How to Create a Budget on a Low Income

Did you know that if you are a family of (4) living in the United States making $47,200 per year (or less), your family is considered ‘low-income‘? Until recently, I didn’t. For the longest time, I thought our family was middle class. After the economic downturn of 2008, I realized we were far from it. It’s around this time that I ‘woke up’ in regards to our finances and realized our need for a budget. It quickly became clear to me that in order to stop living deep in debt and paycheck to paycheck, I not only needed to learn how to create a budget on a low income-I needed to stick to it.

I’m not going to lie. It took me years to figure out how to create a budget for our family’s low income, and (once I had it all on paper) even longer to learn to live within the boundaries of our budget. Hopefully, I can help you learn from my mistakes by showing you what I believe is the easiest way to create a budget on a low income. I say ‘easiest’ because the process of creating a budget is relatively easy (in theory). However, putting your budget into action and learning to live within your means is anything but easy. You will soon realize that living on a low income requires sacrifice and substitutions. It will mean less ‘wining and dining’ and more ‘whining and dining in’.

Learning how to create a budget on a low income and subsequently living on it, does have its rewards. Think about it, living within your budget means you will be able to pay off debt and one day you may even be debt-free. Close your eyes and imagine being able to stay home with your children without needing the second income. Envision being content with where you are and with what you have. A budget can get you there.

How to Create a Budget on a Low Income

This post contains affiliate links. See disclosure for more information. 

 How to Create a Budget on a Low Income

Grab some paper, pencils and a calculator. You could use a handy-dandy electronic device such as an excel program or an app on your smartphone for this step, but for now, we are going to make the budgeting process as easy as possible. And what could be easier than paper and a pencil? Once you’ve gotten the hang of creating a budget, feel free to use whatever app, program or system you prefer. Rosemarie, of The Busy Budgeter, has compiled a useful list of tools you can use when creating a budget.

Add up all of your regular monthly expenses and subtract the total from your net income.

Gather up all of your receipts, bills, credit card statements and bank statements from the previous month. Add up the totals. Next, add up the total take-home income earned for the same month. This total will include your regular paychecks, money from side jobs, alimony, and child support, social security, retirement, etc. This total will NOT include money received in the form of gifts, as this type of income is considered extra funds.

Is the total of your income greater than the total of your expenses? If so, great! You’re on the right track. If not, you have two choices:

  1. Find ways to increase your income. Maybe you could take on a second job, earn money from home on your days off, or sell items you no longer use.
  2. Find ways to decrease your expenses. Look over everything you spent money on last month and see what you can eliminate or reduce. Check out my Pinterest page for some ideas on saving money on a low income.

Next, divide these items into categories, add up the totals, and write them down.

For example, your land line (if you have one) and cell phone amounts will make up the total of your ‘phone’ category. Your electric, gas, water, sewer and trash will constitute your ‘utility’ category. Food will have its own category; toiletries and medication will be another. If you really want to be creative, you could use a different color of highlighter and give each category a color. You can then highlight the amounts of each item with its corresponding category’s color. Or, you could just add up the totals and write them down beside the name of the category to which they belong.

Itemize your budget categories by order of importance.

What I mean by this is, simply, list the most important item of your budget first. Think about what you need to survive; shelter, food, clothing, transportation to and from work, etc.  Therefore, your mortgage or rent category will, most likely, be your first line item in your budget. Everything that goes with your housing such as electric/gas, water/sewer, and garbage service will be listed next. These are your necessary expenses and will need to be paid first each and every month.

Here’s an example of budget categories organized by order of importance:

  • Mortgage/Rent
  • Electric/Gas
  • Water/Sewer/Trash
  • Medicine/Toiletries
  • Food
  • Car Payment(s)
  • Fuel 
  • Auto Insurance
  • Phone(s)
  • Loan/Debt Payments
  • Savings for Future Expenses
  • Internet
  • Clothing
  • Entertainment

Everyone’s list will be different because everyone’s priorities are different. You may not have an internet category on your budget if you choose to go without it or if you simply can’t afford it. Notice clothing is low on the list because I am assuming you have enough clothing (most people do). After all, you probably aren’t reading this post in your underwear. Also, clothing (in America at least) is abundant and super cheap if you buy second-hand. Therefore, it is easily attainable.

