How to budget and save money if you live paycheck to paycheck

Are you tired of living paycheck to paycheck and want to start taking control of your finances?

With a little help, you can turn your financial situation around. Budgeting is critical for anyone looking to save money and build wealth.

Budgeting is the plan you have for your finances so that you know where your money is going. If you don’t have a plan for your money, you’ll wonder where it went.

Imagine earning $40k a year, that’s $400k over the course of 10 years. Without budgeting, you’ll lose track of $400k! However, with budgeting, you’ll know exactly where your money is going and can build a better future.

So today’s post is all about building a better future with a budget when you’re living paycheck to paycheck.

Are you tired of living paycheck to paycheck and want to start taking control of your finances? With a little help, you can turn your financial situation around. Budgeting is critical for anyone looking to save money, pay off debt, and build wealth. These simple tips will help put extra cash in your pocket!

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How to budget and save money when you live paycheck to paycheck

Your decision to start saving money

No one can change your attitude about anything but yourself. You can read all you want about saving money but you have to take action to get results.

Saving money is hard work. You work 40 hours a week and have other adult responsibilities. Naturally, we want to blow off some steam at the end of the week which usually means spending money.

You’ll experience a significant lifestyle change when you want to start saving money. Your lifestyle change starts with creating a budget that you can stick with. It takes willpower to stay within your budget once your entertainment money is gone for the month.

Creating a budget is worth it though. It feels amazing to start saving money and paying off debt every month.


Build a paycheck to paycheck budget

Someone who’s living paycheck to paycheck needs a budget. It is really important to stick with your budget otherwise you won’t save money.

Your budget is a plan to track every single dollar entering and leaving your bank account. A budget allows you to know exactly how much money you’ll spend and save month after month.

So here are the basic steps you need to set up your budget:

1. Identify your income

How much money do you bring home every month?

Only include your base pay and not any extras such as overtime, bonuses, and any other random money. People working in sales or those paid based on commission should write down their lowest income month.

Your base pay is what you’ll base your monthly budget on. Should you receive any additional pay, you can use that money to pay off debt or save more money.


2. Identify your debts

How much money do you owe and to whom?

Write out a list of your debts, the total amount owed, the minimum payment, and the interest rate. Don’t include your mortgage payment on your list of debts. For example, your list might look something like:

  1. Car Payment, $8,000 owed, $120 monthly minimum payment, 6% interest
  2. Credit Card, $2,000 owed, $50 monthly minimum payment, 18% interest

You’ll want to build your budget assuming that you can only make the minimum payments every month. Consider paying extra money on your debts if you have extra money when your budget is done.

You’ll want to pay off your debts as soon as possible. Paying off one debt frees up that money to pay off more debt or save more money.

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3. Identify your monthly expenses and categorize

What are your expenses every month?

Identify the necessary expenses in your life such as food, rent, utilities and about how much these cost every month. Ideally, your monthly expenses are not more than your income!

How much money is left over after you pay your necessary expenses? For example, you’ll have $300 remaining if you earn $1,000 per month but your expenses are $700. That $300 is what you have remaining for fun activities, saving money, and other non-mandatory expenses. Ideally, you’ll use it to pay off any remaining debt or save more money.

You should categorize your expenses into categories and subcategories. A category would be “Auto expenses” which can be broken down into subcategories, like “Auto repair” and “insurance.”

Each subcategory should have money assigned to it so that every dollar you earn is accounted for in your budget. Let’s say you earn $1,000 per month and your only expenses are rent, food, and saving money. You might dedicate $650 to rent, $300 to food, and $50 to savings.

4. Update your budget frequently

How often should you update your budget? That depends on your personality.

If you’re not motivated to budget, I recommend budgeting daily. Daily budgeting helps you stay on track because you can do it quickly. You’ll only need to enter in the purchases into your budget for that day. Daily budgeting will help you develop a regular routine, helps keep you informed on where you stand, and prevents overspending.

Eventually, you can work your way to budgeting once a week. You can sit down, enter in your weeks worth of purchases, and see where you stand before the weekend.

