Are your debt problems always on your mind? Do the bills just seem to keep piling up and you have no idea where the money will come from to pay them off? Do you feel stressed because of this? I have news for you…..you are not alone! Many people would love to pay down their debt or get rid of it altogether, but they have no clue where to start. Although there may be no ‘one size fits all’ strategy that will work perfectly for everyone, there are several strategies which, when learned and applied properly, can lead `you to debt freedom much sooner than you can imagine. The more of these strategies you can apply, the faster you will get out of debt. This article provides the ammunition you need by showing you exactly how to get out of debt on a low income or budget. You can truly stop struggling with debt and get back to enjoying a debt-free life.
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Debt can be a good thing as well as a bad thing. If you have a company, debt can help you to grow that company through expansion (investing in equipment, buying merchandise etc.). On a personal level, debt can help you to acquire valuable things such as a car or a house. It can also help you to take family vacations. When taking out debt, you tend to feel happy because of all that the debt is making possible for you (owning a home, car etc.).
Debt unfortunately becomes a major problem when, through one reason or another, it becomes more and more difficult to repay. When you are on a low income, broke, and saddled with all kinds of debt, even paying off your credit card debt may feel like an impossible task! On the one hand, a revolving high-interest credit card gives you the freedom to spend money you don’t have, while on the other hand, it requires you to pay interest fees that are higher than any returns you can realistically generate anywhere.
Before long you might be using lower interest rate credit cards to pay off higher interest rate ones, and borrowing from one account to pay off another. Reality hits you when one day you realize that you are in trouble and you desperately need help figuring out how to get out of debt!
Effective Ways to Pay Off Your Debt and become debt-free quickly
The following methods are time-tested, proven, and effective in getting you out of your debt woes, especially when you have low income. The more of these methods you can implement, the faster you are going to get out of debt.
1. Understand your debt
Try to get a complete picture of your debt. Start by ascertaining where the debt is coming from? Is it coming from your mortgage, credit cards, auto loans etc.? Make a list of each debt that you have, who it is owed to, how much is owed, and what the minimum required payment is per month. This is the foundation of any debt paying off strategy.
2. Put a budget in place
Decide how much of your paycheck should go towards your debt payments. A budget will help you to keep track of all your income and spending.
The 50/30/20 rule can help you with this budgeting exercise. It is a simple way to budget that does not involve detailed budgeting categories. Instead, you spend 50% of your after-tax pay on needs (rent, mortgage, utility bills etc.), 30% on wants (non-essentials which help to keep you and your family happy, such as vacations and eating out), and 20% on savings or paying off debt.
3. Watch Your Spending
Track your actual daily spending, match them to your budget and identify areas of spending to cut back on. For some people, doing this can save them almost as much money as working a part time job. Allocate the money saved from cutting back to paying down your debts.
Try to spend less money than you intend to spend. If you want something, don’t buy it unless you have the money to pay for it in full and still meet other expenses. If you can be satisfied with less, then use the money you save to pay down your debt.
You won’t know how much you can save unless you give this a try. Track what you actually spend—not what you think you should be spending, over the course of a month. If you aren’t honest with yourself in this exercise, it won’t work, but most people are surprised by what they find out about their spending. Once you know your spending habits, you should be able to identify areas where you can cut back.
4. Choose a Strategic Debt Repayment Method
Once your debt is organized, choose a strategy to pay it down. Either of the below methods will help you to pay down debt, but you should select the one which you feel will be faster or more achievable. The method chosen will help you to choose which debt to pay off first.
4.1 The Debt Avalanche Method – Pay Off Your Most Expensive Debts First
One of the more popular methods for getting out of debt is to make minimum payments on all your debts and credit cards, except one. Chose the one debt that is charging you the most interest and focus all your extra payments on paying that debt obligation off first.
Once this first, most expensive debt is paid off, take all the money that you were paying on that first debt and focus it on the next most expensive debt. Continue this method as you pay down each of your debts, and you will be left with your least expensive debt to pay down last. This strategy will get you out of debt quickly, and you will feel encouraged as you see your progress.
