How to Budget Money on a Low Income

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Do you want to know how to budget money on a low income? What are some budgeting practices you can adopt to secure your future and maximize the value you’re getting for your money?

Budgeting is one of the most important financial skills you can develop, especially if you’re working a low-paying job. However, many low-income earners don’t budget their money and spend to their heart’s content, without much regard for how their spending takes them further and further away from long-term financial security. 

With this in mind, here’s how to budget money on a low income. 

The Importance of Budgeting

When budgeting your money on a low income, your main focus should be improving your financial prospects and making sure you’ve got a safety net to fall back on. However, many low-income earners don’t realize that and budget their expenses with a different goal in mind: to prove to others that they have more money than they actually do. They set money aside from their monthly income to buy luxury items and pay for premium experiences instead of saving or investing it. They do that because they care more about others’ opinions than about their financial security.

In his book The Millionaire Fastlane, MJ DeMarco explains that people spend more than they can afford because they want to enjoy the pride, admiration, and respect that rich people enjoy, and they believe that they can achieve the same positive feelings simply by looking rich.

However, allocating a significant amount of your budget to things that make you look rich is financial self-sabotage, especially if you aren’t earning much to begin with. With this in mind, the most important tip for how to budget money on a low income is to stop caring about others’ opinions. Instead of trying to look rich, you should emulate the habits of rich people:

  1. Create and live by monthly and annual budgets. More than half of all millionaires say they budget. They’re motivated by visualizing the long-term rewards of achieving financial independence and being able to retire.
  2. Know what your family spends annually for basic needs (food, clothing, and shelter). 62% of the millionaires surveyed knew their monthly expenses. In contrast, the the majority of the non-millionaires had no idea how much their consumer-oriented lifestyles cost them.
  3. Set specific daily, monthly, yearly, and life goals. Most millionaires are goal-oriented and take a long-term view. Their goals are not spending and acquiring material possessions, but being able to retire, be financially secure, and enjoy life. People who are financially secure are happier than those in their age/income category who aren’t. Unlike those living paycheck to paycheck, they don’t worry about the next economic slump.

TITLE: The Millionaire Fastlane
TIME: 15
READS: 77.2
BOOK_SUMMARYURL: the-millionaire-fastlane-summary-mj-demarco

Budgeting for Low-Income Earners

Once you adopt the rich mindset, the next step is to develop budgeting practices that work for you. If your income is low, the goal of your budget is to cut down on what you don’t need, while saving room for what you do. To that end, Joshua Fields Millburn & Ryan Nicodemus (Minimalism) recommend establishing a written monthly budget, following a few guidelines:

  • Create categories: Identify what’s truly necessary by identifying all your monthly expenses based on the past six months. Then, divide them into three categories: Need, want, and like.
  • Write down every expense: food, housing, cars, insurance, gas, utilities, pets, clothes, phones, internet, entertainment. Check the list with your significant other or friend.
  • Then use the need, want, and like categories to prioritize and cut where you can. The stricter you are the sooner you’ll be free.
  • Set boundaries: Assign every dollar at the beginning of the month. You won’t worry about what you can and can’t buy because money that wasn’t assigned to something at the beginning of the month can’t be spent. This is required to keep to your minimalist budget.
  • Work as a team: Everyone in the household including children must have a say in the written budget, so you get everyone’s buy-in. You can take from one category to fund another if everyone agrees. With everyone on board, it’s much easier to control your finances.
  • Adjust as needed: You’ll have some slip-ups along the way; it’s part of the process. At first, check the minimalist budget daily, then weekly, and adjust as necessary until everyone is comfortable with the allocations. The first month will be the hardest, but soon you’ll be surprised at how much money you used to waste.
  • Create an emergency fund: Create a savings account for emergencies ($500 to $1,000 to start with). Don’t use it unless there is a true emergency (car repairs, medical bills, job loss, etc.) This fund will allow you to stay within a minimalist budget when something unexpected happens. It should eventually cover several months of income.

Be Careful of Aggressive Budgeting

While budgeting is essential if you’re working a low-paying job, you shouldn’t take it too far. According to MJ DeMarco (Unscripted), aggressive budgeting restricts your focus to your outgoing expenses in the hope that sacrificing pleasures and budgeting every cent now will significantly grow your savings in the future. However, DeMarco insists that if your income is low, you won’t be able to save enough to make a significant difference to your financial situation. Further, inflation will reduce the value of any money you do manage to accumulate. 

According to DeMarco, you should drop this mindset, and instead, focus on expanding your income potential. Specifically, you should leverage your time to create a business that generates income without your direct involvement. He explains that relying on a wage or salary limits how much you can earn because you only receive money based on how many hours you work or how much you produce. For example, you work for an online publisher and either get paid $20 an hour or $20 for each article you submit. So you must work five hours or submit five articles to generate $100—both methods restrict your income to how much time you contribute.

On the other hand, investing time in work that generates passive income—by creating a product or system that earns an income long after your original time investment—expands your income potential and your ability to accumulate large sums of money. 

Final Words

Budgeting your money when you’re working a low-paid job can be tricky. However, it’s essential to make sure you’re covering all your bases so you don’t end up using credit, which will set you further back financially. Not to mention, budgeting is a necessary practice for improving your financial prospects.

If you enjoyed our article about how to budget money on a low income, check out this list of the best books about money.

How to Budget Money on a Low Income

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Darya Sinusoid

Darya’s love for reading started with fantasy novels (The LOTR trilogy is still her all-time-favorite). Growing up, however, she found herself transitioning to non-fiction, psychological, and self-help books. She has a degree in Psychology and a deep passion for the subject. She likes reading research-informed books that distill the workings of the human brain/mind/consciousness and thinking of ways to apply the insights to her own life. Some of her favorites include Thinking, Fast and Slow, How We Decide, and The Wisdom of the Enneagram.

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