When you are living paycheck to paycheck it may seem almost impossible to get out of this tough situation. If you find yourself strapped for funds, you can often feel frustrated as it’s really challenging to become financially independent.
Having debt makes this dream even more difficult to achieve as it slowly drags you down into the vicious cycle of having more and more debt each month.
The Federal Reserve states that American consumers owe $1.04 trillion in credit card debt, which is much more than they used to owe even five years ago. Every consumer has between $6,000 and $7,000 in credit card debt, and if you add other necessary monthly payments, medical costs, utility bills, and other types of debt, the dream of becoming financially independent can be extremely challenging for households with low income.
Is there a solution? How to pay off debt fast with low income? Using opportunities and developing discipline when it comes to personal finance is essential to becoming more financially fit. Even when your income is low there are ways to improve the situation and tackle your debt faster. Keep on reading to find out the best steps to follow in order to eliminate your stress and make your monetary dreams come true.
Steps to Pay Off Debt with Low Income
Thousands of American citizens and residents own credit cards but few of them know how to manage their personal finances and maintain a low balance on their cards without having a mountain of debt.
“The vast majority of Americans don’t have enough monthly income to repay their credit card balance,” says Ted Rossman, an industry analyst at a research group. “Only for about 40 percent of consumers, a high balance on their credit cards isn’t an issue. Others have to pay hundreds of dollars in interest rates annually, and such consumers usually have poor credit.”
The following steps will teach you how to become debt free on a low income.
#1 Define How Much You Owe
The very first step is to understand your current financial situation. You already know that your monthly income isn’t enough to be financially independent while you have to live from paycheck to paycheck. But failing to determine how much exactly you owe in total may lead to further monetary disruptions and a mountain of endless debt.
Are you ready to make it vanish? Start by writing down all of your monthly expenses and bills as well as loans and other types of debt. Make sure you write everything with the interest rates and other additional fees to have a real picture.
#2 Don’t Take Out More Debt
One of the biggest mistakes is to obtain a new loan or a new credit card to repay the existing debt. Think first about alternatives and other options to deal with the debt you already have to pay off. Getting a new loan can worsen the situation and make you feel trapped even more.
Try to consolidate the existing debt if possible. If the creditor agrees to lower the interest by giving your debt consolidation loan, it can be a suitable option. Otherwise, avoid unnecessary actions and spending.
#3 Make a Monthly Budget
One of the widespread reasons for people to start looking into ways on how to pay off debt with low income is that they have a lack of financial education. Financial literacy is an important skill today and having a monthly budget is the first step towards monetary freedom.
Budgeting allows you to see the present state of your personal finances and where your things are going. List down the sources of your monthly income - it can be a full-time position, or a part-time job with a side gig, or a freelance income.
A great way to start budgeting is to follow a zero-sum strategy. It means all of your monthly bills, debt, and savings should comprise the whole sum of your monthly income with nothing left at the end. It may be difficult to follow in the beginning but this rule is useful for helping consumers to avoid stress and unwanted expenses in the long run.
#4 Trim Off Your Spending
Do you know how to get out of debt with low income if you have debt? Once your budgeting skills have improved and you see a clear picture of your monthly spending, think of ways to cut down expenses.
Every person has something that can be easily trimmed off from their monthly spending without hurting your life. Close your purse strings for a while and categorize spending so that you have more cash set aside towards debt repayment. For instance, you may want to:
- Cook more home-made food;
- Purchase groceries on sale;
- Use coupons for clothes or food;
- Get a cheaper auto or use a bike;
- Trim down your subscriptions for the gym or cable;
- Go to thrift shops.
#5 Tackle Your Debt
Now it’s time to deal with the actual debt and try your best to eliminate it. There are two options here – you can either start by paying down the biggest debt or the smallest debt first. There are two strategies and each of them is suitable for a certain situation.
For instance, the Harvard Business Review has researched various debt reduction approaches and investigated that paying down the smallest debt first can help consumers repay all debts up to 15% quicker.
The second method is called the Avalanche so that you begin with the biggest debt and work your way down until there is the smallest one left. For some people this approach can also be beneficial as they will notice the progress by getting rid of the largest debt first.
Moreover, you will be able to save more cash on interest payments in the long run if you choose to repay the biggest debt first.
The Bottom Line
In conclusion, you should start looking for ways to improve your financial stability. If you are struggling to pay for necessities so that you opt for various lending solutions, even searching for the best conditions and knowing your debt-to-income ratio, it can be worth it to search for a new job or try a side hustle.
There are dozens of ways to make more cash. You may want to sell some used things from your home, get a side gig, or make investments to make your monetary situation more stable.
Find the most suitable options to maximize your savings and minimize your spending so that your savings account expands and you always have some funds set aside for any emergency.
Be responsible for your funds and take control of your personal finances to achieve financial independence in the nearest future.