Paying off debt is tough, especially if you are barely making ends meet. Hence, the question, “how to pay off debt with low income?”

You want to eliminate your debts and know it will improve your life in the long run, but you’ve no idea where to start. You know that your bills aren’t going to disappear magically, but the sacrifices seem too much to bear.

Take a deep breath—we’ll offer some solid suggestions to help you pay off your debt even with your low income. Look at your debt and your financial situation as a whole and see what works for you.

The Importance of Lowering Your Debt

There are many reasons why debt reduction is a great idea. Among them:

  1. Fewer bills and less financial obligations
  2. More financial security and extra money for fun stuff
  3. A better credit score and lower interest rates for future purchases
  4. Peace of mind and fewer nightmares about bill collectors
  5. Setting a good example for your kids so they can avoid debt altogether

How to Pay Off Debt With Low Income

You probably didn’t get into debt overnight, so getting out from under your stack of bills will take some time. There are two primary principles to remember before you start. 

  1. Get clear on why you want to get out of debt. Ask yourself if you are ready to make some sacrifices to become debt-free. Then, ask yourself how you will live differently once you pay off your debt. 
  2. Be honest with yourself about how much debt you have and resolve to pay off all your debts, not just a few.

Here are some action steps to take to tackle these two areas:

Stop Acquiring New Debts

Stop buying things on credit. If you don’t have the cash to pay for an item, you can’t afford it. Better yet, you can’t afford it if it’s not in your budget.

Paying off debt might mean saying no to some things in the short term. It involves changing your way of thinking about money and where it goes.

If you are already struggling with the debt you have, you definitely don’t need more to repay in the future. Take those credit cards out of your wallet if they are too tempting. 

There are a lot of quick fixes for your debt, but most result in more trouble with short repayment terms and high-interest rates. These include payday loans, some debt consolidation, or transferring debt from one credit card to another without a concrete repayment plan.

Know How Much You Owe

Determine how much debt you have. Make a list of all of your expenses—small and large.

Look at each credit card debt or loan and gather information on how much you owe, the minimum payments, interest rate, and creditor names. Place all this information into a spreadsheet on your computer, a piece of paper pinned to your fridge, or a budgeting app. 

Request a copy of your credit report from the three reporting agencies—Equifax, Experian, and TransUnion. These reports will break down your debts by the lender, loan amount, and credit card balance.

Examine the report to see if the information is accurate, and note any debts you may have overlooked on your list. If discrepancies arise, bring them up immediately with the creditor or the reporting agency.

Create a Budget

Now it’s time to put all your income and expenses on paper. You already have a list of your debts.

In addition, gather a list of all of your other expenses. Some of these will be easy as the monthly payments stay the same—rent, mortgage, insurance, car, and phone payments. 

Variable expenses are a bit trickier to calculate—such as utilities. In that case, you could approach the payment in different ways. Either take the average payment over 12 months or take the payment of the year before and assume that the payment this year will be similar.

Some expenses only occur once or twice a year. Divide these by the number of months between the payment and set aside that amount each month in your budget.

Remember the little expenses such as gym memberships, association dues, or anything else you pay for regularly.

There are a couple of ways to approach budgeting:

  1. The 50/30/20 budget divides your money into three categories. 50% of your income goes to needs—mortgage payments, insurance, groceries, and other necessary expenses. 30% of the budget goes toward wants, such as streaming services, dining out, and more. 20% of your budget goes toward savings, debt repayment, retirement, and an emergency fund. You can decide what constitutes a need or a want. 
  2. The Every Dollar method takes your income and finds a space for every single penny, from bills to gas in your car to coffee stops.

In either case, you are in complete control. It’s always recommended that you take care of the necessary expenses and then debt payments before spending money on wants to focus on your debt-free goal.

No matter which budget you choose, the important thing is to follow it. Budgeting is about awareness of your spending and wise decisions about where your money is going. And remember that your budget is not set in stone. If one method doesn’t work, make changes or try another type altogether. 

Cut Your Spending

Once you have a budget, look for ways to cut your spending. If your car payments are high, consider trading your vehicle for one with cheaper payments. If your mortgage is high, look into refinancing.

Shop around for better insurance rates. Investigate ways to save on your grocery bills—using coupons or even visiting a local food bank. Switch your phone to a less expensive service.

Cut down on going out or the movies with free activities such as hikes or concerts. Start with small cuts and see what happens. Cuts to one bill free up money to pay down your debt.

