One of the biggest excuses we make when it comes to saving, or the lack thereof, is that we make just enough for our expenses. We don’t have extra to allot for savings. But what if we tell you that you can still save money on a low income?
Here are 7 secrets you can use to have a nest egg despite the amount of your earnings:
Secret 1: Understand your wants versus your needs.
The first secret to saving on a low income is to understand and identify your wants and needs.
Needs are expenses that are mandatory for you to make in order to stay alive and maintain your current income. Examples of needs would be things like food, water, shelter, clothing, transportation, and communication (like a cell phone or the internet).
Wants, on the other hand, are all other expenses beyond your basic needs. Sometimes even expenses that seem like they would be needs are actually wants. For example, we all NEED to wear clothing, but does the clothing NEED to be a Gucci? No. A $2 shirt I have from the thrift store could meet my need to be clothed just as well as a new $1700 gucci shirt could.
When you are identifying your wants and needs, it’s important to ask yourself if you already have something that meets your needs. If you do, then you KNOW that this expense is a want.
Let’s make it clear that there is nothing wrong with spending money on wants. Infact, the whole purpose of saving is to provide us with things we want. But understanding the difference and identifying our own wants and needs will help us find little places where we can make adjustments that will help us have enough money at the end of the month to start saving.
Secret 2: Limit your entertainment expenses.
After a long workweek, there is nothing better than going out on the weekend and having fun with the people you love. Whether it’s going to a movie, a club, a sporting event, a concert, we all love to be entertained. But when we aren’t intentional about how often we are going out, the expenses really start to pile up. Dinner, tickets, cost of travel, and drinks, done twice a week can really add up over a month.
But having fun with the people you love doesn’t have to cost a fortune. There are some simple ways to still spend quality time with your friends and family without breaking the bank.
For example, instead of going out to the game, you could invite your friends over for a potluck dinner and watch the game at home. You can also forgo weekly trips to the movies and buying snacks, and just invite loved ones over, pop some popcorn at home and have a Netflix marathon.
There are lots of opportunities to have a great weekend without spending a fortune. The only cost is a little bit of creativity.
Secret 3: Avoid bad debt.
If you want to really save money on a low income, one of the simplest things you can do is avoid bad debt. Now don’t be confused, we LOVE good debt, and we will talk about that separately.
But to clarify, good debt is debt that will allow you to make more money in the future, whereas bad debt is debt that you don’t need that will only cost you more in the future. Consumer credit card debt is a great example.
Many people rack up credit card debt to cover the cost of wants, like new furniture, home remodels, new cars, and the latest phone. These are usually examples of bad debt. Bad debt makes saving hard for two reasons. First, there are minimum balances due, which means that until that loan is paid off, you have a payment to make every month. Second, you have to pay interest on that loan, which means that the longer you take to pay it off the more you will have to pay. So an item that only costs $100 in cash could end up costing $150 by the time it is paid off because of the interest.
When it comes to credit card debt, a good rule of thumb is to only go into debt for items that you could afford to pay for in cash. That way, you know you can make the payments, you build your credit, and where possible, avoid paying anything extra in interest.
Secret 4: Spend wisely on groceries.
There are a couple of simple things you can do to cut down on the cost of these necessities.
First, you could simply plan out a menu for your meals for the week. By having a menu for every meal, you will already know exactly what items you will need at the store. This will cut down on impulse purchases. And if we can cut down on impulse purchases, we will most likely stick to our menu and less of the food that we purchase will end up wasted.
Second, you could compare prices between different shops. Sometimes one store will sell a product for 5 dollars and another store will be selling the same thing for $2.99. So there may be stores in your area that you know have better prices than others. In a lot of ways you can save just by downloading a price matching app and checking it at the register. For example if you shop at Walmart, they can price match almost any item, if you can show that you can get it for cheaper somewhere else.
Along this same line, sometimes there will be two products at a store that are identical in every way, even manufactured at the same factory, that cost different depending on the brand on the label. Name brand products tend to cost significantly more than generic brands even though the generics are exactly the same product.
Lastly, a super simple trick to spending less at the register is to just pay in cash. In a digital world, it is easy to lose track of expenses. If you physically handle the money and go to the store with a set budget, it is much easier to not overspend.
Secret 5: Minimize the cost of your housing.
Chances are, housing is one of your greatest expenses. A common personal financing practice is to have your housing expenses account for 35% or less of your overall, after tax income. If you’re spending more than 35% of your after tax income on housing, you may want to consider a new housing option that will take a smaller portion of your income. Of all of our suggestions, this is the one that could potentially cause the most lifestyle change, but we include it because this is a lifestyle change that is well worth it.
However if you are determined to stay where you are, or you are already in a situation where your housing costs are less than 35% of your total after tax income, then here are a couple of recommendations.
Let’s start with what you can do if you rent. Sometimes you can save on your rent by negotiating special deals with your landlord. You could perform a service for them that you would normally get paid for, like doing home maintenance, watching their kids, making them meals, or cleaning for them. You may also be able to negotiate lower prices by signing a long-term lease, or by offering to pay the amount of a lease upfront, in cash.
Whether you rent or own your home, another option might be to use any extra rooms or structures on the property as short-term rentals through apps like VRBO or Airbnb. That extra income would be considered passive income and would really help offset the cost of your housing. Plus, if you own your home, the best part is that these tenets would be helping you pay off your greatest asset.
Now let’s quickly address two of our favorite strategies to help you save money on a low income. If you use these strategies, saving will become easier than you ever expected. You won’t even have to think about saving anymore.
Secret 6: Use zero-sum budgeting.
You may be unfamiliar with this term, but zero-sum budgeting is when you are intentionally spending every single dollar you make but not in the way you might expect.
Zero-sum budgeting involves allocating your income towards each of your expense-line items and then allocating the leftover funds to your savings and/or investment accounts. You can also practice zero-sum budgeting by allocating any leftover funds from your current month toward the budget for the next month, essentially adding that leftover money to your budget for that next month in particular.
For example, let’s say you are earning around $3000 a month after tax at your job. Using the zero-sum budgeting method, you can essentially assign this entire $3000 towards your monthly expenses, like rent, groceries, etc and then put the rest into either savings, investments or your next month’s budget to completely drain your checking account.
The main difference between using non-zero-sum budgeting is that you allocate some of your funds to savings as a separate line item. When you then allocate that $3000 to their respective line items, part of that income will go into savings, and as long as you stick to your budget, this allocation method will allow you to grow your savings consistently as the months go on, allowing you to save money even on a low income.
Secret 7: Automate your savings.
Of all of the suggestions we have made, this strategy is by far the most effective and easiest to start doing.
Simply speak with your employer or your HR department and set up automatic deductions from your paychecks to go straight into your savings account. With auto deductions, you will never see the money. You never have to touch it and you won’t even know it’s missing when you get your paycheck.
When you set this up, we recommend that you have your employer auto-deduct AT LEAST 5% but preferably 10%. This percentage was first recommended by George Clauson in his classic personal finance allegory “The Richest Man In Babylon.” We are HUGE fans of this book, and you will hear about it often on our channel, but essentially George noticed that many people pay their expenses first and by the time they are done, they have nothing left to pay themselves, so in his revolutionary book he recommended that people PAY THEMSELVES 10% of their income FIRST, and then pay their expenses with whatever they have left over. This has been some of the best advice ever given on the subject of personal finance. Automating your saving deductions makes paying yourself 10% easier than ever, and helps you save money on a low income.
Have you read this book yet? If not, we HIGHLY recommend it. If so, let us know what you think.