Budgeting on a fixed income can involve carefully reviewing your income and expenses and managing spending to stretch your dollars.
Typically, older adults are the ones living on a fixed income, meaning they receive Social Security payments and/or a pension or rely on retirement savings. They generally receive the same amount each month, though payments may fluctuate slightly due to benefit adjustments or other changes. If you’re living on a fixed income, budgeting can help you avoid overspending and prepare for unexpected expenses. Here are smart strategies to consider.
Key Points
• Budgeting on a fixed income can involve tracking income and expenses to better understand finances.
• A detailed budget should include all essential and discretionary expenses, utilizing methods like the 50/30/20 rule.
• Cost-cutting measures, such as downsizing or limiting discretionary spending, can improve financial stability.
• Building an emergency fund can provide a cushion for unexpected expenses and enhance financial security when living on a fixed income.
• Exploring additional income sources, like part-time work, can supplement fixed incomes effectively.
Understanding Fixed Income Budgeting
Living on a fixed income means you know exactly how much money you’re bringing in each month. While your income may be predictable, expenses can be unexpected. You might need, say, a roof repair or want to help with a grandchild’s summer camp costs one year. That’s why a budget for seniors on fixed income can be so important.
Creating a budget will give you a comprehensive understanding of the money you have coming in and going out of your checking account. You can track your spending, set aside money for emergencies, and monitor your monthly bills.
You might also identify areas where you can cut back to cover an unforeseen expense or keep up with inflation.
Assessing Your Financial Situation
Making a budget allows you to assess your financial situation. Along with tracking your income, you’ll want to make a record of all your expenses.
This component of your budget might include:
• Housing costs (rent or mortgage)
• Utilities
• House, car, and health insurance
• Medical costs
• Transportation
• Groceries and dining out
• Debt payments
• Subscriptions and services
• Clothing
• Travel
• Savings
• Gifts and charitable donations
Some of these expenses may fall into the essential category (housing, food, and health insurance, for example), while others may be considered discretionary (such as clothing and travel). If you’ve found yourself financially overextended, consider whether there are any areas where you could cut back.
You might also explore specific types of budgeting methods, such as the 50/30/20 approach to budgeting. This strategy involves allocating 50% of your after-tax income to needs, 30% to wants, and the remaining 20% to savings or additional debt payments.
To help you with this budgeting technique or another one, you could use a spreadsheet, work with an online calculator, download a budgeting app, or create your own budget planner to track your expenses.
Recommended: 50/30/20 Budget Calculator
Creating a Detailed Income Statement
An important step in this budgeting process is delving into your monthly income. Your sources of fixed income could include:
• Social Security benefits (you may sometimes hear this referred to as OASDI, or Old-Age, Survivors, and Disability Insurance payments)
• Supplemental Security Income
• Pension benefits
• Withdrawals from a 401(k) or 403(b) account
• Withdrawals from a traditional or Roth IRA
• Withdrawals from brokerage or other investment accounts
• Interest and/or dividends from assets
• Passive income from a rental property or another source
In addition, you may have some earnings from work you do, such as a seasonal or part-time job. Factor that in, too.
Take note of how your income might change, as well. A couple of points to consider:
• Government benefits like Social Security, for example, undergo an annual cost-of-living adjustment. Also, if you are claiming Social Security benefits but are younger than full retirement age, you might also receive a lower benefit if you’re earning income above the yearly limit (in 2024, it was set at $22,320).
• If you’re withdrawing money from investment accounts, the amount may fluctuate depending on the performance of the stock market. Although these changes are unpredictable, they’re worth tracking and recording in your budget plan so you can respond as needed.
One of the most common budgeting mistakes is not adjusting the cost of your expenses, so make sure to update your budget as you go. Rent, health insurance premiums, food costs, and more can shift, and it can be important to stay attuned to that.
Cutting Costs and Saving Money
About 40% of older Americans receive income solely from Social Security in retirement, and the average benefit is currently $1,784 per month. This amount can be challenging to live off of, especially when costs are rising due to inflation.
If you’re looking to reduce your spending, here are a few steps you can take:
• Downsize your home: About half of seniors move into smaller homes after they retire. Downsizing could significantly decrease your housing costs and utility bills.
• Reevaluate your transportation needs: If you’re spending a lot on car payments and insurance, consider whether you can switch to a less expensive vehicle or swap your car for public transportation.
• Limit discretionary spending: Shopping, travel, eating out, and streaming services can add up. Review your discretionary expenses to see if you can limit your spending or cut out some costs entirely.
• Seek out senior discounts: From groceries to movies to museums, find out if you can save with a senior discount. You may be pleasantly surprised to find that some discounts begin well before age 65.
• Look for assistance programs: If you’re facing financial hardship, you might qualify for assistance. The government may help cover medical costs via Medicaid, for instance, while patient assistance programs can help out with prescription medications. The Supplemental Nutrition Assistance Program (SNAP) program offers assistance for groceries. This BenefitsCheckUp tool from the National Council on Aging can help you find other programs that offer assistance and benefits.
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Building an Emergency Fund
After years of saving for retirement, you might think your savings days are behind you. However, having an emergency fund can be a crucial lifeline if you run into a big surprise expense, especially when you’re living on a fixed income.
Consider setting up a high-yield savings account and automating the deposit of a portion of your income into it each month. With a high-yield bank account, your savings will be accessible when you need to withdraw them and earn a competitive interest rate when you don’t.
Planning for the Future
Although you may be living on a fixed income, it’s wise to keep an eye on how your financial needs can shift. Those who are retired or semi-retired may want to consider the following:
• Long-term financial planning: The specific amount of income you receive could rise or fall in the years ahead. Consider how adjustments to your cost of living might impact your Social Security benefits, for example, or how much longer you plan to work if you have a part-time job.
• Healthcare considerations: If your expenses increase due to healthcare needs or other factors, consider whether you can take larger withdrawals from your retirement account or set up another income source. Investors may look into rebalancing their portfolios to ride out a volatile stock market.
• Estate planning basics: Estate planning may also be top of mind as you get important documents in order and consider how your assets will be handled in future years. All of this planning can become complex, so you might consider working with a financial advisor.
The Takeaway
Budgeting on a fixed income can help you stabilize your finances and achieve peace of mind. By tracking your income and expenses, you’ll have a clear understanding of the money you have coming in and going out each month. You might also identify areas where you can cut costs, as well as monitor your progress toward building an emergency fund, paying off debt, or reaching another financial goal.
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FAQ
How can I save money on a fixed income?
Learning how to make a budget can help you save money when living on a fixed income. You can use your budget to identify your recurring expenses and cut any non-essentials you find. You might also consider downsizing your home, swapping out your car for a less expensive vehicle or public transportation, and seeking out senior discounts and deals.
What if my fixed income doesn’t cover all my expenses?
If your fixed income doesn’t cover all your expenses, you can try reducing your spending, increasing your income, or both. You might also explore assistance programs from the federal government, your state, or a local organization.
Are there government assistance programs for fixed income individuals?
There are government assistance programs for fixed income individuals on both the federal and state level. The Supplemental Security Income program provides payments to disabled, blind, or elderly individuals, for example, while the Low Income Home Energy Assistance Program (LIHEAP) can help low-income individuals pay for heating and cooling their homes. The SNAP program offers grocery assistance to low-income individuals.
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