How to Budget When You’re Broke
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Fast Facts
Financial Control:
Gain control over your money.
Reduce Stress:
Lower financial anxiety.
Debt Management:
Avoid accumulating more debt.
Spending Awareness:
Identify and cut unnecessary expenses.
There’s no question that money management takes a considerable amount of effort and hard work. And it takes on a whole new hard level when you’re flat broke. Budgeting gets even trickier when your money is stretched so thin, and you feel like you’ve exhausted all efforts to lower your expenses.
But the good news is, no matter how hard it might seem, you can learn how to budget when you’re broke. Starting today, you can make better financial decisions that lead to real results tomorrow. The only difference is you have to plan and stay focused on your goals.
So even when it feels like there’s never enough money to go around, let’s look at how you get your money under control so you can achieve your financial goals.
In this article
1. Take stock of what’s coming in and what’s going out
The first step in learning how to budget when you’re broke is to sit down and figure out where all your money is going. This means tracking every single dollar you spend.
If you want to do this for a month to get a bigger picture, then do it. Or, you can review all your expenses online, whatever’s easier. Write it down, use a spreadsheet, or download your statement online — again, whatever works for you.
Not only do you need to track your spending, but you need to list out your debt, too. Make a hit list of all the creditors and people you owe, how much you owe them, the interest rate, and payment terms. Include debts such as:
- Student loans
- Credit cards
- Personal loans
- Lines of credit
- Mortgage
- Car loans
- Anyone else you owe
You have to know exactly what’s going on with your finances. You may think, “I know I don’t have enough money; why do I need to do this?” But you can deal with the facts by listing all your spending and your debts.
You may have more debt than you realize or be spending more money on eating out than you assumed you were. But you won’t know this until you see the information in black and white.
A word of caution, though — it’s equally important not to let this step drag on for too long. Don’t let your fear stop you from having an honest conversation about your financial situation. And remember, you’re using this information to improve your finances, not to beat yourself up or stop your progress.
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2. Create a budget and stop overspending
Once you have your monthly bills, expenses, and obligations listed out, then it’s time to create a budget. Numerous budgeting tools are available, including an app, an online portal, or a spreadsheet you create.
Not only are there various methods of keeping track of your spending, but there are multiple budgeting methods available. Budgeting methods include zero-based budgeting or envelope systems.
Since you’ve already tracked your spending, you might have found a few areas where you can stop the bleeding with unnecessary expenses. In areas where you are overspending, you can allocate this money to your fixed expenses and other goals.
Your budget right now should focus on:
- Paying your fixed expenses (expenses where payments do not change month to month)
- Mortgage/rent
- Other living expenses like taxes and insurance
- Utilities
- Car loan
- Credit card debt payments/student loans
- Insurance premiums
- Bank fees
- Others
In addition to your fixed expenses, your budget should reflect your financial goals.
You should also note that budgets evolve. Your budget when you’re broke will look different than the one you create when you are debt-free. The budget you use today should work in tandem with your financial goals, such as getting caught up on bills or getting out of debt.
And if you use a budgeting method and hate it for whatever reason, try another.
3. Focus on getting caught up
When you’re in debt and money is tight, knowing where to start is tough. But this question is simple to answer: start by playing catch up with your bills.
Your priority with spending should be shelter, food, and transportation. This means bills related to each category, such as car insurance, gas, and utilities. You may have other highly important expenses, such as health insurance, to add to this list.
If you are behind on any of these priority areas, such as with an electricity or water bill. The last thing you want is to face a disconnection or keep getting late fees tacked on your bills.
Of course, getting caught up is the hard part. How do you pay the extra $500 (or whatever the amount is) to get on track? Here are a few ideas:
- Use any tax refund or stimulus money
- Any “free money,” such as a reimbursement check or money you weren’t expecting
- Take on a side gig and focus all the income exclusively on getting caught up
Once you’re caught up, it’s time to focus on your next steps. Plus, you’ll avoid additional late fees or potential disconnections, which ultimately helps you save money.
4. Create an emergency fund
There are very few guarantees in life. But I’m certain one of them is how an emergency expense always comes at the absolute worst time. You have a flat tire, your child needs medicine, or your pet needs an emergency vet visit. The list of possible scenarios that could wreak havoc on our budgets is long.
Unexpected expenses are a part of adulthood. We simply can’t plan for every bill that may pop up. However, we can prepare for these unexpected expenses by having an emergency fund.
An emergency fund is money specifically set aside for those unplanned expenses. It’s also money you can access quickly when you need it.
Setting aside this money gets you out of the perpetual cycle of debt. When your fur baby is sick, you go to your emergency fund instead of reaching for your credit card to pay the vet bill. Then, you replenish the fund as soon as you can.
