Answer: If you live in a high-cost area but don’t have a high income, you’ll need to get creative if you want to keep your “must have” expenses—shelter, food, transportation, child care, minimum loan payments and insurance—under 50% of your after-tax income.

Many people in high-cost areas devote 40% or more of their incomes to shelter costs, which makes it all but impossible to have enough money left over for their “wants” (clothes, vacations, gifts and other non-necessities that should consumer 30% of their after-tax incomes savings, according to the 50/30/20 plan) or savings and debt repayment (which should consume 20% of your after-tax income under the plan). The result is a perpetually unbalanced budget, which often leads to more debt and lots of anxiety.

But people have come up with various solutions to better balance their budgets. Blogger Donna Freedman was an apartment manager for several years, which helped lower her shelter costs. Fred Ecks, who retired in his 40s, lived on a boat to reduce his rent in notoriously high-cost San Francisco. Other people have exchanged their services for free or reduced rent—by babysitting or serving as a companion to an elderly person.

If you can’t find a solution that lowers your housing costs, you have two options: continue to live with a lopsided budget, and accept that you may never be able to achieve a balanced financial life, or move to a place where you can make the math work.

Answer: Saving and debt elimination are tough on a low income. But that doesn’t mean basic math doesn’t apply in your situation. If you spend too much on your “must have” expenses, there simply won’t be enough left over to live your life, pay off your debt and save for your future.

People on lower incomes manage to stay out of debt and save money. To do so, though, they have to limit what they spend on their overhead. They find roommates or rent a room in someone else’s house, or move in with a family or an elderly person and offer to help out in exchange for part or all of their rent. Some decide they simply can’t live cheaply enough where they are, and opt to move elsewhere. Books and websites devoted to the voluntary simplicity movement can give you other concrete ideas about how to live on a shoestring.

If you can’t bear to trim your expenses, your only other option is to make more money. That’s not an easy prospect in this economy, but a second job or a side business could help you get out of debt and save for a down payment.

Please advise of any websites, books, associations or other resources that suggest what pitfalls to avoid (taxes and benefits have been nightmares for many people I know), how to plan before taking the plunge into self-employment and how to maximize the chance of success.

Answer: An excellent place to start would be “The Money Book for Freelancers, Part-Timers, and the Self-Employed: The Only Personal Finance System for People With Not-So-Regular Jobs” by Joseph D’Agnese and Denise Kiernan, two freelancers who figured out through trial and error how to cope with the erratic incomes while trying to pay for their own benefits and keep the IRS happy. The authors’ system revolves around putting aside a percentage of all income toward these expenses, rather than trying to save specific dollar amounts, which can be tough on an unpredictable income.

Two other great sources include the Small Business Administration website at http://www.sba.gov and Entrepreneur magazine’s site, at http://www.entrepreneur.com.

Your friends also should look for professional groups that can provide networking opportunities with successful freelancers and entrepreneurs in their fields. Nothing beats one-on-one advice and mentoring from those who have figured out how to win the game.

A budget is a great (I’d say essential) tool when you’re trying to get a handle on your money and dig your way out of debt. But once you’re on solid financial footing, accounting for every penny can be a real drag and often isn’t necessary. One of the benefits of finances that work is that you can keep a looser hand on the reins.

I use online personal finance software to track our transactions and make sure we’re spending within the broad guidelines we’ve set down. If we start to run out of money before we run out of month, I’ll review more closely where the money is going and make adjustments.

Here’s how Jeff puts it:

Contrary to what most non-cheapskates seem to think, only about 10 percent of the cheapskates polled said that they have a formal, written household budget. For most of us, a budget seems too much like a diet: a plan that’s always looming over you, bringing you down, when what you really need is a lasting lifestyle change that makes the desire behavior effortless.

While we’re not big fans of budgets, the cheapskates next door do place a high priority on keeping score, doing at least an occasional reality check to see how they’re actually spending their money….I’m mostly looking for red flags—expenses that seem high, either higher than I remember them being in the past or higher than I’d like them to be. These are the things I’ll dig into further or try to control more carefully going forward; they’re also sometimes things that I’ll “chat” with my poooor wife about, if she’s the spender in question.

Here’s what it takes to live a budget-free life:

Reasonable overhead. If your must-have expenses exceed 50% of your after-tax income, you’re going to have a tough time making your money stretch as far as it needs to go. Reducing your overhead—shelter costs, utilities, food, transportation, insurance, child care, minimum loan payments—to the 50% mark goes a long way to create a more balanced financial life. The lower your overhead, the more flexibility you have.

Automatic savings. My top priority is making sure we’re saving enough for retirement. We’re also saving for our daughter’s education. I’ve also got a bunch of savings buckets for various goals and irregular expenses, including property taxes, insurance payments, vacations, home maintenance/repairs and car expenses (and eventual replacement). All of these goals are funded with automatic transfers from our checking account to the appropriate savings account. That way I know I’m on track for all our various goals without having to think too much about it. Then if we want something special or out of the ordinary, we save for it. We have a fat emergency fund as well, which is earmarked for big setbacks such as job loss but which is available if a car or home repair exceeds what’s been set aside in those particular buckets.

Automatic payments. Blogger Adam Baker at ManVsDebt makes a valid point that automatic payments can lead to thoughtless spending. On the whole, though, I find paying bills automatically works well for us as long as I subject our spending to a periodic reviews. Recently, for example, I was able to knock $10 a month off our cell phone bill using MyValidas.com and a similar amount by negotiating a discount on our newspaper subscription. (Hey, I’m a lifetime journalist—can’t rid me of my dead-tree addiction.)

