Trying to save money when you have a limited income can seem impossible. However, a low income does not have to prevent you from meeting your savings goals. Even with a small paycheck, you can still save money for goals like retirement or a home down payment provided that you get a little creative and think outside of the box.
Often, people think that they will be able to make up for not saving now when they begin to make more money, but investing works best when money has time to grow, so it is important not to put off saving even when it seems challenging with your current income. Some tips to keep in mind when it comes to saving on a limited income include:
1. Eliminate debt.
For some people, excessive debt can make it difficult to save. In this situation, it may make the most sense to focus all extra money on eliminating that debt, or at least high-interest debt. Once the debt is eliminated or at least reduced, you will be able to focus on more clearly on saving.
The decision of whether to save money or eliminate debt is often a difficult one. You can think of it in terms of which strategy gives the bigger return. If the interest getting charged on your debt is more than you are likely to earn by investing your savings, then it makes sense to pay off those accounts before choosing to save.
2. Create a budget.
While creating a budget may seem silly, it is actually fundamental to saving, especially with a limited income. Account for your monthly bills and figure out exactly how much is left over, which is the amount that you have for discretionary spending and saving.
Sacrificing all fun may make you go off the budget, so it is important to include at least some money for entertainment while funneling the majority of extra money into savings. Importantly, you should not be in the red once you total up your monthly expenses. If this is the case, you are not in a sustainable position and you will need to figure out how to bring more money in, reduce monthly expenses, or both.
3. Automate your savings.
Once you know the amount that you can safely save each month, automate it. When money gets deducted from your account automatically, you stop thinking about it. Then, when you check your savings account months down the line, you can be proud of the amount that you have accumulated.
If you keep the money in your checking account, you may save it accidentally, so it is important to create something separate. Also, you likely want to put the savings into an investment account, especially if you are saving for something long in the future, such as retirement. If you have more short-term goals, then a savings account may be the better option.
4. Reduce your discretionary spending.
The easiest way to save more money is to spend less on expenses that are not required. At the same time, you do not want to end up feeling deprived, which can push you to make poor financial decisions. Look for free or cheap forms of entertainment. For example, museums sometimes have free days that will not require you to pay.
Cooking at home is much cheaper than eating at restaurants, so you may need to adjust your food spending. Also, going to the library or taking advantage of other free services is a great way to reduce some of the spending that you may be doing. Be creative when it comes to finding genuinely fun things to do that cost little to no money.
5. Carry cash with you for purchases.
If you use a card for every purchase, it can become very difficult to keep track of spending and you may end up going over your budget. For many people, a better approach is to use cash. At the beginning of the week, take out the amount of cash that you have allocated for everyday spending and no more.
Then, you only have access to that cash throughout the week. You can keep a closer eye on the amount of cash left and make better decisions about how to spend it. If you were thinking about a dinner out but only have a small bit of cash left, you may need to cook at home this week and strategize how to spend less the following week to get to that restaurant.
6. Alter your monthly ins and outs.
If all else fails and you cannot manage to get a significant amount of money into a savings account, you will need to analyze your larger financial picture. Sometimes, this means making major changes to reduce your monthly expenses, such as moving to a less expensive housing option or getting rid of a vehicle and using public transit.
While these seem like significant sacrifices, you need to think about your financial goals and what sacrifices are worth it to you. The other option is to increase income. While this sounds impossible sometimes, it is almost always possible to work a side gig. Instead of getting rid of your vehicle, for example, sign up to do rideshares. Think about hobbies you can pursue to make additional money, or simply find odd jobs around town.