9 Ways To Get Out Of Debt On A Low Income

While approaching your debt burden can feel overwhelming, several techniques can help you become debt-free. Understanding the amount you owe, cutting areas of spending and seeking a debt consolidation loan are just a few ways you could pay down your debts. It is possible to get out of debt with a low income, though it may require creativity and hard work.

How To Pay Off Debt With Little To No Money: 9 Tips

Getting out of debt comes down to a few simple steps. While the specifics may look different for everyone, you can use the following best practices to help you tackle your debt bit by bit.

1. Calculate How Much Money You Owe

No matter what your income situation is, it’s important to determine the exact amount of money you owe when you’re trying to get out of debt. That way, you have a clear understanding of what you will need to do to keep on top of your payments. It’s also helpful to know what you’re paying each month and whether your income can help you sustain these payments while taking care of your other financial needs.

For example, knowing how much you owe can help you determine your debt-to-income ratio (DTI), which is the percentage of your gross income that is going toward debt. It can be an indicator of financial health — the higher your DTI, the more you could be stretched thin financially. 

Take a look at your loan statements or credit card bills to see what your current balance is. Add all these up and you’ll get the total amount you owe. You can also consider looking at your monthly payment amounts to see the total minimum amount you need to pay each month toward your debt.

2. Avoid Taking On More Debt

When you are trying to get out of debt, not taking on additional bills is important. If you’re paying down debt but are racking up more, you’re increasing the odds of continuing the debt cycle, leading you to not getting out of debt for a long time. You could also end up in more debt than you can reasonably handle.

One way to avoid taking on more debt can include tightening your budget for the foreseeable future or consider paying for expenses with cash. Or, see where you can increase your income so you can avoid using credit cards or new personal loans.

3. Establish A Budget

While a budget equals restriction to many people, learning to create a budget is beneficial to help you get out of debt. That’s because you can see exactly where your money is going, and it’s easier to plan on how you allocate your funds. Think of a budget as a money management tool, not as a way to punish yourself.

No matter how low your income is, you will most likely benefit from a budget. To start, take stock of your income and track your spending to see where your money goes. A free app like Rocket Money^SM could help you easily track spending trends. Then, allocate your income to various fixed and variable costs for categories such as your mortgage or rent, groceries, transportation, and loan payments. Then, keep track of your spending throughout the month to ensure that you are only spending what you intended in the correct category.

Since your finances and life circumstances can change, you may have to adjust your budget on a continual basis. It’s a smart idea to review your budget at the end of every month (or sooner if you feel the occasion calls for it) to see what worked and what you may need to change.

4. Cut Areas Of Spending

This step may feel impossible, but it doesn’t hurt to try to cut out different areas of spending in an effort to put more toward your debt. You can combine this step with creating your initial budget — cutting back can help you allocate enough money toward debt and necessities.

Though it’s not a good idea to cut back on all the fun stuff — you could end up rebelling against your budget and spending more than you were initially — these tend to be easiest areas to cut back on. Consider reviewing your subscription services and memberships to see where you may be able to cut back. Other areas where you can lower your spending include dining out and purchasing unnecessary clothing.

5. Negotiate Existing Bills

One tactic people tend to use is bill negotiation, which entails contacting a company to try and get a lower price on a service you’re currently using. Some types of bills you can negotiate include your homeowners insurance, auto insurance, internet or phone.

If you can successfully lower some of your bills, you can use what you saved toward debt. However, you can consider going with another company if your current one isn’t willing to lower your rate. Consider shopping around for rates to find the best one for your needs.

6. Implement A Debt Repayment Strategy

Having a tangible debt repayment strategy can help make paying down loans more manageable. It can also serve as a way for you to see your progress and hopefully motivate you to keep going.

Two debt repayment strategies you can consider include:

●      Snowball method: The debt snowball method focuses on the smallest debt first. You will make the minimum payments for all your loans, but pay more toward your smallest debt amount. Once that is paid off, you use what you would have used toward that loan to pay the next smallest loan, and so forth until all of your debt is paid off.

●      Avalanche method: Instead of your smallest debt, this method focuses on the debt with the highest interest rate first. While you’ll make minimum payments on all your loans, you’ll put more toward the one with the highest interest until it’s paid off. Then, you’ll move onto the next highest-rate loan until they’re all paid off.

7. Explore Side Hustles

Taking on a side hustle or increasing your income can give you some much needed breathing room in your budget and help you get out of debt faster. Whether it’s gig work like becoming a rideshare driver, taking on extra shifts at your day job, or starting a side business, some of the extra income can go toward your debt payments.

8. Consider A Debt Consolidation Plan

Implementing a debt consolidation plan from a reputable lender may be the answer you need. In many cases you can consolidate personal loans and credit card debt.  Some common ways to consolidate your debt include:

●      Debt consolidation loan: This type of loan entails taking out a brand-new loan to pay off all your eligible existing debts, essentially rolling your debt payments into one. The idea is to simplify your payments so it’s less overwhelming. Ideally, you can find a loan that has a lower interest rate than your existing debt.

●      Home equity loan: A home equity loan allows you to tap into your home equity by taking out a second mortgage. You can use the loan proceeds to pay down your existing debts. This type of loan, though it can come with a lower interest rate, carries a lot of risk. If you default on this type of loan, you can lose your home. Be sure to carefully consider your options.

●      Balance transfer credit card: A balance transfer moves existing qualifying debts onto another loan — usually a credit card. You will need to contact the credit card company to see if a balance transfer is possible, and whether there are any fees involved.

9. Try Credit Counseling

Credit counseling involves working with a reputable professional to come up with a plan to get you out of debt. It could include working on budgeting, helping you negotiate with creditors or a debt payoff plan. When choosing a credit counseling agency, make sure confirm it’s a legitimate organization. Consider looking up reviews online and ask for a free initial consultation before making your decision. If their services sound too good to be true, you may want to continue your search elsewhere.

The Bottom Line: Paying Off Debt When You’re Broke Takes Time, But It’s Possible

Paying down debt on a low income can feel impossible, but it can be done. It may take some more time and effort, but using tactics such as negotiating bills and avoiding taking on more debt can help. To help make it a simpler process, consider using the free Rocket Money app to help you track your spending, create a budget, and get tips on ways to maximize every dollar. Create a Rocket Money account today.