Saving & Budgeting on a Low Income

by Colleen Reinhart

Sticking to a budget can be tough no matter how much money you make, but creating a budget that works is even more difficult when you're already stretching every dollar to make ends meet. Although sticking to your goals takes more perseverance when you have less to work with, balancing your budget and setting something aside for a rainy day is possible, as long as you're willing to put in some extra effort.

Figure Out What You Should Spend

Pull up your bank and credit card records from the last month and calculate what you're actually spending. Divide all of your expenses into five categories: housing, transportation, debt, savings and other life expenses. Then, grab your calculator and figure out what you actually should be spending, based on your take-home pay. Personal finance adviser Gail Vaz-Oxlade suggests 35 percent of your net income should go to housing, 15 to transportation, 15 to debt, 10 to savings and 25 to other. Compare these ideal values to your actual numbers, and it'll be easier to see where you need to cut back.

Make Saving a Habit

Saving becomes easier when you make it automatic and sock away small amounts that your budget can handle. Although Vaz-Oxlade suggests putting away 10 percent of your net income, start with 5 if you are barely scraping by. Set up an automatic, monthly withdrawal from your checking account to your savings. When the money disappears without you having to move it, you're less likely to spend it before you get a chance to squirrel some cash away. You can sneak even more into your rainy day fund by working saving into your daily life. Commit to saving all of your change in a glass jar, for example. Pay yourself by putting a dollar in your piggy bank every time you finish a household chore, like laundry or dusting.

Don't Pay Full Price

Make it your motto to never pay full price on anything. This mantra can help you save in a number of areas of your life. If paying down credit card debt is your goal, call up your credit card providers and try to negotiate lower interest rates. Move all of your debt to the lowest-rate card and close the others. Watch TV shows for free online, instead of footing hefty cable bills. Buy in bulk, make it or grow it yourself when possible, buy generic brand grocery products, clip coupons and barter things like babysitting time with other families.

Saving for Retirement

No matter what you make, you'll need some of your own savings to make it through your golden years. Even low-income earners can commit to stashing away 1 percent in a 401(k) or IRA. If you expect your income to increase in the future, Roth retirement accounts allow you to pay tax upfront while you're in a lower tax bracket and to benefit from tax-free investment growth. Saving for retirement helps lower your income tax burden, too. In 2011, singles earning $28,250 or less and couples making $56,500 or less could claim a saver's credit to reduce taxes paid to the IRS -- worth up to $1,000 for singles and $2,000 for couples.

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