May 20, 2022 "How to Budget When You’re Broke": Today I found this article by Kristin Wong on Pocket Worthy. This article appeared on Mozilla's page:
It takes commitment and time, but you can learn to manage your money even when there's not much of it. Follow these steps to set up a budget if you're broke.
We've discussed how to create a basic, real-world budget, but that advice often doesn't apply when you're struggling to make ends meet. The basic ideas are the same, but your breakdown of spending is probably going to look a bit different, and everyone's situation is going to be unique to them. So here's what you need to do to get back on track.
First: Assess Your Financial Situation
If you have more money going out than coming in, here's what your financial plan boils down to: spend less and/or earn more. To figure out how to do this, first take an assessment of your income and expenses. This will help you develop a reasonable and realistic budget.
Categorize Your Expenses
Break down your expenses over the past few months. Categorize and separate them into needs and wants. Separating will help you prioritize your finances. To get a clear idea of your needs and wants, consider creating a hierarchy of spending. Organize your debts, too.
Identify Your Problem Spending Areas
Take note of your spending habits. Are there any specific stores you frequent? Do you have a coffee habit that can be cut? Many times, there are "leaks" in a budget that can be plugged. The first step is figuring out where they are. Identify these categories, and keep them in mind once you start your budget.
Cut Back Your Spending
Find ways to reduce your expenses. The first place to start is the "wants" category.
It's important to allow yourself a little breathing room for fun in your budget. If you don't, you risk busting it—and that can make you want to quit altogether. But remember: the key to managing your money when you're broke is downsizing your lifestyle. If you can't afford to pay your bills, take a close look at what might be luxuries. Here are some examples of unnecessary expenses:
- Cable
- A data-heavy cellphone plan
- Vacations
We once asked Lifehacker readers: "When the financial going gets tough, what are the first amenities you cut back on?" Check out the answers.
Save Money on Bills
Once the wants are out of the way, take a look at your needs—you may find you can save a lot there, particularly on your bills. Check out our bill-by-bill guide to saving money on your monthly expenses for some ideas.
Be Frugal
When you're struggling to make ends meet, frugality is your friend. Make the most out of your money and the things you spend it on. For example, you could:
- Stretch your meals: The New York Daily News rounded up some of the best grocery options when you're broke.
- Do It Yourself: One of the best ways to cut costs is to learn to do things yourself rather than pay for them. For example,
- you can save some money by learning basic preventive car maintenance,
- taking on home projects,
- and making your own cleaning products and toiletries.
- Save on housing:
- Can you negotiate your rent?
- Can you move into a cheaper place?
- Since this is likely one of your biggest expenses, it's one of the best ways to make a dent in your spending.
Your options will vary. The point is to adopt a frugal lifestyle and look for opportunities to trim costs.
Prioritize Your Money Goals
Many people wonder whether they should focus on debt or savings first. The answer depends on your situation. But financial expert Sarah Place recommends at least building an emergency fund before tackling debt. According to Bankrate:
"Place acknowledges that it's difficult to tell people to save 'in an environment where they are earning a fraction of a percent of interest on their savings' while being charged 'usurious loan shark rates of over 30 percent on their credit cards. However, in the given economic circumstances, tough choices have to be made,' she says."
Setbacks are inevitable. If you're not prepared for them, they can devastate your budget and your finances. While it might take some time to build an emergency fund, it will allow you to stick to your budget if a financial setback arises.
Not all experts agree on which is best to focus on first, debt or savings. To see which one works for you, check out Bankrate's full article.
Tackle Your Debt
Whatever you choose to focus on, don't risk your finances unraveling by ignoring your debt. Late fees and interest can turn a small debt into an overwhelming one. Your debt should be a priority.
Pick a Repayment Method
You'll have to come up with a debt repayment plan. To do this, first pick a method:
- The "Debt Snowball" method: Pay your smallest debts first. Seeing your debts paid down will help you build the momentum to keep going. Lifehacker writer Melanie Pinola points out that a recent study found this method to be effective.