Let’s talk about the ‘entertainment’ category in your budget for a moment. The entertainment category will contain everything that is non-essential. Cable or internet TV, cigarettes, alcohol, lottery tickets, eating out, going to the movies, going to the gym, and magazine subscriptions are just some of the items considered extra or  ‘entertainment’. This is where the main differences lie between living on a modest/high-income versus a low income. If you are budgeting for a low income, you may not have any money left for entertainment once you make it down to the end of your list. You may have to live without this category for awhile in order to make ends meet, build up savings, and pay off debt.

How to Create a Budget on a Low Income


Plan for future expenses.

Every year, your vehicle(s) registration bill comes in the mail. If you have children in school, they will need school supplies. If you own a car it will need oil changes, brakes, tires, etc. Your kids may want to play an organized sport (or two). There are birthdays, holidays and other events to plan for. If you own a home, it will require routine maintenance. The possibilities for future expenses are endless. How do you make sure you have room in your budget to handle these non-monthly expenses so they don’t sneak up on you? The answer is to turn them into monthly expenses. Do your best to calculate how much you spend annually on ‘expected’ expenses. Divide the total by 12 and add that amount into your budget each month. Do not leave it in your checking account because it has a way of disappearing. Either withdraw the money from the bank and set it aside until needed or transfer it to a savings account.

Save for emergencies.

The only way to prevent yourself from going (further) into debt is to set up an emergency fund. Financial expert, Dave Ramsey, recommends an emergency savings of at least $1,000. If you are trying to create a budget on a low income, that number can seem impossible to achieve. Your goal should be to set aside at least $500 in an emergency savings account and add to it as you can. You should only withdraw money from this account in the case of a true emergency. An expected mechanical problem on your car is an emergency. Dinner at TGI Friday’s is not.

Saving at least $500 for your emergency fund should take top priority when planning your budget. The best way to generate some quick cash for an emergency fund is to sell items you have lying around your house or garage. You’d be surprised at some of the items people will snatch up for the right price. Also, income tax season is right around the corner. Consider setting aside a lump sum as soon as your refund is received.

Another rather painless way to build up your emergency savings is to bank any extra or unexpected money you receive. For example, if you get paid weekly, there are four months in every year when you will receive an extra paycheck. If you are paid every other week, you will receive two extra paychecks per year. Resist the urge to spend that money and build up your savings account instead. Also, if you are fortunate to earn a pay raise or are gifted money, bank it, don’t blow it. You will be glad you did.

How to Create a Budget on a Low Income

Cut yourself some slack. 

Once you’ve perfected your budget on paper, put it into action. Don’t expect to get it all right the first time, though. You may need to fine-tune your budget more than once in order to find what works and what doesn’t. You will also need to draft a new budget each month as your income and expenses may vary. If you find yourself consistently going over your budget, you will need to pinpoint the categories you are overspending in and either find ways to cut back or shift money over from other categories.

Change your perspective.

Once you learn how to create a budget on a low income, and stick to it, you will discover freedom you never thought was possible. Living on a budget is liberating, not restrictive. You will finally be in control of your money instead of it controlling you. As you pay off your debt you will have more breathing room in your budget to save or spend as you see fit. The most important thing, though, is to be content with your life whether you have a little or a lot. You can always work to improve your financial circumstances. Remember, being considered ‘low income’ doesn’t have to define you.

(I am not a financial expert. I am just a regular person who has lived and learned and would like to share my discoveries with you.)

Tired of living paycheck to paycheck? Here are 7 simple steps to create a budget on a low income.

Tired of living paycheck to paycheck? Here are 7 simple steps to create a budget on a low income.


Join our free newsletter

You'll receive weekly updates, personalized simple living challenges, money-saving tips, exclusive offers, as well as access to our (ever-growing) library of decluttering resources.

Powered by ConvertKit

About Cheryl Lemily

A wife, mom of 3 boys & 2 dogs. A minimalist raising a minimalist(ish) family. Living a small, slow, simple life. Helping others declutter & simplify.

2 comments on “How to Create a Budget on a Low Income

  1. Really practical tips! I have also found that saving for emergencies is so important to staying out of debt. Without that savings you end up having to use a credit card. So we make that savings account a high priority! Thanks for sharing your tips!

Leave a Reply

Your email address will not be published.

CommentLuv badge