your finances long-term. By making a plan to get out of high-interest debt, you can start chipping away at the balances and eventually free up more of your income for covering expenses and saving for the future. Tackling credit card debt can be especially important, since credit cards often have especially high interest rates, which can keep you in debt for a long time if you’re just paying the minimum balance every month. 

Consider trying the snowball method or the avalanche method to prioritize paying off your debt. This might require you to cut back on discretionary spending or saving in order to put more money toward your debt payments until they’re under control. And if you find yourself overwhelmed with multiple debts, consider seeking assistance. You can often negotiate an affordable payment plan with lenders if you just call and request it. There are also free and low-cost credit counseling organizations that can help you make a debt-repayment strategy. 

Low-income budgeting tip: Use money-saving hacks

One helpful approach to budgeting money on a low income is to reduce expenses as much as possible. That doesn’t have to mean going without necessities or creating unsustainable restrictions. Instead, find practical ways to save money in multiple areas in order to stretch your dollars further.

Shop smarter

Save money on groceries, household items, and other day-to-day expenses by:

• Using coupons and discount apps
• Buying groceries in bulk when possible
• Shopping at discount stores and thrift shops
• Comparing prices across different stores
• Waiting for a sale before making a purchase

Save on utilities

Reduce your electric bill and other utilities by:

• Using energy-efficient appliances and light bulbs
• Turning off lights and unplugging electronics when not in use
• Adjusting thermostat settings to save on heating and cooling costs
• Washing clothes in cold water and line-drying when possible
• Using a water-efficient shower head and take shorter showers

Pay less for insurance 

Consider options for reducing the cost of your car and home insurance by:

• Shopping around for a better deal on your car insurance
• Maintaining a good driving record to avoid car insurance premium hikes
• Bundling your car and home/renter’s insurance to get a multi-policy discount
• Adjusting to a lower coverage level if you’re carrying a larger policy than you need

Cultivate good spending habits

Help yourself stick to your budget by developing good spending habits:

• Recognize what triggers impulse buying and learn to reduce temptations
• Delete payment info from your phone and websites to make it harder to buy on a whim
• Order groceries online and pick them up to avoid the urge to buy extras you don’t need
• Avoid buy now, pay later services that entice you to spend more than you can afford   

How to budget money on low income: get started and keep at it

Budgeting on a low income is all about making intentional financial decisions. By taking time to analyze your income and expenses, make a plan, and employ practical strategies, you can start feeling more in control of your finances. If you can’t afford to fund many discretionary budget expenses or put as much into savings as you’d like, don’t give up. Building financial stability is a process that can take time, and your persistence will eventually pay off. Start your budget today, cut unnecessary expenses, and take the first step toward a more secure financial future.

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