How To Budget On A Small Income

how to budget

How To Budget

Learning how to budget is an extremely important skill to figure out early on in life. Budgeting can be really tough on a small income, and generally when you start out in your career that will be the case. Let’s not beat around the bush here either. There are plenty of “how to budget” guides that just aren’t realistic.

One of the biggest issues I have with other advice forums for budgeting is the “general rule of only spending 30% of your income on rent”. In reality, if you live in any major city in 2020, that just flat out isn’t reasonable. With steady inflation and wages staying stagnant along with covid-19 layoffs, you will be spending a lot on rent.

Another thing about budgeting is the fact that a lot of guides tell you to sit down and hash out a budget once a week, once every two weeks, or once a month. If you are a type A, organization freak then maybe this tactic works for you. But if you are that person, then you probably wouldn’t be here reading this post!

Here are all the things you can do and learn to be able to get your finances straight and build a budget even with a small income. These tips are realistic and achievable as well.

For more budgeting and finance tips be sure to follow me on Pinterest, and check out the Finance page.

Why Should I Learn How To Budget?

There are plenty of reasons as to why you should budget, and not everyone has the same intentions when it comes to budgeting. Here are a few reasons why budgeting increases financial security overall. 

  • Reach your savings goal: budgeting and planning your finances can help you reach a defined goal. It’s easier to be able to plan to save $50 a week than to plan to save $10,000 in one year. A budget can help you focus on what’s achievable right now. 
  • Alleviate debt: according to recent studies, in 2020 about 80% of Americans have consumer debt, we can probably thank student loans for that. That’s a staggering number, but it’s a fact of life for most Americans. Budgeting is an important financial tool to learn in order to manage personal debt. 
  • Set yourself up for retirement: I love to drive this point home right here. The long term goal many people have is to get to a financially secure point where they can retire. It is so important to pick up good money management tactics early on, so that retirement is achievable. There’s a lot of uncertainty surrounding future reliance on government welfare systems such as social security. Because of this, I like to live by the idea that I have to rely on myself instead. Budgeting now, will surely allow you to achieve your retirement goals later down the road.

How To Budget: Overview 

  • Have a Plan
  • Calculate After Tax Income
  • Keep Track of Spending
  • Cut Out Unnecessary Spending
  • Apply a Method

1. Have a plan

How To Budget

The main priority is to have a plan when you sit down to start a budget. What are your goals long term? What are your goals short term?

Determining your goals is an important step to consider because these are the main reasons to budget. You’re budgeting for something. Is your goal to save $1000? Is it to get out of debt, or pay off a credit card, or buy a new car?

When you’re starting out, there’s a lot of different pieces to plan so write them all down. This doesn’t have to be extremely specific, but just figure out a broad goal. We can get specific later. 

After you have determined what the general goal of budgeting will be, you can start to look at income vs. expenses. 

2. Calculate After Tax Income

It’s important to use your after tax income to determine your budget. Don’t just go off a rough estimation of your annual income, because in the grand scheme of things that’s not so helpful.

When you use your after tax income you can gain a more accurate representation of what your disposable and spendable income is.

3. Keep Track of Spending

Concrete Expenses:

Concrete expenses will include things that, no matter what goes on in the month, they are bills that get paid. These will include, but are not limited to:

  • Rent
  • Utilities
  • Car Payment
  • Insurance

Determine on average how much you spend on your concrete expenses each month. These will fluctuate a little bit, but for the most part it should be around the same amount. Figuring out how much you HAVE to spend a month will give you a better idea of how much is possible to save. 

A big mistake I personally make is telling myself my goal is to save $1000 in one month, and then I get frustrated when I don’t reach that goal. When I look at the bigger picture, it’s because my necessary expenses were more than my savings goal, so it just isn’t even possible. 

Variable Expenses:

Variable expenses are everything you spend money on that fluctuates significantly each month. Some of these expenses include the following:

  • Dining Out
  • Entertainment
  • Food
  • Gas
  • Shopping

The reason food and gas are categorized as variable expenses is because they can change a lot more than the concrete expenses. Maybe you drive a lot more one week than another. Perhaps you buy food for a big party compared to your normal grocery shopping, etc.

Variable expenses also include things such as your wants or your saving. Anything that fluctuates considerably during the month would be a variable expense.

Traditional Budgeting

how to budget spreadsheet
Click to download this FREE budget planner!

To begin learning how to budget, keep track of your spending for two weeks to a month. Maybe you already have an idea of where you can improve, but by keeping track of spending you can really see in detail what needs to change. 

You will determine your total income for the time period you’re budgeting, and the total spending. Simply subtract your spending from the income and you can see how much leftover you have to put away into savings. Or, you will find out if you’re spending more than you’re making.

So let’s be honest with ourselves, it seems like a pretty good goal to budget with spreadsheets like this. Once a month sit down and determine your total income vs. total expenses, right?

I mean, in theory yes! However, if you’re a creature of BAD habits like most of us, then you won’t have the personal accountability to do so. It’s really kind of a thing for people who are able to stay super organized. Which again, if that’s you then you probably are already budgeting just fine. 

Best Apps For Tracking Budgets

Seeing your expenses and income vs. spending written down on one sheet of paper is very helpful. However, we live in the age of technology. This means we can simply automate the budgeting process. Who knew it could actually be so easy!?

