Icecream and Caramel sauce

How to Budget When You Are Broke

In Budgeting Tips, General Budgeting by Phil McGilvrayLeave a Comment

How to Budget When You Are Broke

It is such a simple pleasure but every time I get the ice cream out of the freezer I am reminded of the period in our lives when money was so tight the ice cream rarely made it into our shopping trolley.

There is nothing fun about being broke, constantly juggling the bills and expenses is a stressful way to live. It is made particularly hard by the guilt you experience when do spend on fun stuff because you know you can’t really afford it!

What I want to share with you know is the simple 5 step process I personally use and have used with hundreds of clients to show them how to budget despite starting from a financial position best described as ‘Broke’.


Step # 1 – Make a List of ALL Your Expenses

This sounds simple but to do it properly takes some time. To help you do it thoroughly you can download my budget worksheets which will provide a thorough list of expenses to minimise the risk of missing something.


Step # 2 – Convert Your Income and Expenses to a Monthly Figure

The reason you are converting your income and expenses to a monthly figure is so you can make a direct comparison between what you earn and what you need to put aside each month to cover your expenses. Here is how you do this calculations.

Weekly to monthly

Weekly income and expenses should be multiplied by 52 to make them an annual figure and then divided by 12 to give you a monthly figure

So a weekly income of $1,000 x 52 gives you an annual figure of $52,000 divided this by 12 and you have a monthly figure of $4333.33

Fortnightly to monthly

Fortnightly income expenses should be multiplied by 26 to make them an annual figure and then divided by 12 to give you a monthly figure

So a fortnightly income of $1,500 x 26 gives you an annual figure of $39,000 divided this by 12 and you have a monthly figure of $3,250


Step # 3 – Make a Direct Comparison Between Your Monthly Income and Monthly Expenses

Now that you have a both your income and your expense as monthly figure you can make a direct comparison between your monthly income and the sum of all your monthly expenses.


The chances are you have just realised that the sum of your monthly expenses exceed you monthly income. This is not a nice reality to face but no that you know you are in an excellent position to do something about it.

Oh, and if you are one of the few who have discovers your income exceeds your expenses, great job but no doubt you can do better, so keep reading!


Step #4 – Prioritise and Reduce Expenditure

The Golden rule of money management is simply this – ‘you cannot spend more than you earn’. This rule is real as the laws of gravity. Sure, debt will allow you to live beyond your means for a while but eventually it will catch up with you.

So, what you need to do now is prioritise your expenses, most important expenses at the top least important at the bottom. Starting at the bottom of this list reduce and or eliminate expense until your Income exceeds your expenses.

Of course, if you have a way to increase your income i.e. a second job, putting in some overtime, starting a small side business, this will help immensely however the most obviously place to start is to reduce your outgoings.


Step #5 – Start Setting Aside 1/12th of Your Expenses Each Month

Okay, now that you have done the hard work you need to establish a budgeting system that will help you stick to what you have allocated to each expense.

My Grandma taught me to budget using physical glass Jars.

Grandma had a glass jar for each of her expenses. On each glass Jar she had stuck a label with the name of each expense and the amount she needed to allocate to that expense Jar on a monthly basis.

By putting aside 1/12th of each expense per month Grandma knew that as each expense turned up the money would be sitting there ready to pay it.

This was a simple yet effective system, that took all the stress out of Grandmas’ finances despite the fact she only received a modest old aged pension.

Now you will be pleased to know that I am not about to suggest that you start accumulating coffee Jars to get your budget set up however the principles of Grandma’s system are just as relevant today as it has ever been.

An effective budget will:

  • Tell you how much you need to set aside for each expense each month
  • Allows you to keep track of how much you have accumulated towards each expense from previous months
  • Help you record and track what you have spent, and most importantly
  • Tells you exactly how much you can afford to spend against each expense without breaking the budget.

Over the past 20 years I have used glass Jars, Paper budgets, excel spreadsheets and now we are onto version 2 of our Grandma’s Jars web and mobile applications.

When you are broke it does not matter which budgeting system you use but you do need to have a system. A budget may not increase your income but it will do two very important things:

Firstly, it will ensure you are setting aside 1/12th of your future expenses so that as the bills and expenses turn up you will have the money sitting there ready to pay them, no stress, no juggling!

Secondly, where you can afford to allocate to fun stuff you are then able to spend this money guilt free knowing that this money is spare after the bills and other important expenses are covered.

So please download the budget worksheets and go through the process I have outlined above, it does take a little bit of effort but the peace of mind is so worth it!


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