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Let me say this straight.

Learning how to budget and save money on a small income can seem impossible.
 
Where do I start? How can I save money when I’m not making much?
 
How do I dig myself out of a financial hole?

But here’s the thing:
 
It’s never too late to learn how to live on a budget and save money. And you know what? It doesn’t matter how much money you earn – or don’t earn.
 
As Robert Kiyosaki says:

It’s not about how much you make, it’s about how much you keep.
 
But budgeting is a skill like any other. It takes time and practice. So I’m glad you’re here. You’re ready to make some positive changes in your life.
 
Let’s jump in. 

Step 1 | Forget Savings Percentages and Rules

man budgeting

First things first, the whole “Save xx%” of your income rule goes out the window when you’re living on a low income.
 
Since you’re trying to get your budget in order, those rules don’t apply to you right now. Now that we’ve covered that, let’s get into the action steps.
 

 
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Step 2 | The Goal is Zero

mans work desk

Have you heard of zero-based budgets? They’re the perfect way to learn how to budget and save money on a small income.

But don’t just take it from me:
 
Research shows that when you use a zero-based budget, you pay off 19% more debt and save 18% more money. Aren’t those odds you want in your favor?
 
But what is a zero-based budget exactly?
 
The point of a zero-based budget is to make income – expenses = $0
 
This doesn’t mean you have zero dollars left in your bank account at the end of the month. Instead, it means you assign every dollar a job.
 
So if you cover all your expenses during the month and have $100 left over, then you aren’t done budgeting yet.
 
For my visual readers, here’s a zero-based budget in action:

 

example of a zero based budget

Step 3 | Calculate Your Total Income

calculator and bills

Are you ready to create your budget? Let’s start with your income. This is what you (or your household) brings home after taxes. 
 
Include everything:
 
Wages, side hustles, child support or anything else that hits your bank account each month. If your income varies from month to month, then you have 2 options:
 
Option One: Take a conservative estimate of what you think you’ll bring in
 
Option Two: Scan through your paystubs for the last year and budget using the lowest amount.  
 
Once you have your number, write it down.

Step 4 | Identify Your Necessitiescoins stacked up

 
Expenses and necessities are two different things. You may owe $50 to Target each month, but that shouldn’t be included in your six necessity categories: 
 
– Shelter (Rent or Mortgage, Insurance)
 
– Food (Groceries only – not dining out)
 
– Utilities (Water & Electric)
 
– Clothing
 
– Transportation (Car payment, Gas, Car Maintenance, Insurance)
 
– Healthcare (Prescriptions, Doctors Appointments)
 
When it comes to learning how to budget and save money on a small income, here’s my tip:

For each necessity, come up with an average number and round up to the nearest 10th. For example, if you normally spend an average of $136 a month on gas, round up to $140.
 
Or $283/month on groceries = $290
 
Write your necessities number down. 

Step 5 | Identify Your Non-Necessities 

woman writing in notebook

Your non-necessities are anything you didn’t cover from Step 4. Credit card debt, student loan payments, internet, and retirement are a few examples.
 
Total each of these non-necessities up. If you have debt, this step can be hard.

Is it a tad overwhelming?
 
Here’s the deal:
 
If you can get through this step, you’ll have a much higher chance of becoming debt-free. So don’t skip it.

Step 6 | Clear the Excess

checkbook and dollar bills

Still with me?
 
You’re committed to making this work. And the best way to make it easier is to trim the fat from your budget.
 
So what areas are you overspending in?
 
For me, this meant pulling the plug on cable and switching to Amazon Instant Video instead. I also picked up America’s Cheapest Family and implemented Annette and Steve’s ideas.
 
(They’re a family of seven who lived on an average income of $35,000)
 
I was able to save $287/month on groceries by using their tips and tricks.
 
But everyone’s budget looks different. Take a hard look at yours to figure out what areas can be improved.

Step 7 | Pick a Debt Payoff Plan

couple holding pink piggy bank

People who are trying to figure out how to budget and save money on a small income typically struggle with debt. But your best line of defense is to develop a debt payoff plan.
 
There are two popular methods:

1. The Debt Snowball
2. The Debt Avalanche
 
Both methods get the job done, but I’m a big fan of the debt snowball method.
 
Why is it called the debt snowball?
 
Picture a snowball rolling down a hill. It starts small but as it builds up speed, it adds layers of snow.
 
As the snowball gains momentum, it gets larger and larger. By the time the snowball reaches the bottom of the hill, it’s grown to the size of a boulder.
 
The debt snowball uses this theory – start small and work your way up. Over time, you’ll gain momentum.
 
So here’s what you do:
 
List your debts from smallest amount to largest amount (everything but your mortgage). Don’t worry about the interest rates, either.
 
