There’s no question money management takes a considerable amount of effort and hard work. And it takes on a whole new level of hard when you’re flat broke. When your money is stretched so thin and you feel like you’ve exhausted all efforts to lower your expenses, budgeting gets even trickier.
But the good news is, no matter how hard it might seem, you can learn how to budget when you’re broke. You can make better financial decisions starting today, 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.
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 of 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 go back and 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
- Car loans
- Anyone else you owe
The point is, you have to know exactly what’s going on with your finances. Sure, you may think “I know I don’t have enough money, why do I need to do this?” But by listing out all your spending and your debts, you can deal with the facts.
You may have more debt than you realize, or you may 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.
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. There are numerous budgeting tools available, whether it’s an app, 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 such as the zero-based budgeting, or envelope system.
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)
- Other living expenses like taxes and insurance
- Car loan
- Credit card debt payments/student loans
- Insurance premiums
- Bank fees
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 you hate it for whatever reason, then try another.
3. Focus on getting caught up
When you’re in debt and money is tight, it’s tough to know where to start first. 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 that you need to add to this list.
If you are behind on any of these priority areas, such as with an electricity or water bill, then it’s time to get caught up. 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, then 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 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 is long of the possible scenarios that wreak havoc on our budgets.
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.
Having this money set aside gets you out of the perpetual cycle of debt. When your fur baby is sick, instead of reaching for your credit card to pay the vet bill, you go to your emergency fund. 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 somewhere you could sell too or other valuable items. Cut your overspending and sell a few things and you can build up this fund in a flash.
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.
5. Create a plan to deal with credit card debt
When you’re broke and in debt, you have to 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: This 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 you were paying 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 to this method is you pay less in interest over time, but the debt snowball method allows you to experience quick wins sooner.
The advantage to both debt repayment strategies is it gives you a plan of attack. And in order 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 towards your dreams and goals. Plus it alleviates that stress you feel 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 payments each month and give you more breathing room in your budget. However, you’ll end up paying longer over time, so proceed with caution.
Whether you refinance or not, a solid strategy is the best solution.
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 all of these strategies mentioned above.
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 of your money — but 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 out 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.
Give serious thought to how you can bring in extra income. It’s the fastest way to smash your debt and get your finances back on track.
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. Remember, all the sacrifices you make now, get you one step closer to where you want to be. And it won’t be too long before you will be crushing those financial goals you’ve set for yourself.