  • Mint: Mint allows you to connect your banking apps to their app. It will combine all your income, your spending, and your savings into one digital spreadsheet. You can set allowances and budgets, so you can see where you tend to overspend. I use Mint for my budgeting needs!
  • Goodbudget: This is the envelope based budgeting method, that’s digital. Goodbudget offers a more hands on approach to budgeting. If you are someone who wants to take full control of your finances this app may be a good fit for you.
  • Every Dollar: This app applies a zero-based budgeting approach which will be discussed further in the budgeting methods list. Zero based budgeting essentially means that every dollar goes somewhere. This is a good app for someone who needs to take total control of their finances.
  • YNAB: The You Need A Budget app also allows bank syncing making it easy to consolidate all your transactions into one area. Just like Every Dollar, YNAB uses the zero based budgeting method to keep track of your money.

4. Cut Out Unnecessary Spending

Okay so this post is about budgeting for people with a small income right? We’ve gone over all the fundamentals of how to even begin learning how to budget. These are all good tips no matter what your income range is.

The hardest part about budgeting on a small income is learning how to cut down on unnecessary spending. The overall goal when it comes to budgeting is to keep track of your finances as a whole. This includes looking at each transaction to find out what kind of spending needs to stop.

When you don’t have a huge disposable income, that becomes more important because we don’t want to end up spending more than we make.

This is why it’s suggested to at least once, use a traditional spreadsheet to go over one month of income vs. spending. Seeing your spending habits written down in front of you paints a very clear picture of where the areas of improvement are. Here are some things you can do to cut down on your unnecessary spending, because those small transactions do add up.

Some Tips:

  • Check transaction history: A very simple way to start is to go through your debit and credit transaction history. Not only can you see where you’re making frivolous purchases, but you can detect fraud right when it occurs.
  • Unsubscribe: Do you have subscriptions to Hulu, Disney +, Netflix, HBO, and more? Why? Limit your subscription services, especially for things you aren’t getting your money’s worth out of. If you can, share accounts with families and friends, so you can benefit from all the services while only paying for one or two.
  • Pack a Lunch: This article from The Simple Dollar explains how Americans spend their money on food. Any time you eat out, you’re already over the average daily amount for food spending.
  • Save Bonuses: Another big thing people tend to do is see bonuses as extra spending cash! This tends to happen with things like tax returns! Take that “extra” money and put it into savings. Just because it’s more money than you expected to have, doesn’t mean you have to spend it. Besides, bonuses and tax return money are income you worked hard for anyway.

5. Apply a Method

Now comes the actual budgeting, which is to apply a method. There are quite a few ways you can go about budgeting, so let’s go through some of them. 

Traditional Budgeting

As said earlier, this type of budget is the cut and dry spending vs. income. Are you spending more than you’re making? If so, then you need to change some things. It’s great to start with a traditional budget to see what areas of spending and saving you need to improve on.

When you write things down on paper, you’re creating a visual that can help you determine the faults in your current budgeting strategy.

Zero Based Budgeting

The zero based budgeting method is one where every dollar is accounted for. By the end of the month, or whatever the budget period may be, there is no “free spend” money leftover.

Basically, all your money is categorized into expenses, savings, and debt payments. By the end of the month you reach “zero” because all of your income is accounted for in one of those categories.

The advantages of zero based budgeting is that each dollar no matter how small it may seem is accounted for. This creates discipline in your money managing strategies. Zero based budgeting is also rather flexible, because it’s up to you to determine how money is categorized each budgeting period.

The disadvantages are that this budgeting requires work. You need to keep track of every small transaction to be able to categorize them and know where your income is specifically going.

50/30/20 Budget

This method is a really great plan for someone just starting out. It’s pretty broad, so there’s a lot of room to tweak it however way it suits you. Ultimately, 50% goes to needs, 30% goes to wants, and 20% goes to savings.

The trickiest area to this budget plan is determining the difference between needs and wants. Groceries are considered a need, but if fruits and vegetables turn into candy and ice cream, then you have your wants. Buying food is a need, but buying a burrito from a restaurant is a want!

Not only does this method help you learn to budget, but maybe it will help you make better grocery store choices!

The advantages of a 50/30/20 budget are the general flexibility. This budget doesn’t require you to be super nit picky over all transactions.

80/20 Budget

A simplified version of the 50/30/20 budget is the 80/20. Save 20% and spend 80% freely. This plan is great if you’re already pretty honest with yourself about your spending. If your goal is only to increase your savings then it’s a great plan.

If you need a little more accountability on your spending, then it might not be the best budget to go by. The best thing about these broad budgets are you can adjust them to fit your needs. Maybe it’s better for you to apply a 70/30 plan or a 50/50 plan if that’s feasible.

Envelope Method

The cash envelope budgeting method is pretty old school in comparison to how we budget now with apps and online banking. Even though it’s old school, the cash envelope method is really useful.

To budget this way, go to the bank and pull out cash for your expenses such as groceries and gash. Each envelope gets a certain amount of cash allocated for it. For example, the gas envelope gets $200 for the month.

Using cash for budgeting is actually a really great method. When you use cash, you have a clear visual reminder of how much money you have to spend and how much you have already spent. Credit and debit cards make it all too easy to swipe, swipe, swipe!

In Conclusion

  • Have A Goal: Come up with a plan for why you are budgeting. Is it something as simple as getting control of your finances or as specific as saving for a house?
  • Calculate Income Vs. Spending: Most importantly when it comes to budgeting is simply knowing how much you make vs how much you spend. That’s priority number 1.
  • Cut Out Unnecessary Spending: Be thorough and go through you transaction history to track your spending. You should know where you are making frivolous purchases and where you can stop spending money.
  • Choose Your Method: When you have determined which method you want to use, apply it! Let’s see what can be done to help you stick to your plan. Like a lot of things, budgeting is easier said than done, but believe in yourself!
  • Automate it: There’s plenty of budgeting apps out there that will keep track of your spending for you. Use them! Plan your budgets online and become notified right away when you overspend.

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