Here’s an example:

 
– Target Credit Card – $500
 
– MasterCard – $2,500
 
– Car Loan – $10,000
 
Once you’ve done that, follow these two steps:
 
1st Step | Pay AS MUCH as you can towards the smallest debt. Make minimum payments on everything else.
 
2nd Step | Once the smallest debt is gone, focus on the next smallest debt. Continue working your way up. 
 
In our previous example, our two smallest debts were:
 
Target – $500
MasterCard – $2,500
 
Let’s say we were paying $125 per month towards Target.

Since we focused on paying off the Target card first, we were only making the minimum payments on the MasterCard ($75/mo)
 
Now that we’ve paid off Target, we take that $125 and add it to MasterCard’s minimum payment.
 
Target payment: $125 + $75 MasterCard minimum payment = $200

Now that MasterCard is getting $200 paid towards it each month.
 
For my visual readers, here’s how that looks:

debt snowball
 
As you keep going, you are paying more and more each month towards your debt.
 
This is how the snowball payments grow larger.

debt snowball

So when we make it to the car loan, we’re throwing a whopping $500 each month at it.

You see?

This debt payoff method is perfect for when you’re figuring out how to budget and save money on a small income.

If You Can’t Meet The Bills:

man stressed out over bills

Alright, so I have to include a section on how to start a budget when you’re already behind. This is the four-step process that I recommend:
 
1 | Stop ALL Spending
 
If you can’t meet the bills, the last thing you should be doing is buying more stuff.
 
Stop all unnecessary spending immediately.  Cut out Starbucks, fast food, cancel subscriptions, and stop impulse buys. 
 
2 | Negotiate Better Rates

Did you know that some banks and credit card companies will actually lower your interest rate if you ask?
 
I know it seems like most credit card companies are penny pinchers. But, they’re also businesses and they want to make sure they get paid. 
 
So if they know you’re struggling with the payments (thus, them risking not getting paid) they’re willing to work with you to come up with a solution. 
 
Bankrate found that 56% of customers that called their credit card companies asking for a lower interest rate were successful. 

3 | Use a Company Like Credible 

Interest rates are tricky.
 
And in the end, they’re what costs you a ton of money. So if you only make minimum payments on your credit cards, it can take years and years to pay them off.
 
Let’s say you only made the minimum payments on a $5,000 credit card.
 
The interest rate is 15%
 
Do you know how long it’d take to pay it off?
 
6.5 years with $2,892 worth of interest.
 
Yikes. Not good when you’re trying to figure out how to budget and save money on a small income.

So what should you do? First, stop adding more debt. Step away from the credit cards.
 
Secondly, transfer the balance to a lower-rate card or use a company like Credible to lower your interest rate for you.

Credible offers two free services:
 
1. Student Loan Refinancing
2. Personal Loans
 
What does student loan refinancing mean?
 
When Credible refinances your loans, they match you with a better loan that comes with a better interest rate. A lower interest rate will save you hundreds – if not thousands – over the life of your loan.  
 
If you have multiple loans, this means they’ll combine everything into a new, single loan. This makes keeping track of your bills simple. And according to their research, Credible users save an average of $18,886 over the life of their loan.
 
(You can also refinance if you have just one loan)
 
What are personal loans?
 
Personal loans are ideal for credit cards and other types of debt. If you carry a high-interest rate on your credit cards, for example, then you can move that balance over to a personal loan.
 
Bottom line?
 
Know your options. Don’t feel stuck with a high-interest rate. Do what you can to lower it.
 
Note: You can read more about Credible in our Credible Review
 
4 | Pay Less for Your Necessities 
 
In step 6, I told you to clear the excess. Now that you’ve done so, you need to find ways to pay less on your necessities. Here’s what I mean:
 

  • Change where you shop. Some places have Aldi which has great food at great prices. Try to find a better store near you.

 

  • Become a savvy consumer. Most of my money saving tricks came from America’s Cheapest Family. I cut my grocery bill by over $200 by using their tips.

 

  • Move to less house than you can afford. Sounds extreme, doesn’t it? It isn’t – that is, if you’re struggling to make ends meet. When you become sick and tired of being sick and tired, you’ll be willing to do whatever it takes.

 

  • Become a one car household. Spending roughly $20,000 – $30,000 (or more) for something that loses 11% of its value the second you drive it off the lot, and then sits idle 90% of the time, isn’t the best financial decision. Holly from the Simple Dollar talks about this in her post: One Year Later – How We Make it as a One-Car Family in the Suburbs.

 
And finally, set financial goals for yourself. Determine where you want to be in 6 months, a year, and 5 years. Do your part.
 
Little by little, small things add up. What can you do now that will set yourself up for success later?
 
That’s my tips for learning how to budget and save money on a small income.
 
Thanks for reading.

 

 
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