A good tracking system. The online personal finance software lets me know what’s left over after all the transfers and bill payments are made (love that cash-flow forecast feature). So I know that what’s left over is available for day-to-day spending. To earn rewards, we put much of our spending on credit cards (which are paid off in full each month, of course) and I’ve set up alerts to let me know when we’re closing in on a spending limit I’ve set for each card. If you’re not comfortable using an Internet site like Mint, Yodlee or Quicken Online (soon to be merged with Mint), then Quicken’s software is a good alternative (the data lives on your computer, rather than in the cloud).

And that’s it. As I’ve said, doing without a formal budget isn’t a good idea until you’ve conquered your credit card  and other consumer debt and are living comfortably within your means. Once you achieve that, though, the reward for all your hard work can be kissing your budget goodbye.

Answer: You can find averages in the U.S. Census Bureau’s annual Consumer Expenditure Survey, which you’ll find at www.census.gov. The categories are fairly broad — you won’t find a line item for diapers, for example — but the bureau provides averages for housing, food, transportation, clothing and insurance, among other categories. The bureau also slices the data various ways: by income, by metropolitan area, by child.

You may find the information more interesting than helpful, however, because every family’s situation is different. A couple with little debt and no children, for example, can comfortably afford a bigger mortgage payment than a family that has both kids and debt.

A better way to manage your spending is to use Harvard bankruptcy professor Elizabeth Warren’s 50/30/20 plan. Warren, who outlined the budget in her book “All Your Worth,” recommends limiting your “must have” expenses to 50% of your after-tax income. Must-haves include shelter, food, transportation, utilities, child care, insurance and minimum loan payments.

That leaves 30% for wants, including clothing, entertainment, gifts and vacations, and 20% for savings and debt payments.

Many families in high-cost areas find it extremely tough to keep must-haves to 50% of their after-tax pay. Some spend that much, or more, on their housing. But the 50/30/20 plan underscores how important it is to contain your basic overhead if you want to have money left over to pay down debt from the past, save for the future and enjoy your life in the present.

photo credit: Andres Rueda

I’m a fan of having access to plenty of low-cost credit—as a proxy for an emergency fund while you’re building one, and to supplement your cash once you’ve got several months’ worth of expenses set aside. The future is uncertain, after all, and you can never tell when a cascade of events will wipe out your reserve.

What’s worrisome is that so many people never get beyond relying on their plastic as their only source of funds for unexpected emergencies—or even relatively predictable events like car and home repairs.

The national research center Demos recently published its second survey examining credit card debt among low- and middle-income households, which it defined as households whose incomes fell between 50% and 120% of the local median income.

“The Plastic Safety Net: How Households are Coping in a Fragile Economy” blows it in one sense by citing an “average” debt of $9,827 for these households. If you’ve been reading me awhile, you know how deceptive these “averages” are, since they’re skewed by big balances owed by a relatively small number of households.

A better measure of household debt uses medians, which describe the halfway point—half of the surveyed population owes less, half more.

The latest figures available from the Federal Reserve show that only 25.7% of the lowest-income households, 39.4% of lower middle income and 54.9% of middle income households have any credit card debt. Of those who have credit card debt, the median balances are $1,000, $1,800 and $2,400, respectively.

The other data Demos cited, though, was revealing. Particularly:

•    3 out of 4 low- and middle-income households reported using their credit cards as a safety net–relying on credit to pay for car repairs, house repairs, layoff or job loss, money given or loaned to relatives, college expenses or starting or running a business.

•    More than 1 out of 3 households reported using credit cards to cover basic living expenses, on average for 5 out of the last 12 months.

•    The most important predictor of higher “debt-stress” levels was whether a household relied on credit cards to cover basic living expenses such as rent, mortgage payment, groceries, utilities or insurance.

•    For 1 in 2 households out-of-pocket medical expenses contributed to a families’ credit card debt, with an average of $2,194 dollars related to out-of-pocket medical expenses.

•    The average interest rate paid on a families’ card with the highest balance was 14.8% with close to 1 in 4 indebted households paying more than 20% interest on their card.

•    In the past five years credit card indebted homeowners used an average of $14,344 in home equity to pay down credit card debt.

•    The majority of credit card indebted households used tax refunds toward debt reduction and nearly half of respondents worked extra hours or took on an extra job in order to get out of debt.

That last finding shows most households realize they have a serious problem and are trying to do something about it.

Demos’ recommendations to reduce dependence on high cost debt include:
1.    Promote increased savings, not increased debt, to help families meet unexpected financial emergencies.
2.    Modernize the unemployment insurance system and expand coverage and benefit levels.
3.    Strengthen the position of low-wage workers in the labor market.
4.    Address rising health care costs and the growing number of uninsured.
5.    Establish a new agency focused on consumer financial protection.

I think numbers 2 and 3 are longshots, particularly in this economy, but 4 and 5 are in process and the first suggestion–promoting savings rather than plastic–has always been a good idea.

If you want to break your own dependence on plastic, read the following:

• How to plan your ‘emergencies’
• How much should you spend on…
• Why you need budget buckets
• The $0 emergency fund
• Want to sleep better? Save $500

54%: Spending less on leisure activities
48%: Cutting their utility bills
46%: Shopping at discount stores
40%: Increasing use of coupons
39%: Buying generic products
38%: Canceled or postponed buying a big-ticket item

First Command noted that these consumers are tucking away more money. In January, short-term savings per family totaled $883, up 13% from $783 in December. However, investments didn’t fare as well. About 63% said they lost money in their retirement accounts and 47% lost money in stocks.

For more of my tips on dealing with budgets and debts, click on the links below!

• How to stick to a budget

• How do I deal with massive student loan debt?

• Should I tap my 401(k) to pay debt?

• How to deal with debt cycle

• Should I fund a Roth IRA or pay down debt?