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How To Budget And Save Money On A Low Income (6 Easy Ways)

40% of Americans have less than $300 in savings, along with a third of British people having less than £600 in savings, according to SpendMeNot and Finder.

This is an issue that can be solved by tracking your income and managing your spending more efficiently through a budget.

But wait?

According to The Penny Hoarder, over 55% of people don’t have a budget, and to follow this up, Mint states that around 65% of Americans don’t have any idea of how much they are spending.

That’s not all…

As this problem is still happening today and needs to be addressed… ASAP!

You can begin by focussing on the steps to start saving money first, and the video below goes through the 5 instant ways you can start saving money right now every paycheck you get, it’s worth a look…

So, what is a personal budget and why is it important?

A budget is simply a personal money management plan that you use to track your income and expenses. This means a portion of your money covers your needs, wants, savings and debt which helps to keep your spending habits under control.

It’s important to stick to a budget, as this will help you achieve your financial goals faster to achieve financial independence. 

Especially, when trying to save money from your salary every month, as seen in this post here.

Now, let’s take a look at what you can do to create a budget that works for you. This is one of many key areas to consider when trying to achieve financial freedom, and you can read all about that in this free ebook here.

So, read on to find out the 7 easy steps on how to budget and save money on a low income.

1)- Workout Your Income After Taxes

It’s important to know what your net income is after taxes. As this is what you are left with to cover your expenses and day to day needs.

However, the risk you have for this is that the higher your income, the higher the tax bracket you enter based on your earnings. This leads to lifestyle inflation which commonly impacts people between 35 to 45 years old.

Now, taxes can be annoying to figure out…

You can find out more about the highest tax rate you may pay in your country from the World Population Review.

There you’ll see that the UK is ranked 18th in the world for the highest taxed countries. Whereas, the USA is ranked 43rd in the world for the highest taxed countries.  

But there’s more…

According to the World Population Review, the current countries listed below do not tax you on your income.

  1. Saudi Arabia.
  2. United Arab Emirates (UAE).
  3. Oman.
  4. Kuwait.
  5. Qatar.
  6. Bahrain.
  7. Brunei.
  8. Bahamas.
  9. Cayman Islands.
  10. Bermuda.

Either way, whatever income you have after being left over after taxes, is what you have left to work with, so be sure to consider this.

Not to mention, you may need to consider your contribution to your student loans and pension as well. 

This is because when your income increases, so do the amount you pay towards student loans and your pension.                                                                                     

2)- Set Your Financial Goals

Set Your Financial Goals

Your financial goals should be written down somewhere you have access to it for personal reference to help you track the progress of your current financial situation.

The common format used for goal setting is SMART goals. These stand for:

  • S = Specific.
  • M = Measurable.
  • A = Achievable.
  • R = Realistic.
  • T = Time.

However, when relating these to your financial goals, this format will help you set the daily, weekly, monthly and yearly goals you need to achieve to reach your financial targets.

The common financial goals you should have in mind before you can reach financial independence are the following:

  1. What amount of money do you need to retire?
  2. How much do you plan to live on each year?
  3. How do you plan to sustain your income?

Although these are basic things to consider, these are fundamentals you need to understand to work towards the desired goal.

As for working this out, you can do the following…

Decide on the amount of income you want to earn each year, multiply it by 25 and then you can live on 4% of this each year.

Here’s an example, if you want to make $50,000/year.

50 x 25 = $1,250,000.

So, you need to have a total of $1,250,000 to meet the criteria of earning an income of $50,000 from your assets.

This is known as the 4% rule, which offers a guide for you to follow in reaching your financial independence and retiring early.

If retiring early is your goal, there are 5 easy steps you can follow to achieve FIRE. You can read more about achieving FIRE in this post here.

3)- Focus On Your Spending Habits

Now, you need to address your spending habits and decide on if whether your spending your money is needed or not.

This is where you need to make a list of all your current expenses and separate them between “necessary” and “unnecessary” expenses.

As a result, you have more control over your current finances, while having enough money left over to save and invest for reaching your future goals. 

However, when choosing your investments you should focus on stable growth which can help you reach your goals, and sustain you during retirement. Mutual funds and index funds are passive investments you can make, and you can read more about them in this post here.

4)- Choose A Budget Plan That Works For You 

Choose A Budget Plan That Works For You 

Now, this is where you need to choose a budget that works for your current financial circumstances.

Within this budget plan, you need to allocate your income to cover the expenses you need to live on which make up the majority of your income.

You also need to allocate money towards your savings, debt and investments, along with some money left over to spend on items you want.

Some common budgets you may consider are:

  • 50/30/20 budget rule: 50% expenses, 30% wants, 20% savings, investments and debt.
  • 75/15/10 budget rule: 75% expenses and wants, 15% savings and investments, 10% for debt.
  • 70/30 budget rule: 70% expenses and wants, 30% savings, investments and debt.

The most popular budget is the 50/30/20 rule. However, you shouldn’t just focus on this budget because it’s commonly used as you need to make sure the budget you choose will suit your current financial situation.

As not everyone’s financial situation is the same, and not everyone’s financial goals are the same either. 

Of course, choosing a budget and sticking to it can be a challenge for people who want to take serious action for their future, and you can learn how to create a budget suited to you in this post here.

5)- Ensure You Automate Your Savings 

With the extra money, you have leftover from cutting out unnecessary expenses you should automate your savings, debt and investments to avoid overspending on things you don’t need.

As a result, you can reach your goals much faster and remain consistent in achieving your financial goals.

6)- Track Your Progress & Make Changes If Needed 

You need to monitor your financial situation to ensure your taking the right steps to achieve your goals.

That’s not all…

As 3 in 5 adults are without a budget, this leaves 60% of people not tracking their current financial situation, according to OppU.

By not tracking your financial situation, you are at risk of living the constant cycle of “paycheck to paycheck” for longer than you plan to.

So, do yourself a favour and keep track of your financial situation.

Why Do You Need A Budget?

Having a budget creates financial stability, this allows you to track your expenses and allocate the money you earn towards different areas in your plan. Overall, a budget makes it easier to pay your bills, pay off debt, save and invest your money.

That’s not all…

According to Investopedia, a budget helps you plan more efficiently for unexpected emergencies and unnecessary stress about your finances.

There are many reasons why a budget can help improve your life, but these are the following positive things to expect from a budget:

  1. Happier retirement.
  2. Less stress.
  3. Less debt incurred.
  4. You are more prepared for emergencies.
  5. You become more aware of your spending habits.
  6. It restricts you from overspending.
  7. You are less likely to spend money you can’t afford to.
  8. You sleep better without worrying about your finances.

These are some of the many benefits of having a budget, but the main benefit is that you can achieve your financial goals faster (whatever they may be).

Did I Miss Anything?

The way you manage your money is important, during the short term and helps you sustain your retirement even on a low income.

As a result, this allows you to reach your financial goals faster, allowing you to become financially independent.

But, you need to focus on your income after taxes, paying off high-interest debt, and then having a budget tailored to your financial situation.

By focussing on these areas about how to budget and save money on a low income, you can achieve your financial independence faster than you think.

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