A lot of people who write about how to live really well on less than $25,000 a year haven’t actually lived recently as a family on less than $25,000 a year. What’s more, part of that $25,000 is going to be subject to income tax, so take away about ten percent or so automatically. So you’re really talking about how to budget roughly $22,000 each year to feed, clothe, and shelter your family.
What does it mean to live well?
It’s impossible to live well on $22,000 a year if “well” means you’re always going to be able to get material goods you want. It’s hard not to take a constant turnover of material things for granted, if you’ve been used to that kind of lifestyle.
However, when you’re trying to live for under $22,000, you’re not going to see a lot of movies in their first theatre run. You’re not going to be heading out to restaurants and fast food places a lot, or maybe at all. You definitely won’t be keeping up with the latest smartphone. You might not even have a cell phone at all.
You’ll also have to redefine what Christmas means. That’s both for buying presents and receiving presents. Most Christmas presents at this level of income are practical gifts or homemade gifts, with an occasional small splurge that’s been saved up for all year.
However, with $22,000 income a year, you should normally be able to afford all the things you really need. Your budget will be tight, but it should be doable.
If you’re clear about the difference between want and need, you’ll find it a lot easier to live on less than $22,000 a year. When you’re not constantly stressing out about the things you want and can’t have, it’s a lot easier to live well. After awhile, maybe you’ll find that you no longer really want the kind of stuff you always used to think you couldn’t live without.
Don’t get in debt!
Once you get into the credit card interest cycle, it’s hard to break out of it. If your credit cards get the better of you, you’ll be wondering how to live decently on less than $12,000 a year, never mind $22,000, because your credit card interest and repayment will eat up all the rest.
If you’ve internalized the difference between wants and needs, you normally won’t get into credit card debt at all. After all, you won’t be buying anything that you haven’t budgeted for.
Try really, really hard to save at least $100 a month, or more if you possibly can. It’s your emergency fund and your savings for the future. It doesn’t sound like much, but it will add up over time.
Budgeting for less than $22,000 a year for singles
For just one person, it’s pretty easy to live for less than $22,000 a year. It’s easiest if you get a roommate. That way, you can usually cut down your monthly rent to $500 or less a month, depending on where you live. Even in the most expensive cities, you’ll still be able to keep below $1,000 a month with a roommate.
As long as you remember to be very careful with cell phone minutes, your other needs aren’t going to be anywhere near as expensive as your rent. You can save a lot of money this way, if you’re careful. However, if you’re not careful and don’t track your expenses, they can sink you completely.
Fast food and restaurant costs can really add up, and that’s even without the tax and tip. If you eat out a lot, you’re easily spending over $200 every week. That’s over $10,000 a year!
Nearly all basic home groceries are tax-free. If you cook your own food, your grocery costs can be cut to just $100 a month, or even less. Really! Buy rice in bulk, buy pasta when it’s on sale, buy frozen no-name vegetables or clearance vegetables, and cut way back on meat.
Clothing can get really expensive fast, but it’s never because of what you need. It’s because of what you want. Think hard about how much clothing you really need. You’ll need a winter coat, a couple of pairs of good shoes, and a couple of changes of clothing for each season. Odds are you already have those!
If you work in an office, you’ll need really good mix-and-match outfits. Look in second-hand shops for cheap deals.
To keep you on track, set aside between $10 and $40 a month for splurge items which are clearly wants, not needs. That’s over and above the amount you set aside for savings, not part of your savings. You can spend this money every month, or you can save up for something special. Any extra piece of clothing beyond your needs, like an extra pair of shoes, counts as a want and not a need.
Budgeting for less than $22,000 a year for families
If you’re part of a family of four, things get a lot more tricky. There’s a reason $22,000 is below the poverty line for families in a lot of places.
Start with shelter, because it’s always the most expensive. Try really hard to find a place that rents for less than $1,000 a month, which already comes to $12,000 a year of your $22,000. You’ll need every penny of what’s left for other expenses.
Other than rent, your basic bills are electricity, water, sewer, telephone, insurance, and any licences and professional memberships. Altogether, they’re going to cost you at least $200 a month if you’re lucky, probably a lot more.
Skip the cable unless it’s included in the rent. That’s a want, not a need.
Add car maintenance and gas for the car if you have a car. Assess if you really need a car at all. You definitely shouldn’t have more than one car! That’s a want, not a need. All it takes is cooperative scheduling with the other members of your family.
Clothing expenses for growing children will be your next highest expense. They grow out of their clothes so fast! You’ve got two options here. It’s cheapest to buy all your clothing in thrift stores, where you can get most pieces of clothing for less than $5. If you’ve got a bit of skill with a sewing machine, you can also make your family’s clothing.
You’ll have to cook all your own food. There’s no way you can afford fast food for the whole family every week. You might be able to get away with a pizza deal once every couple of months, but only if it’s a really good deal and you’ve budgeted for it. Shop the sales and the coupons and buy the staples in bulk to stretch every single penny.
Skip the movies. Skip the X-Box. Skip toys that need batteries. Skip anything that costs money and is going to keep costing money for new games or upgrades or a continuing membership.
Start looking for free things to do for entertainment. A good place to start is your local library bulletin board. It’s jam-packed with free classes, free movies, free lectures, free crafts, and a whole lot of other free things.
Another good way to enjoy yourself is to get outdoors. Bike, walk, roller-blade. It’s already exercise and daily destressing. If it turns into regular commuting, it also cuts down on your car costs!
Tobacco, alcohol, gambling, cosmetics
These four things burn more money in people’s coat pockets than every other expense combined. They’re expensive, they’re wasteful, and three of the four are addictive to boot. Most cigarettes average out between fifty cents and a dollar each. If you smoke a pack of them every single day, well, you do the math.
Now, there’s nothing wrong with an occasional lottery ticket or a bottle of wine to celebrate a special occasion, if you’ve budgeted for it. But if you can quit cold turkey, just think on how much money you’ll save!
Cosmetics is a bit more tricky. However, even at the office, a lot of people cut back to the most simple makeup, and plenty of people skip it altogether. Even if you work in a place where everyone wears makeup, you can probably get away with a lot less than you think you can.
Concentrate on the durable classics, and try to buy them on sale or promotion if you possibly can. You can save the most money if you cut back hardest on the kinds of cosmetics which have the shortest shelf life, either because of expiry contamination or because of fashion.
Is home ownership possible?
Home ownership on $25,000 a year is not realistic in the most expensive cities where typical rent for a tiny apartment runs over $1000 a month, but it’s not completely impossible. You’re going to be struggling to make ends meet as it is. Even if you manage to set aside as much as $100 a month, you’re still not going to get anywhere near a down payment for years. You’re probably better off to keep on renting.
In a cheaper area where rent’s much lower and some small but solid houses still run around $100,000 or less, it’s a lot more realistic. After all, if you manage to squeeze aside a hundred dollars every month, you’ll save $1,200 a year. It’s not a lot, but it’ll get you to five percent of $100,000 inside five years, even at today’s pitiful interest rates. If you can save up for ten years and squeeze out a few extra dollars a month, you’ll be in even better shape.
With your income, you probably won’t be able to get a mortgage from an A-list lender, so you’re not going to get the best interest rates out there. Sad but true, you can actually get better mortgage terms with higher income and less savings, never mind that you did everything right.
But the important thing is that you can get a house at all. Budget the mortgage as strictly as you did the rent, always push aside a few dollars in savings for emergencies, and you’re on your way.