If you're earning minimum wage while covering all your living expenses, there is no doubt this can be difficult. In fact, a financial situation like this is what perpetuates poverty. Considering the soaring cost of living throughout America while recognizing that wages do not rise in tandem, it's safe to assume that saving money can feel impossible.
In many cases, getting a higher-paying job seems like the solution. Still, it's not as easy as it sounds because many people lack the credentials for higher-paying jobs. They need to pursue a college education that costs money and takes time away from work to get credentials. It's a risk some people can't afford to take, and that is why it's imperative to learn how to save money by cutting expenses.
To accomplish this, your spending will need to be significantly reduced. You will need to understand how to put every earned dollar to work rather than on unnecessary purchases.
Below are a few tips that low-income families can adopt to help them save more money to add stability to their life.
Think About Your Financial Goals
An effective way to reach a goal is to clearly define it, then reverse engineer it. Suppose you earn minimum wage and most of your income goes toward monthly bills; you need a plan to maximize your residual income. Write down your goals and start from here. This can include:
Short-term goals:
- Paying off credit card debt
- Building an emergency fund or separate savings account
- Reducing any unnecessary spending
Long-term goals:
- Saving for a down payment for a home
- Paying off more significant debts such as student loans
Whatever your goal is, reverse engineering will make it appear so much more manageable, particularly if your income is low. So, how do you do this? Let's have a look.
Suppose your goal is to save for a 3-month emergency fund because your income is so low that you worry about covering emergencies in the future.
Step 1: Calculate how much your monthly expenses are. This only includes the necessary bills you pay every month, such as rent/mortgage, utilities, groceries, phone bills, gas, and insurance. You don't want to include any miscellaneous expenses because the point here is to cut your costs as much as possible. Let's assume you're monthly bills are $1300, which includes all your necessary living expenses.
Step 2: Calculate how much residual income you have remaining after all your bills. Say, for example, your net income each month is $1900. This would leave you with $600.
Step 3: Now that you have these totals, you can calculate how long it would take you to reach your goal of saving three months' worth of expense, which totals $3900. If you were to save every penny of the $600 each month, it would take 6.5 months to reach this goal.
It's that easy. When you have a specific and clear goal in mind and break down your finances, you can quickly determine how to reach it. While it's challenging to allocate all your money to a savings account each month, it's essential to work toward a better financial future with limited options. If increasing your income is not a viable option, reducing your spending should always be factored in as your next step.
1. Eliminate or Reduce All Unnecessary Spending
Many people believe it's too difficult to cut expenses; therefore, they don't even bother. While others believe there is nothing left to cut. While this is true for a fair few, it's not the reality for most. Additionally, we often associate reduced spending with an unpleasant way of living life. This is a cynical thought process that keeps many people in poverty. Eliminating unnecessary spending allows you to save for the future and your retirement, and conditions you to look at money more healthily.
To eliminate spending, it's best to start by tracking your money. Print off the last 60 days of bank statements and credit card statements. Aside from your housing, utility, gas, and grocery bills, calculate how much money you spend on everything else. You might catch yourself saying, "Well, I needed that," or "That was a necessity." Ask yourself, "If I didn't buy it, would there have been a consequence?" This will help you distinguish between a need and a want.
You will want to apply an effective strategy to help you monitor these expenses. The cash stuffing system is a practical and viable solution. It allows you to divide your cash into envelopes while ensuring you are spending the allotted amount. Additionally, for all the expenses you want to eliminate entirely, you won’t designate an envelope, making it easier to ensure these categories are eliminated.
To maximize your savings, you should limit your categories to essential expenses only, including;
- Mortgage/rent
- Utilities
- Gas
- Groceries
- Insurance
- Car Payment/transportation
The list intentionally leaves out all other spending categories because, remember, it's designed to limit spending. By this point, you may have concluded that your residual income after expenses is still relatively so you want to go leaner, but there is nothing left to eliminate. Below are a few options to cut additional expenses.
2. Lower Your Essential Expenses
Lowering essential expenses may seem like a daunting task, and that's because it is, but it's worth it. To do this, you will need to spend time calling service providers for your utilities, cell phone, and internet bills to negotiate cheaper fees. You might be surprised to learn that you can save quite a bit of money each month simply by negotiating presumably overpriced plan rates. The average American spends $147.38 each month on their cell phone, internet, and streaming bills. Streaming service alone is $39.96, which is an absolutely unnecessary bill.
Another option to lower your essential expenses is to rent out space if you have any. While this isn't the most ideal option for most people, it could be worth it if you perform the proper background checks on your potential renter. This isn't an option for all people, but if it is, collecting rent can pay down your debts quicker and help you save more money.
3. Consolidate Your Debt
Consolidating your debt is an excellent way to reduce your monthly expenses and should not be overlooked. The average American spends $1,233 each month on debt payments alone. That is an astronomical amount of money, especially for people living on minimum wage.
If this is the reality for you, take the time to address it as soon as possible. Call your credit card provider to negotiate lower interest rates that you might qualify for. If no changes can be made, shop around for competitors that offer balance transfers with low-interest rates. By consolidating your debt onto one account with a low-interest rate, you're reducing your monthly interest payments while streamlining all your bills, making it manageable.
Doing this can help you save a few hundred dollars each month, depending on your total debt amount. The added savings will expedite your goal and help you save for new goals as well. Additionally, putting a freeze on your credit cards will also help you reduce your spending and prevent you from accumulating further debt.
4. Cancel Vehicle Payments
Financing a vehicle is often necessary if you don't have the savings to pay for one upfront. But that doesn't mean overpriced car payments are okay if you're financial situation is unfavorable. Keep in mind, the average American spends $598 on monthly payments and insurance each month. This is simply unreasonable for so many households. If your monthly income is $1800 on average, this is 33% of it.
Canceling vehicle payments can be tricky because it entails you selling your car back to the dealer, hoping they will repurchase it for the value of your outstanding loan. If they offer a lesser amount, you will be left with a lien on the vehicle, which must be paid off. In this case, determine what the monthly payments of the lien will be. If it's much less than the vehicle payments, you might want to consider this option. Alternatively, you can sell it privately at a selling price that would cover the loan balance.
By selling your vehicle, your means of transportation will be public transit until you can save enough to buy a used vehicle. It will be a difficult transition, but the money you save will make a significant difference in your life. Vehicles are a necessity in some cases, but they should never be at the expense of your financial freedom.
5. Get Started Now
Struggling to get ahead financially is one of the most significant stressors in life. Still, it can be improved despite a low level of income. When we thoroughly analyze our spending habits, we quickly realize that we have an income problem in addition to a spending problem. So, there's no better time to initiate these changes than right now!
To recap, the most important thing is to have a goal because without one, you're working toward nothing, and change doesn't happen. Overspending is often the culprit that prevents you from saving more money and paying down debt. With an appropriate spending plan, debt management plan, and control over your spending, you can change your life, even while living on minimum wage.