4.2 The Debt Snowball Method
Many people find this method easier to apply than the Avalanche Method. You start by paying off your smallest debt first and work your way up, regardless of the interest rate. This creates a sense of accomplishment and momentum to move on to the next debt.
5. Pay More Than the Minimum required payment
If possible, try to always pay more than the minimum required payment on your debts. If you have an outstanding credit card balance and you only make the minimum required payment each month, it might take forever for you to pay off the balance.
If you want to pay off your balance as quickly as possible, pay as much extra as you can afford. You can save a lot of money this way in the long run.
6. Restructure your Debt
You may be paying more interest than you need to, based on the types of debt that you have. Asking your financial institution to restructure your debt can result in significant lowering of your interest payments, and free up much-needed cash to help you to achieve debt freedom faster. Here are a few things that can be done.
6.1 Switch to lower interest rate debt
Many credit cards, for instance, have high interest rates. Try to determine if you can have it switched to a lower interest rate one.
6.2 Consolidate your debt
If you have multiple loans or credit cards, they may be combined under a new credit application to take advantage of a lower annual interest rate and payment. This may take the form of a new loan or line of credit which enables you to pay off and close those other debts for good.
See if your bank or credit union is willing to help you to consolidate all your consumer debts into one loan with one payment at a lower interest rate. This can be a helpful first step in getting your debt paid off. However, debt consolidation will only work if you create a budget which allows you to save some money each month.
6.3 Refinance Your Mortgage
If you own your own home, you may have sufficient equity to consolidate all your debts into your mortgage. However, if you don’t have much equity in your home, additional mortgage insurance costs may be quite expensive.
Just like with a debt consolidation loan, you need to create a budget that allocates money to savings each month.
7. Buy a Quality Used Car Rather than a Brand New One
You can save a lot of money if you buy a quality used car rather than a new one. By spending less money on a used car, the money saved can help you to get out of debt much faster.
8. Become a One Car Household
If your family has two cars, consider getting rid of one and taking transit or carpooling if necessary. You can literally save thousands of dollars each year by only using one car. The money saved can be used to significantly pay down your debt.
9. Reduce Your Grocery Bill
To save money, try stocking up on groceries when they are on sale, or stockpile when they are on sale and then skip one grocery shop every month, surviving off the food that was stockpiled. Non-perishable groceries like canned goods and cereal can be stockpiled in your cupboards, while things such as meat and bread can be kept in the freezer.
The key to this strategy is watching for sales, and only stockpiling when groceries are on sale and freezing foods is done properly. Even when you skip a grocery shop you will still need to buy perishable groceries such as milk, fruit and vegetables, but hopefully you can skip the rest of what you would normally buy.
10. Get another source of income and Pay Down Your Debt Aggressively
Getting a second job, consistently picking up an extra shift or two at work, doing side hustles such as food deliveries or making extra money online, are common ways for many people to pay down their debt.
If you can earn enough extra money from any one of those methods, you can become debt free within a short number of years, but it is imperative that you apply most if not all your extra income to debt repayment.
11. Speak with a Credit Counsellor
If you’ve tried everything to get out of debt and you think that bankruptcy might be your only solution, try speaking with a Credit Counsellor. A reputable Credit Counsellor will explain all of your options for getting out of debt and let you choose the option that makes the most sense for you in your situation.
Your struggles with debt can seem overwhelming and almost unbearable, but there is always a solution. You must first make a conscious effort to get rid of your debt problems once and for all.
This article has provided several solutions on how to get out of debt on a low income or budget. They are all easy to execute once you are committed to doing what is required.
If you do not take control of your debt situation, you run the risk of constantly feeling stressed and out of control with your own life. This can lead to health challenges, which can cause you to rack up even more debt on hospital and other medical expenses.
So do yourself a favour and choose a path to get out of debt sooner rather than later.
Thanks for reading this article. I hope you’ve found it enlightening and will act on the information received. Please feel free to leave a comment below and let me know what you think.