To quickly build up your fund, look around your house to sell as much as you can stand to part with. Maybe you have valuable jewelry or other valuable items somewhere you could sell. Cut your overspending and sell a few things, and you can build up this fund quickly.
There’s no hard and fast rule on how much an emergency fund should be, but many personal finance experts agree to aim for $1,000. This is significant enough to cover a big hit but not so much it’s unobtainable.
Again, keep this money in another account, such as an online savings account. You won’t make a ton of interest, but that’s ok. The point is to have access but keep it away from your checking account.
Related: How to Start an Emergency Fund
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5. Create a plan to deal with credit card debt
When you’re broke and in debt, you must create a plan to manage this debt. While you’re getting caught up on your fixed expenses and creating your emergency fund, your debt payoff strategy may take a back seat. But once you’ve met those two goals, it’s time to work on debt.
If you have credit card debt, you’re not alone. The average credit card debt in America in 2020 is $5,313. Whether you are higher or lower than this, it ties up your money and keeps your other goals, like savings.
Like budgeting, there are various methods of dealing with credit card debt. Two of the most popular methods are snowball and avalanche.
- Debt snowball: The snowball method has you list your debts in order of smallest amount to largest. Then, you put all available and extra money you can pull together to pay off the smallest debt first. Meanwhile, you’re paying the minimum amount on the other debts only. Once your smallest one is paid off, you roll the money into the next smallest one plus the minimum amount you were paying. You keep doing this until all debt is paid off.
- Debt avalanche: The avalanche method is a slightly different approach. Instead of paying your smallest amount first, you pay your highest interest rate card off first. Again, all extra money goes towards this while you pay minimums on the others. The advantage of this method is you pay less in interest over time, but the debt snowball method allows you to experience quick wins sooner.
The advantage of both debt repayment strategies is they give you a plan of attack. And to get out of the cycle of constantly being broke, you have to get rid of debt. Plain and simple.
You may have heard the expression that being debt-free gives you freedom. And this is so true because it frees up your budget to put money toward your dreams and goals. Plus, it alleviates the stress you feel from owing someone money. Talk about freedom!
6. Create another plan to manage student loans
Student loans are another category that deserves considerable attention. These loans may have a low interest rate, and the payments may be spread out over 10 or 20 years, but the payments and debt keep you from achieving your other goals.
Like the credit card debt strategies, student loans need a debt repayment plan, too. You can apply the debt snowball and avalanche method to these loans, just like with credit cards.
If you have private student loans, look into any benefits from refinancing. If you qualify for a lower interest rate, it could loosen up your monthly payments and give you more breathing room in your budget. However, you’ll pay longer over time, so proceed with caution.
Whether you refinance or not, a solid strategy is the best solution.
7. Bring in extra income
Lastly, if you’re broke, it’s time to seriously consider how to bring in extra income. Whether this means a second job, a side gig, a new job, or asking for a pay raise. No matter how you slice it, the extra income accelerates the abovementioned strategies.
Bringing in an extra income could result in an additional $500, $1,000, or maybe more! Imagine what you can do and how quickly you can get caught up by focusing on your income.
Whatever you decide, use the “extra” money to meet your financial goals. Don’t let it get sucked into the black hole of your checking account! Be intentional with all your money— particularly your extra earnings — to attack your plans.
If you’re considering a side hustle, there are a long list of ones you can try, such as:
- Drive for a rideshare
- Drive for a delivery service
- Dog walking or pet sitting
- Child care
- Offer freelancing services
- Sell items on eBay or Etsy
- Rent a room through Airbnb
All of these ideas are side hustles where you get paid almost immediately. But side hustles aren’t the only option. You could put your efforts into finding a new job, where you’re paid more for your worth too, or ask for a raise with your current one.
Consider how you can bring in extra income. It’s the fastest way to smash your debt and get your finances back on track.
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The bottom line
It's not easy being broke all the time. It's downright exhausting and adds anxiety to our lives that we could all do without. But learning how to budget, even when you're broke, gives you a plan and a purpose with your money. By taking control of your finances through careful financial planning, you pave the way for a brighter financial future. All the sacrifices you make today are investments in your future financial freedom, and with time, you'll see how much money you can save and grow in your bank account. Keep your eyes on your goals, and before long, you'll find yourself successfully crushing those financial milestones you've set for yourself.
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Writer
Sara Coleman is a former corporate gal turned creative entrepreneur. She began writing professionally several years ago and now contributes to multiple websites, blogs, and magazines. She’s also an avid reader and can’t resist a great historical fiction novel. Sara holds a BA in journalism from the University of Georgia and can be found supporting her Bulldogs every chance she has. She resides in Charlotte, North Carolina, with her wonderfully supportive husband and three children. When she’s not ushering her kids to sports and dance lessons, she can be found creating content for her own website, TheProperPen.com.
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