I don’t recommend going beyond two weeks between budgeting. Doing so doesn’t allow you to know where you stand and might lead to overspending in some categories.

The important thing is to find a budgeting frequency that works for you. You don’t want budgeting to control your life, but you need to ensure you’re in good standing.


Are your base monthly expenses greater than your income?

You might not find things you like when budgeting for the first time. For some people, they discover they make less than their base expenses every month.

This usually happens when someone doesn’t make enough money or lives above their means. For example, someone who works a low-income job or bought a house with too large of a mortgage payment.

You have two options when your base expenses exceed your monthly income. You can either increase your income or reduce your expenses. Most likely you’ll want to do both options.

Increasing income vs reducing expenses

Let’s start by asking, “do you make enough money to be considered average?”

Google your cities average household income. Is your household income is lower than your cities average household income?

Seattle's average household income
Seattle’s average household income

It is possible to live slightly below average, but who wants to be considered below average? You will find yourself doing much better financially if you can raise your income to be average or higher.

Your city is set up so that most people making the average income will do ok for themselves. Other factors do apply, such as the cost of living. Someone making an average income in a low cost of living area will do better than someone living in a high cost of living area.

Start by looking for other jobs and finding money-making opportunities. Consider finding additional part-time work or working overtime.

You may also want to reduce your expenses further. Start by cutting out areas in your budget that aren’t necessary and you could live without.

You may have to sacrifice in some areas to make your budget work. A common example is eating out less to save money.

The seven baby steps by Dave Ramsey

Financial expert Dave Ramsey created seven baby steps for paying off debt and creating wealth. When you’re creating your budget, keep these guidelines in mind and recognize where you fall in this plan.

I’ve personally had great success using the baby step program, allowing me to pay off 40% of my mortgage in two years. Following this program has helped myself and I know it can help your family.

Baby step #1 – $1,000 saved for emergencies

The first thing you want to do is save $1,000 for emergencies. This will help protect your family from minor financial crisis like your car breaking down. Keep this money accessible, because you never know when you might need to access it.

Baby step #2 – Pay off all debt except the house

The second step is to pay off all your debt except your house. This is because debt is a crushing thing for most families.

Imagine having three debts of which have a minimum payment of $75, $50, and $50. You’re spending $175 every month that could be used to benefit your family. Imaging having your debts paid off and the extra $175 in your pocket every month!

Dave recommends using the debt snowball method for paying off your debt. That is to pay off the lowest balance debt first, regardless of interest rate. You continue to pay the minimum payment on the other debts while you work on paying off the first.

Baby step #3 – 3 to 6 months of expenses for emergencies

With your debts gone, start saving for 3 to 6 months worth of expenses for emergencies. Building an emergency fund is critical for surviving large financial crisis, like losing your job.

Baby steps #4-7 – See Article for the 7 baby steps to pay off debt

Baby steps 1 through 3 should be your focus if you’re living paycheck to paycheck. If you’re interested in seeing the other baby steps, please see Dave Ramsey’s seven baby steps for getting out of debt and building wealth.

Tips to increase your income

You should always be looking to earn more money. Here are a few tips to increase your income:

Get a new job

I always recommend constantly keeping an eye out for other job opportunities. You’ll never know when a great opportunity will present itself.

You should consider job hopping every two years, if you can find a good opportunity. Companies will often give you a substantial offer above what you’re currently making in an attempt to steal you away. I have met people who have gotten a 50% pay raise just by finding the right opportunity at the right time.

Job hopping is becoming the new normal. It’s much harder to stick to a company and work 30-40 years and still advance your salary.

Ask for a raise

If it’s been awhile since your last raise, maybe it’s time to ask for one. The best time to ask for a raise is after you’ve done something big for the company or at the end of the year.

Work overtime or get a part-time job

No one likes to work overtime, but it can be a useful tool for paying off debt quickly. You could also consider doing something at your own leisure, such as driving for Uber.

If you’re looking for money saving tips, I recommend checking out our budgeting and save money course. The course is packed full of information to help your family budget better and save more money every month.