Knowing the rules of budgeting will help you master your finances. A person who knows how to budget money on a low income is an individual who can easily learn how to save, invest and get rich. Smart budgeting is at the basis of all successful financial actions.
“What either makes or breaks a budget is the variable expenses.” It’s going out with friends here and there. Also, the $1.25 we’re giving to Redbox. It’s all these little things that add up, “affirmed Carlos Moreno, a financial expert at the Mobility Mentoring Center at Economic Mobility Pathways, a Boston-based nonprofit organization whose purpose is to help families with low income.
What is a Budget?
The first questions we should put ourselves are what is a budget and how to budget on a low income?
Budgeting is a system that enables you to elaborate on a plan on how to split your income. This plan allows the user to have control over their finance and learn how to save.
How to make a budget plan?
The 50-30-20 Rule
The 50-30-20 budgeting rule is one of the most popular methods to save, thanks to its effectiveness and ease to put into practice. This rule is used by both people like me and you, who are taking charge of their finances, and by billionaires as well. It was popularized by Senator Elizabeth Warren in her book, All Your Worth: The Ultimate Lifetime Money Plan.
Basically, the 50-30-20 rule is viewed as a simple budgeting framework where you:
- Take 50% of your income and put it aside for your needs
This can mean anything from groceries, rent, basic utilities, transportation, insurance, debt, child expenses, etc.
- 30% goes towards what you want
- Commit the remaining 20% towards your savings and debt
The rule can be combined with different budgeting options for the best results. Next, we’ll understand the main three budgeting methods.
The Envelope System
The envelope system is a budgeting procedure that uses a physical system and incorporates the 50-30-20 rule. This method is very easy to apply. All you have to do is take a few envelopes and set each one for a specific category: rent, utilities, groceries, or debt. Place the cash you plan to spend on these expenses into the envelopes.
In order to make this budgeting system have better results, you can add the 50-30-20 rule into it. So the envelopes for expenses fall into the 50% category, and you will add two more: one envelope for the 30% to spend on wishes and goals, and the 20% envelope – towards savings.
This is a traditional and old-school method that has very good results. While some people use the normal method with cash and envelopes on a monthly basis, some have opted for digital methods, such as spreadsheets or apps like Mvelopes and Goodbudget.
So, what is a zero-based budget? The concept is simple. It helps to monitor your spends easily. What you need to do is to consider your whole monthly income and utilize each part of it deliberately. For example, you can pay the utilities and save the rest for the trip you wanted to plan until you remain with zero dollars.
If you choose this practice, make sure you pay any debt before thinking on what to spend it. You can use apps to help you monitor your spendings. A few good examples of budgeting apps are EveryDollar and YNAB.
By understanding the budgeting process you realize that it’s an easy way to automate your savings and make the most of your spare money. It’s a calculated process where you put money aside for emergency funds, trips, paying debt, and towards other wishes. Here are some of the ways to budget your money:
Determine your after-tax income. Usually, if you have set up a retirement and 401(k) plan, the health, life, and savings will be deducted automatically. Additionally, if you have extra earnings, from side gigs and other sources, extract the taxes and add the rest to your income.
Select a budget plan from the ones mentioned above. It’s important for it to cover all the needs, some of your wants and to build your emergency fund. Track your progress, as it will bring you the satisfaction of being accountable with your money. There are multiple online budgeting tools which you can try out.
Use automation options for your savings. This way you’ll be able to track your savings account and ensure your expenses. Moreover, review your choices from time to time, as your income and expenses tend to change.