- The "Debt Avalanche" method: Pay debts with the highest interest rates first. As finance blog Ready for Zero points out: "proponents of the Debt Avalanche point out that you can lose thousands of dollars by choosing not to tackle your highest interest accounts first."
Reduce Your Credit Card Interest Rate
Yes, it's possible. According to Bankrate, a national survey found that 56 percent of consumers who called credit card companies to ask for a lower interest rate had positive results. Bankrate reports:
"A five-minute phone call to your credit card issuer could save you hundreds, even thousands, of dollars in interest charges. 'There's no incentive for them to lower your rate unless you call. The squeaky wheel gets the oil,' says Brad Dakake, a consumer advocate with Massachusetts Public Interest Research Group."
It's worth a shot. But beware of credit card interest rate scams, too. According to the Federal Trade Commission:
"Voice mail boxes across the nation are being clogged with prerecorded phone calls from companies that claim to be able to negotiate significantly lower interest rates with your credit card issuers if you just pay them a fee first."
Request Extensions or Payment Plans
Let's say you're behind on bills, debt or rent. Investopedia suggests you work something out with your provider, lender or landlord:
"Don't be afraid to request bill extensions or payment plans. These requests are often granted. If your biggest worry is eviction from your apartment, talk to your landlord, but, also, see if you can get extensions on any other expenses to free up money for keeping your home."
Playing catch-up might derail you from your other financial goals. But the most important thing is to keep your debts organized and come up with a plan on how you'll tackle each one.
Draft Your Plan
Every cent will be accounted for, making your budget pretty tight. At this point, a traditional budget strategy may not be suited for you. But don't miss blowing your budget, either. Avoid the following mistakes:
- Not being realistic: Crunch the numbers realistically. Set a reasonable amount aside for each of your expenses. Maybe you plan to eat for $25 a month by taking on some extreme measures. In reality, they're probably not going to work. Don't set yourself up for failure.
- Cutting out all the fun: It's important to give yourself some breathing room. Money in Your 20s explains: "You may have to limit it to twenty dollars a month if your budget is really tight, but...this extra little bit of money can prevent you from feeling deprived, which can lead to overspending."
The amount of breathing room will depend on your situation. But it should only be enough to keep you from blowing your budget. Set aside an appropriate, but modest, amount.
Once your expenses and goals are in place, it's time to draft your plan. J.D. Roth of Get Rich Slowly shares his advice:
"I began by listing my debts in the order that I wanted to repay them...
Next, I listed my expected sources of income.
Finally, I brainstormed a possible plan of attack."
Brainstorm your own plan of attack.
Once you pick your debt repayment strategy, allocate an amount toward each debt. Calculate how long it will take to eliminate each one, with your budget in place.
Breaking up goals into smaller milestones makes them easier to achieve.
Take Advantage of Opportunities
Part of managing money when you're broke is increasing your income. For example, you might be able to:
These options aren't available to everyone. But ultimately, it's about being resourceful.
Look for opportunities to earn more and save more money.
Then seize those opportunities. Sometimes, they might look more like sacrifices.
Here's a personal example: My mom struggled to make ends meet in her 20s. She was raising me alone and working full-time at a grocery store. Somehow, she was able to save up $10,000 in a few years. I asked her how she did this. Part of it, she said, was taking advantage of every opportunity that came her way.
She worked overtime. She took up a job at Stop-N-Go. Any unexpected windfalls went into savings. She called these "lucky breaks." Most people wouldn't see overtime as lucky, but my mom was committed to her financial goal. So she put everything in terms of achieving that goal, and took advantage of anything that would help.
If you're depressed over your lack of funds, keep this in mind: many of the best success stories start with being broke.
Come up with a plan.
Set small milestones.
Seize opportunities.
