How to Budget When You’re Broke

CEBU, Philippines — It takes commitment and time, but you can learn to manage your money even when there's not much of it. Here are steps to set up a budget if you're broke:

We've all probably been advised how to create a basic, real-world budget. But that advice often doesn't apply when you're struggling to make ends meet. The basic ideas are the same, but your breakdown of spending is probably going to look a bit different, and everyone's situation is going to be unique to them. Following is what you need to do to get back on track:

First of all, assess your financial situation. If you have more money going out than coming in, here's what your financial plan shall boil down to: spend less and/or earn more. To figure out how to do this, take an assessment of your income and expenses. This will help you develop a reasonable and realistic budget.

Categorize your expenses. Break down your expenses over the past few months. Categorize and separate them into needs and wants. Separating will help you prioritize your finances. To get a clear idea of your needs and wants, consider creating a hierarchy of spending. Organize your debts, too.

Identify your problem spending areas. Take note of your spending habits. Are there any specific stores you frequent? Do you have a coffee habit that can be cut? Many times, there are "leaks" in a budget that can be plugged. The first step is figuring out where they are. Identify these categories, and keep them in mind once you start your budget.

Cut back on your spending. Find ways to reduce your expenses. The first place to start is the "wants" category.

It's important to allow yourself a little breathing room for fun in your budget. If you don't, you risk busting it – and that can make you want to quit altogether. But remember: the key to managing your money when you're broke is downsizing your lifestyle. If you can't afford to pay your bills, take a close look at what might be luxuries. Some examples of unnecessary expenses are cable, a data-heavy cellphone plan, vacations and the like.

Save money on bills. Once the “wants” are out of the way, take a look at your needs – you may find you can save a lot there, particularly on your bills.

Be frugal. When you're struggling to make ends meet, frugality is your friend. Make the most out of your money and the things you spend it on. For example, you could:

Stretch your meals. Find some of the best grocery options when you're broke.

Do it yourself. One of the best ways to cut costs is to learn to do things yourself rather than pay for them. For example, you can save some money by learning basic preventive car maintenance, taking on home projects, and making your own cleaning products and toiletries.

Save on housing. Can you negotiate your rent? Can you move into a cheaper place? Since this is likely one of your biggest expenses, it's one of the best ways to make a dent in your spending.

Your options will vary. The point is to adopt a frugal lifestyle and look for opportunities to trim costs.

Prioritize your money goals. Many people wonder whether they should focus on debt or savings first. The answer depends on your situation. But financial experts recommends at least building an emergency fund before tackling debt. Yes, it’s difficult to tell people to save in an environment where they are earning a fraction of a percent of interest on their savings while being charged ‘usurious’ loan shark rates of over 30 percent on their credit cards.

Setbacks are inevitable. If you're not prepared for them, they can devastate your budget and your finances. While it might take some time to build an emergency fund, it will allow you to stick to your budget if a financial setback arises.

Tackle your debt. Whatever you choose to focus on, don't risk your finances unraveling by ignoring your debt. Late fees and interest can turn a small debt into an overwhelming one. Your debt should be a priority.

Pick a repayment method. You'll have to come up with a debt repayment plan. To do this, first pick a method:

The "Debt Snowball" method: Pay your smallest debts first. Seeing your debts paid down will help you build the momentum to keep going. A recent study found this method to be effective.

The "Debt Avalanche" method: Pay debts with the highest interest rates first. Proponents of the Debt Avalanche point out that you can lose thousands of dollars by choosing not to tackle your highest interest accounts first.

Reduce your credit card interest rate. Yes, it's possible. A U.S. national survey found that 56 percent of consumers who called credit card companies to ask for a lower interest rate got positive results.

“A five-minute phone call to your credit card issuer could save you hundreds, even thousands, of money in interest charges.  There's no incentive for them to lower your rate unless you call. The squeaky wheel gets the oil,” says Brad Dakake, a consumer advocate with Massachusetts Public Interest Research Group.

It's worth a shot. But beware of credit card interest rate scams, too. According to the U.S. Federal Trade Commission, "Voice mail boxes across the nation are being clogged with prerecorded phone calls from companies that claim to be able to negotiate significantly lower interest rates with your credit card issuers if you just pay them a fee first." That’s proof that it can be done.

Request extensions or payment plans. Let's say you're behind on bills, debt or rent. You can work something out with your provider, lender or landlord: Don't be afraid to request bill extensions or payment plans. These requests are often granted. If your biggest worry is eviction from your apartment, talk to your landlord, but, also, see if you can get extensions on any other expenses to free up money for keeping your home.

Playing catch-up might derail you from your other financial goals. But the most important thing is to keep your debts organized and come up with a plan on how you'll tackle each one.

Draft your plan. Every cent will be accounted for, making your budget pretty tight. At this point, a traditional budget strategy may not be suited for you. But don't miss blowing your budget, either. Avoid the following mistakes:

Not being realistic: Crunch the numbers realistically. Set a reasonable amount aside for each of your expenses. Maybe you plan to eat for $25 a month by taking on some extreme measures. In reality, they're probably not going to work. Don't set yourself up for failure.

Cutting out all the fun: It's important to give yourself some breathing room. You may have to limit it to little it money a month if your budget is really tight, but... this extra little bit of money can prevent you from feeling deprived, which can lead to overspending.

The amount of breathing room will depend on your situation. But it should only be enough to keep you from blowing your budget. Set aside an appropriate, but modest, amount.

Once your expenses and goals are in place, it's time to draft your plan. J.D. Roth of “Get Rich Slowly” shares his advice: "I began by listing my debts in the order that I wanted to repay them... Next, I listed my expected sources of income. Finally, I brainstormed a possible plan of attack."

Brainstorm your own plan of attack. Once you pick your debt repayment strategy, allocate an amount toward each debt. Calculate how long it will take to eliminate each one, with your budget in place. Breaking up goals into smaller milestones makes them easier to achieve.

Take advantage of opportunities.

Part of managing money when you're broke is increasing your income. For example, you might be able to get a better job, ask for a raise, sell your stuff, find a side gig.

These options aren't available to everyone. But ultimately, it's about being resourceful. Look for opportunities to earn more and save more money. Then seize those opportunities. Sometimes, they might look more like sacrifices.

If you're depressed over your lack of funds, keep this in mind: Many of the best success stories start with being broke. Come up with a plan. Set small milestones. Seize opportunities. Overall, this will help you take control. Once you do, you might be surprised at what you accomplish.