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How to Save Money on a Limited Income

Yes, it’s possible to save money on a limited income, you just need a saving strategy that works. Here’s how I learned to stash a few dollars away even when I was barely making ends meet.

Even if you're only making pennies, there are a few ways you can save money on a limited income.In my twenties, the last thing I wanted to do, or felt I even could do, was save money. Investing money never crossed my mind – I thought that was something old guys in suits did while making evil plots to dominate the world.

My financial philosophy went something like this — What was the point of working at jobs I didn’t really like (and didn’t pay particularly well either) if I couldn’t spend money frivolously during my free time?

After all, I was living in San Francisco. Why save $20 when I could spend that same amount drinking wine while watching the fog roll in over the city?

Not that I had a lot of money to spend (or save) anyway. My paychecks barely covered my rent for a rundown studio prone to flea infestations.

You may feel that you’re in a similar situation (without the flea problem, I hope): 32 percent of 18-29 year olds are underemployed, meaning you can’t find full time employment that pays well.

I’d never tell you not to indulge in a beer or a new pair of shoes every once in awhile.  So I hope you believe me when I say that even if you’re just scraping by, you should really (really, really, really) put some money aside for savings and investments.  Because the day will come when you’ll need it.

After a few years in San Francisco, the fun wore off. I was sick of crappy jobs and wanted to go to graduate school so I could end up with a career I actually enjoyed. But I had no money. Suddenly, I really regretted all the dinners, concerts and cocktails I indulged in.

It took me a long, long time to forgive myself (and I’m still paying off the loans I took out to go to graduate school). To avoid the mistakes I made, follow these simple steps to learn how to save money on a limited income.

1. Save 10 percent of every paycheck.

I know … It seems like a lot. But look at it this way: if you’re not making a lot of money, 10 percent really isn’t that much.

Why do it at all in that case?

Because shit happens. You may get fired from your job. Or the company may be experiencing financial troubles and let you go (I’ve experienced both, although technically, I quit before I was fired). These things (and worse, like a fire or health emergency) can happen even if you’re young, well-liked, smart and genetically blessed.

Your landlord won’t care about your emergencies. Neither will the grocery store. If you don’t have money, you don’t get a roof over your head or food.

So make sure you’re putting money aside every paycheck for emergencies. Most financial advisors recommend you have enough to cover a full three months of all living expenses, including utilities.

2. Set up an automatic savings plan with an online bank.

At one point in my twenties, I decided to open a savings account. But I did it at the same bank where I had my checking account. The savings account was linked to my debit card, meaning I could withdraw money from it whenever I wanted. So you can imagine how that worked out … The first Friday night I wanted to go out but didn’t have enough money in my checking account, I simply withdrew it from savings. And never put it back in.

I still don’t have enough self-discipline to maintain a savings account at Chase, where I do the rest of my banking.

So I hold my savings at Capital One 360, an online high yield savings account.

I authorized them to automatically withdraw a certain amount of money from my checking account on the same day my paychecks are direct deposited. Because the withdrawal happens the same day as the deposit, I barely notice the money is gone.

The best part? It takes 2-3 business days to transfer money from this savings account back to my checking. That means I can’t withdraw money from my savings on a whim, but I can get money from it in the event of an emergency.

3. In addition to saving, invest in your 401(k).

Social Security is going the way of typewriters and wristwatches. You’ll need to fund your own retirement.

You may think you need your money now to pay off loans, cover rent and so on.  But you’ll need it more when you retire. There will be unfun costs, like medical bills. And fun things to spend money on, like travel.

If your company offers a 401(k), take advantage of it.

At a minimum, you want to contribute whatever amount your employer will match (Around 73 percent of companies that offer 401(k)s have some sort of match program). This means if your employer says they’ll match “up to 5 percent” of your contributions, they’ll put in, dollar for dollar, the same amount you do (up to 5 percent).

By not contributing the amount they’re willing to contribute, you’re turning down free money. Sure, it’s money you can’t (or rather, shouldn’t) use until you retire, but it’s free money nonetheless.

You may be thinking, “Makes sense … I’ll do it when I’m in my 30’s. I’ll still have plenty of time to save for retirement.”

But the longer you save, the more you earn off those investments.

For example, let’s assume that at age 25, you start putting $100 per month ($1,200 per year) into your company’s 401(k). You keep this up until you are 65. Along the way, your employer continues to match your contributions, and you get a salary raise of 5 percent every year. You make good investment choices, which result in an 8 percent rate of return. By the time you’re 65, you have $687,235 in your 401(k) to live off of.

But if you wait until the age of 35 to start contributing to your 401(k), you’ll only have $263,745 in that account.

To figure out what you may, or may not, have in your 401(k) one day, use this calculator.

4. If you don’t have access to a 401(k), invest in a Roth IRA.

If your company doesn’t have a 401k, or you’re not eligible to participate, you can and should still invest for retirement.

Consider Roth IRAs.  You don’t need any stinkin’ boss to open up one of these  retirement funds. Your contributions and earnings grow tax-free and, when you finally retire, you won’t have to pay any tax on your withdrawals.

That means you’ll have to pay taxes on the money you invest now. But since you aren’t making  a lot of money, you won’t be paying a lot in taxes. And you’ll get higher paying jobs as you get older, which will put you in a higher tax bracket. When you’re old and rich, and ready to take money out of your Roth IRA, you’ll be glad you paid taxes on it back when you were young and broke.

You can only contribute $5,500 to your Roth IRA every year, but hey … This is another reason why it’s not so bad to be broke! You probably don’t have more to invest than that anyway.

Published or updated on December 2, 2013

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About Patty Lamberti

Patty Lamberti is a freelance writer and Professional-in-Residence at Loyola University Chicago, where she teaches journalism and oversees the graduate program in digital media storytelling. If she doesn't know something about money, you can trust she'll track down the right people to find out. You can learn more about her at www.pattylamberti.com. And if you have any story ideas, or questions about money etiquette that you'd like her or an expert to answer, email her at moneymannersqs@gmail.com.


We invite readers to respond with questions or comments. Comments may be held for moderation and will be published according to our comment policy. Comments are the opinions of their authors; they do not represent the views or opinions of Money Under 30.

  1. I took advantage of the automatic online money transfer to savings from checking a long time ago. I am very glad that I did because in the past I would try and save everything manually. That of course, did not work out the way I planned.

  2. dojo says:

    Saving money as soon as it’s deposited on your account is always a great idea. I’ve done the opposite for many years (would save what’s left) and it never worked properly. 10% is not a huge deal, but it does compound over the time.

  3. Dustin says:

    Great article, simple and to the point. I am in my mid 30’s and did not save in my 20’s. Knowing what I know now every penny counts in the world of saving money. Last year we got on a plan/budget and it has now started to change our future. Just start now!

  4. I definitely agree with you on all the points, though I don’t know if 10% is a reasonable amount to save considering many twenty-something’s have a boatload of debt. Some of that might be better allocated to paying down the debt.

  5. Ashley says:

    I think the key to being able to save adequately at any budget is by not depriving yourself. I find that when I go to extremes to save I often have to end up dipping into it to make ends meet. You’ll learn to compromise in order to meet savings goals.

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