8 Helpful Tips to Building a Budget on a Fixed Income
Retired Americans are more financially secure than most other age demographics, but roughly 10 percent of adults over the age of 65 still live below the poverty line.1 That can make it much harder for older adults with debt or little savings to budget for everyday expenses. Living on a fixed income is even more challenging when you consider less predictable costs such as food and medical care. Regardless of your financial standing, making a budget is especially important when your income is fixed. In this guide, we’ll cover eight tips to help you make a budget on a fixed income.
Know Exactly How Much Is Coming In
It may sound strange, but having a fixed income doesn’t mean your income will always be 100 percent predictable. You are also likely to have multiple sources of income, which can make it more complicated to track how much money you bring in each month. You should become well acquainted with all your income sources. Make note of any income that varies from one month to the next, such as investment income, so you know exactly how much to expect each month while accounting for potential variations.
Make an Inventory of Expenses
Once you know how much income you can depend on, do a full inventory of your expenses. Start with your biggest fixed expenses, such as housing costs, health coverage, and car payments. Then evaluate your average monthly spending on variable expenses such as groceries, medical bills, and entertainment. Don’t forget to factor in tax obligations, which could remain relatively consistent or fluctuate from year to year depending on your tax liabilities.
FYI: If you feel overwhelmed by creating a budget, a financial adviser can offer you expert advice on ways to manage your money and maintain your current lifestyle without breaking the bank.
After you have accounted for all your fixed and variable expenses, further categorize these costs into essential and nonessential expenses. Many people have different ideas about what counts as essential. You may consider certain entertainment costs essential for your mental health, for example, while someone else may think they’re a nonessential luxury. Either way, use your best judgment to do an honest assessment of your needs versus your wants. It doesn’t mean you need to cut all nonessential expenses out of your budget. Just be aware of what they are so you can make changes if necessary.
Create an Accessible Emergency Fund
Most seniors spend their entire working lives saving and planning for retirement, so it feels logical to stop saving once you retire and simply enjoy the fruits of your labor. When you’re living on a fixed income, however, you never know when a sudden large expense could throw your entire financial plan out of balance. You should always be prepared for the unknown with an emergency fund.
Did You Know? You can set up a high-yield savings account with your current banking institution or an online bank in a matter of minutes.
A savings account is one of the best ways to set aside funds that can also grow a little over time. A savings account won’t yield huge returns like some other investments, but it will be easily accessible. That’s extremely important, since you never know when an emergency will require you to withdraw funds at a moment’s notice. You should avoid putting your emergency funds in investments or accounts that are difficult or time-consuming to access.
Anticipate Higher Expenses in the Future
When it comes to budgeting, you should always err on the side of caution. That means underestimating your income and overestimating your expenses (within reason). Not only will it help you be prepared for the unexpected, but it will also help you manage the inevitability of higher costs in the future. Inflation all but guarantees that every dollar you have today will not be worth as much a year or even a month from now. When you sit down to create a budget, make sure you calculate future costs that are, at the very least, in line with current inflation trends.
Pro Tip: Visit our guide to tax credits and deductions for seniors for some helpful tips ahead of the next tax season.
The same philosophy extends to tax rates. Roth IRAs are especially popular because they allow you to pay taxes on the money you save during your working years and then withdraw it tax-free once you retire. Many people choose this option because they believe taxes — particularly income taxes — will likely increase in the future. Even if it’s too late to make major changes to your retirement plan, assume your tax obligations will be higher in the future and budget accordingly.
Be Extremely Careful With Debt
There is a lot of debate over how concerned older adults should be about paying off high-interest debt. Social Security benefits are protected from wage garnishment if you cannot pay your debts.2 Some states also protect IRAs and other retirement investment accounts from debt collectors. Consequently, some financial advisers tell older adults not to prioritize debt payments at the expense of basic needs like food and medicine.
FYI:Credit cards often have much higher interest rates than personal loans or mortgages. If you already have credit card debt you’re struggling to pay down, consider a low-interest debt-consolidation loan to ease the financial burden.
That doesn’t mean, however, that you can rack up credit card debt during retirement and expect no consequences. Debt collectors can still go after unprotected assets like homes and vehicles. Accumulating more debt on a fixed income will make it increasingly difficult to pay your bills, so it is best to avoid taking on new debt as much as possible.
If your loved one is overwhelmed by debt or other expenses, watch our video below. Attorney Eric Olsen offers tips to help seniors who are struggling financially.
Assess Your Housing and Transportation Needs
Two of the biggest expenses for seniors are housing and transportation costs. Even if your home and vehicle are paid off in full, you’ll still need to pay property taxes and general maintenance and upkeep on your major physical assets. If you find these costs are stretching your fixed income too thin, you may want to consider selling some of your assets or downsizing your home. Many retirees find that they don’t need the same size house they did during their working years. By downsizing, you could potentially save yourself thousands every year.
FYI: If you need cash but you’re not inclined to sell your home and downsize, consider using part of your home as a rental to generate extra income.
The same holds true for transportation. If you own vehicles you don’t use very often, you could sell them and opt for public transportation or private ride services as needed. That way, you will have extra funds to put toward essential expenses and fewer overhead costs going forward.
Remember That Every Dollar Counts
It’s important to focus on big expenses first, but that doesn’t mean you should ignore smaller ones. A lot of small purchases can be just as expensive as one large purchase. It’s easy to overlook small recurring charges that take away from your available funds every month. If you pay for cable TV or multiple streaming services each month, for example, consider reducing or consolidating your entertainment expenses to save. If you make enough adjustments to your small, recurring expenditures, you could make it easier to find extra funds when you need them.
Take Advantage of Senior Discounts
Living on a fixed income can be challenging, but being a senior also comes with perks. Whether you’re shopping for groceries or buying a movie ticket, don’t be afraid to inquire about senior discounts. You could end up saving on tons of everyday purchases by doing a bit of research in advance and asking about discounts at checkout.
Making a budget on a fixed income requires a comprehensive understanding of all the money that comes in and goes out of your accounts. Once you know what you’re making and spending, you can create a functioning budget that allows you to pay the bills, live comfortably, and set aside funds for emergencies. Taking the time to make a budget is well worth the effort, even if your finances are in good shape. A working budget ensures you can live the lifestyle you want to live today and still be prepared for what comes tomorrow.
U.S. Census Bureau. (2022). Poverty Rate of Children Higher Than National Rate, Lower for Older Populations.
Social Security Administration. (2023). Old Age And Survivor's Insurance