How to Live on a Tight Budget

A solid budget lays the foundation for the success of any financial plan. Through effective budgeting, you can pay bills on time, save for big-ticket items, and spend cash to acquire investments that generate additional wealth. In some cases, you will be forced into a tight budget due to a combination of relatively minimal income and the necessity of achieving important financial goals. When living on a tight budget, it is critical that you distinguish between needs and wants.

Financial Goals

Financial goals will serve as motivation for you to stay the course on a tight budget. Common long-term financial goals include building up enough resources to make a down payment on a home, put your children through college, or retire comfortably. In the short term, you may simply be looking to make timely payments on all bills and to eliminate expensive debt. All goals should be categorized by timeline and total costs. Perhaps your aim remains to pay off $5,000 worth of credit card debt within the next six months.

Financial Calculator and Projections

With a list of goals in hand, you can pull up an online financial calculator and toggle through projections. The financial calculator allows you to enter variables for an estimated rate of return, time frame, and savings amount. After using the financial calculator, you can determine the amount of money that should be saved each month at a set rate of return to meet a particular goal. Financial calculators are available to help you manage debt, project savings, and plan for retirement. Yahoo! Finance is a good source for financial calculators.

Discretionary Spending

You will eliminate discretionary spending from your budget, if you are having trouble paying bills or if your goals appear slightly out of reach. Discretionary spending goes towards consumer goods and services that depreciate quickly and do not add value to your bottom line. Consumer items would therefore include designer jeans, concert tickets, high-end electronics, and fine restaurant dining. With discipline, a discretionary purchase can also serve as motivation. For example, you could treat yourself to a Caribbean cruise, after paying off $7,000 in credit card debt and saving up $10,000 in cash reserves.

Committed Expenses

Committed expenses are necessary to maintain good health, avoid loan default, and conform to the law. Rent, utilities, taxes, insurance premiums, groceries and transportation to and from work are examples of committed expenses. A reduction in committed expenses typically involves a major lifestyle change and cost-benefit analysis. For example, you may take on $500 worth of moving expenses -- to move into a smaller apartment that saves you $300 in rent each month. This move may be necessary for you to free up cash flow, save money, and avoid living from check-to-check.

Savings and Investments

Over time, you should work to establish six months worth of committed expenses in bank deposits. While doing so, you can also put money to work with financial markets. The Securities and Exchange Commission (SEC) recommends mutual funds for smaller investors. Mutual funds allow for automatic diversification, because one fund share represents claims to a larger pool of dozens of different securities. You can buy shares directly through mutual fund companies for as little as $50 per month.

How to Live on a Tight Budget, Sources:

SEC: Invest Wisely - Mutual Funds

Yahoo! Finance: Calculators

Australian Securities and Investments Commission: Managing Your Money

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