Overall, this will help you take control. Once you do, you might be surprised at what you accomplish.
As the economy continues along an uncertain path, it’s not too late to take action to protect your finances.
Some economists and investors argue that the U.S. is already in recession. While Canada isn’t there yet, most (59 per cent) Canadians feel like we are. With the cost of living on the rise, you might be looking for ways to make your hard-earned dollars go further.
With a bit of planning and some smart spending, you can help protect yourself from the effects of a recession.
Spend less
This speaks for itself.
Create a budget and include everything that you spend money on. Whether it’s hydro bills, transit costs, streaming subscriptions or coffee money, include everything you can.
Once you’ve accounted for where your money goes, see what you can trim off.
If you frequently buy your lunch, it would be prudent to start making it at home.
Instead of paying for the premium subscription to a streaming service, you might find you can make do with a lower-tiered account, or cancel your subscription altogether.
Work more
You may feel stressed about how little spare time you have, but if you can, working more to make some extra money can help you along.
Of course there is the option to find part-time work in fields such as retail or customer service.
However, if you have a skill that can be used remotely, try to take advantage of it. You can then maximize your time while also avoiding the commuting costs of an in-person role.
Having a freelance remote role also gives you the freedom to make a schedule that works around whatever other job or responsibilities you have.
For instance, if you work in human resources, hire yourself out as a part-time résumé consultant.
If you’re presently employed, and are worried about your job security, take time to update your résumé and start to put the feelers out for other employment. If you suddenly find yourself without a job because of an economic downturn, you will hopefully be further along on the path to finding another position.
Emergency fund
Emergency funds are savings that are readily available to you, but intended to only be used when absolutely necessary. Whether it’s to pay for unexpected medical expenses or house repairs, setting aside money to help with these costs is invaluable.
The standard recommendation is to have three to six months of salary set aside in an emergency fund. While this amount might seem overwhelming, if you slowly contribute to your fund you’ll find that amassing the money isn’t impossible.
If you haven’t started an emergency fund, there’s no better time than now. Opening up a secondary bank account solely for this purpose is helpful, as you can separate your daily operating funds from those for worst case scenarios.
Try to set aside 10 per cent of every pay cheque for the emergency account. This may mean having to sacrifice some frivolous expenses like takeout meals, but eliminating those is a good idea to help recession proof your finances anyway.
If 10 per cent is too ambitious, $10 is good as well.
Every bit you can save helps, and you can always contribute more to your emergency fund when you can.
To make setting aside the money easier, consider automating the transfer to the savings account. Ideally, you can use a high-interest savings account that will allow you to build on your investment faster than a standard savings account. Doing this will allow you to save the money without having to think about it.
Invest
A general rule of investing is to set aside 10 per cent of your pre-tax income.
Watching the value of investments dip can be concerning, but if you’re playing the long game, now’s a great time to invest. Keep in mind the old adage of “buy low, sell high” — when markets are down it’s time to contribute to your portfolio.
Money can be tight, but if you’ve worked out a proper budget and trimmed fat away from your expenses, you’ll be able to scrape together some cash to invest.
In fact, making investments a line in your budget is invaluable, as it creates discipline and ensures you are taking future savings into account.
The market will find its footing, and a diverse portfolio will prove profitable in the long run.
When the market swings upward you’ll be confident that investing your money in the downturn was the right move.
No new debts
If you’re worried about the impact a recession could have on you, now’s not the time to go out and buy that new car. Taking on new debts adds stress to your savings, and can be financially crippling if you suddenly find yourself unemployed or having to pay higher interest rates.
If you have any high-interest debts, like credit cards, pay these off as soon as possible.
You can also consolidate these debts with others at lower interest rates, allowing you to pay more money toward the principal instead of the interest.
The possibility of a recession can be scary, but weathering the storm doesn’t have to be. With some good planning and smart savings, you can ensure that you’re prepared for a worst case scenario.
This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
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