Find Ways to Earn More Money

If you’ve gone through your budget and made cuts, and it’s still not enough, it may be time to bump up your income. There are several options you can explore:

  1. Sell something. Do you have things collecting dust in your attic, extra appliances in your kitchen, or too many clothes in your clothes? Have a garage sale to clear your clutter and make some money. Visit consignment shops or sell goods on local social media sites.
  2. Get a second job. Delivering meals or working a part-time job on the weekend can yield extra cash to pay off some bills.
  3. Discover a side hustle. Examine your unique skills and offer your services to others. If you can write, you can put your skills to work as a freelancer. Offer yoga or cooking classes. Offer handyman or house-cleaning services in your spare time. 
  4. Ask your boss for a raise, go for that promotion, or see if you can work overtime (if it results in a bigger paycheck).

Methods of Saving Money

There are several ways to pay down debt; here are the most popular methods. Look at each one and determine whether they will work best for you.

Debt Snowball

With the debt snowball, you pay your smallest debts first. By doing this, you celebrate a small victory rather quickly with one less bill to pay going forward.

  1. Make a list of your debts and sort them according to the total amount due, smallest to largest. 
  2. Pay the minimum amount on all of the debts except for one with the lowest balance. To that one, pay the minimum amount plus any extra you can manage. If you get extra income, add it to the payment. 
  3. When that debt is eliminated, pat yourself on the back, and move to the debt with the next lowest balance. 
  4. Send the minimum payment plus the amount you’d been paying for the first debt. Continue until that one is paid off.
  5. Keep going until all debts are eliminated.

Debt Avalanche

The debt avalanche works similarly, except the focus is on the debts with the highest interest rate. The idea is that you will save money on interest in the long run.

Pay the minimum on all but the one with the highest interest rate, throwing all extra money at that debt until it’s paid off, then move to the card with the next highest rate.

Debt Consolidation

Debt consolidation moves all balances to one central payment system. The result is fewer bills but a bigger payment that may be less than all the smaller payments combined.

If you consolidate to a card or loan with a lower interest rate, you could save a lot of money. There are three ways to do this:

  1. Transfer all of the balances to a single low-interest credit card. Some charge zero interest for a while.
  2. Find a company that offers debt consolidation loans. This is an unsecured personal loan. Check for fees and repayment terms.
  3. Borrow against the equity in your home with a home equity loan. In essence, you are taking out a second mortgage and will pay closing costs. If you default on the loan, they can take your home.

Get Ahead of Debt

While paying off debt is the ultimate goal, your success depends on changing a few habits. We’d also like to offer a few more suggestions that might help along the way.

Create an Emergency Fund

Many people get into debt and stay in debt because they are not prepared for the unexpected expenses that inevitably occur.

So, before paying off debt, set up an emergency fund of $500-1,000 in a savings account. That way, when these expenses come up, they won’t derail your budget or debt repayment plans.

Develop a “Minimum Needs” Budget

We discussed a budget covering all of your expenses, but creating a “minimum needs” budget is also helpful. This budget covers basic living expenses, such as rent/mortgage, groceries, utilities, and debt repayment.

Include all expenses that need to be paid every month that you can’t eliminate. Then, examine each bill to see where you can cut costs. Eliminating all non-essential spending, such as your cable bill or gym membership, can free up money for debt payments. 

Consider Refinancing

Refinancing involves another company purchasing your debt. Like refinancing your home, you could save thousands of dollars with a lower interest rate. This is similar to a debt consolidation loan. Be sure to read the fine print concerning payment terms.

Set Goals and Find Accountability

Paying off debt is hard; many fail because they don’t have proper motivation or support from others. For some, setting SMART goals helps them focus.

Instead of setting a goal to “pay off debt,” you might set a goal to “pay off $5,000 in 6 months.” The second goal is Specific, Measurable, Achievable, Relevant, and Timely—or SMART. 

Having an accountability partner will also set you up for success. If you have a spouse, make sure you are on the same page regarding goals and spending.

If you are paying off debt solo, find a trusted friend or family member to check in on you. Even following blogs like the one you are reading now can offer encouragement.

Give Yourself a Guilt-Free Allowance

Paying off debt can be stressful and feel like an unfair burden when you constantly have to cut corners and say no.

To keep up your spirits and stay focused on the end goal, give yourself permission for fun with a small allowance. It’s up to you to decide how much.

Choose enough to prevent you from feeling deprived but stay within your budget.

The Final Word

Paying off debt, especially with a low income, can be challenging, but taking small steps and staying persistent will pay off in the long run. Millions of people are in that exact situation, but there is hope. For extra encouragement, book a call with The Budgetnista or browse our library of articles on the blog. 

About the Author Tiffany Aliche

Tiffany “The Budgetnista” Aliche, is an award-winning teacher of financial education, America’s favorite, personal financial educator, and author of the New York Times Bestselling book, Get Good with Money. The Budgetnista is also an Amazon #1 bestselling author of The One Week Budget and the Live Richer Challenge series and most recently, a children's book, Happy Birthday Mali More.

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