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Creating a low to middle-income budget

by | Apr 20, 2021

You don’t have to be a millionaire to create a successful budget. By following these 8 simple steps, you can create a low-income budget to fit almost any pay rate.

What is a budget?

A budget is a plan based on how much money you have coming in versus how much money is going out. You can create a budget for various timeframes: yearly, monthly, weekly, and even daily. Since most bills occur once a month, let’s start by creating a low-income budget on a monthly basis.

Why is budgeting important?

Budgeting is the backbone of any successful financial profile. The goal of budgeting is to ideally spend less money than you have coming in each month. This simple practice can keep you out of debt and even save you money! “How,” you ask? When you budget the right amount of cash to pay your bills on time, you can avoid unnecessary late fees and penalty charges. Additionally, on-time bill payments can also contribute to a good credit score, which could save you a ton of cash in interest over time (see my $0 credit score).

Eight simple steps to creating a low-income budget

Creating a low-income budget doesn’t have to feel like rocket science. To begin, gather your bills and follow the 8 simple steps below. 

1. Calculate your household income

The first step to creating a low-income budget is to calculate how much money your household is bringing in each month. If you’re providing for yourself solo, then this money would only be how much you personally make.

If you live with a significant other or family member and split the bills, you’ll want to add in all of the money that is being brought into your shared household.

Pro tip: When adding in your paycheck, be sure to only account for your net pay, not your gross. Here’s why. Even though you technically make your gross pay, a portion of that goes to taxes, benefits, etc. Your net pay is the amount of money you’re actually taking home, so this is the amount you should rely on when creating a low-income budget. Any other form of monthly income such as unemployment, disability, or a pension should also be included.

2. Write down your fixed monthly expenses

Your fixed expenses are all of your unavoidable bills with a set monthly payment. Even though your unique lifestyle and needs may vary, here is a list of some common items that may fall into the fixed category.

  • Rent/mortgage
  • Utilities
  • Auto payment
  • Auto insurance
  • Personal loan
  • Student loan
  • Medical bill
  • Internet
  • Cell phone
  • Credit card
3. Write down your discretionary monthly expenses

Unlike your fixed bills, discretionary expenses do not have a set monthly payment. But just because an item is ‘discretionary,’ doesn’t mean it’s necessarily something you can live without. However, discretionary payments usually allow some wiggle room to either reduce how much you’re spending or cut it out another.

  • Food
  • Household supplies (i.e. personal hygiene products, cleaners, supplies etc.)
  • Gas
  • Cable or streaming apps
  • Clothes
  • Subscriptions/memberships
  • Entertainment
  • Other
4. Set aside savings

The general rule of thumb tells us to set aside 20% of our income to go towards savings. But if you’re creating a low-income budget, you may be thinking fat chance. But the good news? Even a little bit of savings can go a long way. If you can’t afford 20%, set aside an amount you are comfortable with. This money can come in handy when those little life moments, such as flat tire or unexpected medical expense pops up.

Pro tip: If you really want to get savings savvy, consider putting a portion of your income into a retirement fund. Accounts like 401K, IRA, or Roth IRA, can help you set yourself up for more than just a rainy day. They can also help you ideally invest and grow your money for the future. There may be fees and restrictions tied to a retirement account, so always do your research before deciding which route is best for you.

5. Subtract all expenses from your income

Now that you know how much money is going out, the next step is to find out what’s left. To do this, add up all of your expenses from above and write down the total. Then, subtract this number from the monthly income amount you calculated earlier. For best budget results, you should have a little leftover to either throw into savings or even get some extra goodies. But if your numbers are too close for comfort or are putting you in the red, adjustments may be necessary.

6. Adjust spending where you can

If your monthly expenses are higher than your income, you’ll want to make to same changes. Not to panic, more often than not, these can be easy fixes. Here are some tips to get your low-income budget back in the black.

  • Cancel. Take a look at all of your expenses. Are there any items you can part with? Hitting the cancel button on things like a gym membership, music app, or even one of your streaming apps can give your budget a boost.
  • Reduce. Items such as food, clothing, and entertainment can all be reduced. Obviously, we can’t go without food, but you can make more affordable choices. Instead of name brand, go generic. Shop sales and clip coupons when you can. And if you really want to cut back, reduce or avoid dining out. It may not be as snazzy, but cooking at home can save you some big bucks. For other discretionary items such as clothes and entertainment, consider a no-spend month in these categories until you get caught up.
  • Renegotiate. When it comes to most your fixed bills, you may not be able to get rid of them, but you can try to renegotiate them for a lower rate. If you’re on a low-income budget, a great way to potentially add some bill buffer is to call your lenders to see you qualify for a lower payment. You can do this with almost any bill, including your utilities and medical bills. Depending on the company, and your personal circumstances, payment assistance may be available.

Pro tip: By this same token, service bills such as your cell phone and car insurance can also be negotiated. These industries have a high level of competition. Because of this, many service providers will either give you a discount to stay or offer you a lower rate to make the switch. You may be surprised to learn just how much money you save by simply asking or shopping around.

7. Consider a side hustle

If you’ve done all of the above and are still having a hard time making ends meet, consider a side hustle. Love grocery shopping? There’s a side hustle for that. Enjoy a good drive? A rideshare gig could be right for you. There are plenty of side hustles to choose from that allow you to work when and where you want. And this extra cash could be just what your low-income budget needs.

8. Assign every dollar you bring in

After all of your adjustments are complete, take another look at your income versus your expenses. In order to prevent overspending, assign every dollar you bring in to a specific bill or category. Make sure to assign and pay all of your fixed bills before deciding how much you have left to spend on your discretionary expenses. Once all of your expenses are covered, you should also put your ‘free dollars’ into categories as well. Adding this money to savings, using it towards food, or wherever else you see fit can help ensure that all of your money is spent wisely.

Budgeting in a nutshell

The key to creating a successful low-income budget is to know where you stand and stick to the plan. Wrapping your head around the money coming in versus the money going out each month can help you decide if and where changes need to be made. By making the proper adjustments, cutting back where you can, or even picking up a side hustle, you can master your budget at just about any income.

Disclaimer: The content provided is for informational purposes only and not to give advice or guidance on credit improvement. The list above is general in nature and may not cover all of your options. Always be sure to do your own research on which financial strategies are right for you.

Liz Richards

Liz Richards

Credit Content Specialist

Liz Richards is a content creator specializing in credit wellness and best budgeting practices. As an in-house ScoreShuttle contributor, Liz transforms complex financial topics into easy-to-digest tips that consumers can use to manage their credit and financial worthiness.

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