Budgeting: Stretch a Small Income

Time To Read 4 MIN READ

It's tough enough to make ends meet in a pricey city like San Francisco. It's even tougher when you're a grad student and a budding actress, and neither of you makes more than $27,000 a year. So if anyone knows how to stretch an income, it's Mickey Pentecost, 25, and Tina Huang, 24, who we interviewed in 2006. They had been married the previous June after dating since they were students at LaGuardia High School of Music & Art and Performing Arts in New York City.

Take on extra work

A doctorate student in microbiology at Stanford University in Palo Alto, California , Mickey was receiving an annual stipend of about $27,000 plus health insurance. Tina was earning favorable reviews, but not a lot of money, for her work with two theater companies. To help pay the bills, she was taking on extra work in the box office at an arts center, and with a company that uses live theater to train corporate employees. "You have to be creative and flexible," says Tina.

Save money on the wedding

Thrifty by nature, the couple saved money on their wedding by getting married at a friend's house on a farm. Instead of registering for gifts, they encouraged family members to give cash or gift certificates, which they used to pay for the wedding.

Conform to a rent budget

Once in San Francisco, they conformed to a rent budget of $1,300 to $1,350 a month, scouring newspaper and online ads and visiting endless open houses (but "avoiding the trendiest parts of the city"). Through an ad on Craigslist.org, they finally found an apartment on legendary Haight Street for $1,295, and they saved money by dealing directly with the owner.

Cook in rather than eat out

Tina and Mickey make the most of their digs, by cooking in rather than eating out. A fireplace helps lower their heating bills during the winter. They buy in bulk at Costco and use discount cards at other stores.

Consolidate loans at a lower rate

The couple's only debt when we interviewed them was Tina's $13,000 in student loans, and she was considering saving on interest by consolidating her loans at a lower rate.

Share one car and use mass transit

She and Mickey share one car—a used 2001 Honda Civic they bought for its decent gas mileage and good repair record. They also rely on public transit.

Build an emergency fund

With day-to-day expenses such a big challenge, Tina and Mickey haven't thought much about long-term savings or retirement. But they have a $10,000 stash in savings bonds—a gift from Mickey's grandmother when he was a child —that they could use to build an emergency fund and jumpstart retirement savings.

Cash in mature bonds

After checking the value of the bonds at www.savingsbonds.gov, Mickey could cash in bonds that have matured and put emergency money in Vanguard Prime Money Market fund, which was yielding more than 4 percent at the time. [It was yielding about 2.3 percent in the fall of 2008.] Mickey may owe taxes on the bond interest, but the couple's 15 percent tax bracket is probably much lower than it will be in a few years, so they'll save on taxes.

Fund a Roth IRA

Because Mickey and Tina have earned income, they could also use the proceeds from the bonds to fund a Roth IRA. They can each contribute up to $5,000 in 2008, and with $1,000 they can invest in T. Rowe Price Retirement 2045, a life-cycle fund designed for people who will be retiring in 40 years. They can withdraw their Roth contributions at any time if they need the money, and can each withdraw $10,000 in earnings tax- and penalty-free to buy their first house.

Write off business expenses

Tina is in a great position to write off business expenses connected with her self-employment income. She could, for instance, deduct long-distance phone calls, travel and mailing expenses, and a screen-acting class she was thinking of taking in Los Angeles.

Get a high-deductible medical policy

It would cost about $300 a month to add Tina to Mickey's health insurance policy. But because she's young, healthy and living in California—a state with a competitive health insurance market—Tina could probably find a better deal on her own (she can shop at www.ehealthinsurance.com). She'll save money with a high-deductible medical policy, paired with a health savings account, to which she can contribute pretax money to cover out-of-pocket medical expenses, or build a tax-free kitty for the future.