5 Tips to Get Out of Debt on a Low Income
By Space Coast Daily // June 10, 2023
Getting out of debt may seem challenging if you live on a low income, but you’re not alone. In 2022, the average credit card debt in a U. S. household was around $18,054.
That amount can grow even higher if you’re already struggling to make ends meet and rely on credit cards to make everyday purchases. But with the right tools, you can pay off your debt and improve your financial situation.
Continue reading for five tips to help you get out of debt on a low income.
Create a realistic financial plan
Creating a financial plan with realistic goals is the best way to become debt free. Below are a few ways to help prioritize your spending while you pay off debt.
Create a budget
Find out your net income, the money you receive after expenses like taxes, health insurance, and retirement contributions are deducted from your paycheck. Next, list your fixed monthly costs, which are bills that don’t fluctuate, like your rent/mortgage, car payment, and phone bill. Then list all your variable monthly expenses, which change from month to month, including groceries, eating out, and medical expenses.
Once you have everything written down, subtract your fixed and variable expenses from your net income to see how much money you can realistically set aside to pay your debt.
Establish financial goals
Everyone’s financial goals look different, so it’s important to establish what will be the driving force in your debt repayment journey. Maybe you want to purchase a new car in the future, or you want to buy your first home. Write down your goals and expectations and when you want to achieve them.
Track your spending and make adjustments
Each month, track how much you’re spending on your needs and wants to see where you can cut back and adjust for the next month. If you find yourself eating out more than usual or spending on items that aren’t necessities, you may want to scale back a bit to save.
Build an emergency fund
Money can get tight when you start allocating it toward your credit card and loan payments. With an emergency fund, you’ll have extra cash on the side to cover unexpected expenses that may come your way, like medical bills or car repairs.
You don’t have to save a massive chunk of your check to build your emergency fund. Start small with as little as $10 and increase your savings as much as you can over time. You can also utilize extra money you may come across, like your tax refunds or bonuses, to help build up your savings more quickly. Once you’ve saved around three to six months’ worth of funds, you can reroute those savings toward debt repayment.
Figure out how much debt you owe
Looking at your debt head-on isn’t the easiest thing, but it’s the only way to plan how to pay it off successfully. You can get a copy of your full credit report annually online for free, showing you the debt you owe for every account.
You can create a spreadsheet or go old fashioned with pen and paper to jot down all your credit card and loan balances, along with the interest rate associated with each one. This will help you figure out which ones to prioritize when it comes to repayment.
Decide on a repayment method
There are several different strategies to pay off your debt, including the debt snowball method, debt avalanche method, debt consolidation, and a balance transfer. Here’s a breakdown of how each approach works:
Debt snowball method:
The debt snowball method is a strategy that focuses on paying off the debts with the smallest balance first while making minimum payments on your remaining debts. After you’ve paid off the smallest balance, you’ll use the money you were putting towards that debt to pay off the next smallest balance, and so on.
Debt avalanche method:
The debt avalanche method involves paying the debt with the highest interest rate first while making minimum payments on your other debts.
Debt consolidation is when you take out one loan to pay off several smaller loans. The interest rate on a debt consolidation loan is typically lower, which helps you save money in the long run.
A balance transfer allows you to move a balance you owe from one credit card to another that may have a lower annual percentage rate (APR), which helps you pay off more of the principal balance due and less toward interest.
The Bottom Line
Having a low income doesn’t have to limit your financial freedom. Create a realistic financial plan, determine how much debt you owe, and decide the best repayment method for your income. By following these tips, you can get out of debt with confidence and gain control of your finances.