Getting out of debt is challenging enough for people who earn decent money. If your income is low, it can seem downright impossible. It’s not, though – keep reading for some tips regarding how to pay off debt fast with a low income.
How to pay off debt fast with a low income: 11 essential tips
Note: Please consult a licensed financial advisor. Treat the tips I’m about to share as conversation starters between you and a professional.
1. Rank your financial priorities
Not all debt is equal. Additionally, paying off debt probably isn’t the only financial priority you have. Establishing a ranked list of priorities is crucial to ensuring you approach eliminating debt in a strategic fashion.
Check out the second point in my article about organizing your finances for some tips on establishing a sensible list of priorities that accounts for not only your debt repayments but also daily expenses and other productive financial behaviors (i.e. saving for retirement).
For the purpose of this article, pay attention to where debt repayments fall on the list.
Your first priority should be staying afloat, which means paying for essentials (i.e. housing and groceries) and making minimum monthly debt repayments. Your second priority should be establishing an emergency fund that will help you stay afloat in the event of job loss or some other negative event. It’s only once you get to the third tier of priorities that paying off debt aggressively (aka making more than the minimum monthly payments) starts making sense. Keep this in mind – don’t jeopardize your financial progress by paying off debt aggressively at the cost of higher priority items.
2. Identify an amount you can afford to throw at your debt monthly
Once you understand your financial priorities, figure out how much money you can afford to put towards debt repayments each month in excess of the minimum. If the debt carries a high interest rate (typically considered 5% or more), that may mean redirecting the money you would normally spend on discretionary purchases or investments.
For example, let’s say you typically spend $200 per month on dining out. If you have credit card debt, strongly consider putting as much of that money as possible toward paying off debt. The same goes for spending in any other category that’s not vital.
Keep in mind – you can’t eliminate spending in some discretionary categories entirely. Dining out is a classic example. Even if you don’t do it at a restaurant, you still need to eat! Eating those meals at home might cost you, for example, $50. By eliminating dining out from your budget, therefore, you’d free up $150 for debt repayments (as opposed to the full $200).
Failing to take this into account can hurt you in the long run. You’ll approach paying off debt more aggressively than you can actually afford to.
3. Use irregular income to get ahead on debt repayments
Don’t forget to account for irregular income when making a plan to get out of debt fast with a low income. Your tax refund along with any bonuses you might receive from work can help you make substantial leaps forward.
Decide ahead of time what percentage of irregular income should go towards debt repayments. Consider using as much of it as possible in a productive manner, in accordance with the list of priorities you identified in the first step on this list.
4. Create a zero-sum budget
Establishing a zero-sum budget is a great approach to ensuring you’re using your income wisely. This is crucial when you have a low income since every penny counts.
In case you’re unfamiliar, a zero-sum budget is one in which every dollar you earn has a predetermined purpose.
For example, let’s say you earn $2,000 monthly. Setting a zero-sum budget might entail allocating $1,000 to rent, $800 to other essentials, and $200 to repaying debt.
One key benefit of a zero-sum budget is that it leaves little room for error. If you adhere to the budget, you’ll never have money left over to misuse at the end of the month. A zero-sum budget is also predictable, helping you estimate exactly when you’ll be debt-free.
YNAB is a very popular zero-sum budgeting app. It forces you to give every dollar a purpose then ensure your spending stays on track.
5. Be strategic about which loan repayments you prioritize
When it comes to figuring out which loans you should pay off first, there are two popular strategies.
The first is called the debt snowball. It entails paying off your loans in order of smallest balance to largest. This will help you build momentum and stay motivated. It’s an especially powerful strategy if you’re wondering how to pay off debt fast with a low income since it directs your money where it will have the most significant psychological impact.
The second strategy is the debt avalanche. It entails paying off your loans in order of highest interest rate to lowest. Generally speaking, this is the more financially sensible strategy of the two. However, it lacks that feeling of momentum, which may make it feel less exciting if you have a low income.
Work with a financial advisor to identify the correct approach based on your circumstances. Whichever strategy you choose, you’ll benefit from being intentional about which loan repayments get priority.
6. Look for ways to increase your income
If you’re reading this article, you probably have very aggressive debt repayment goals. If you’re unable to meet those targets on a low income, look for ways to earn more.
As long as you have spare time, earning more money is probably easier than you think. Check out this article for a list of ways to earn money quickly without necessarily taking on a second job. The gig economy makes it very easy to trade your spare time for an extra few hundred dollars per month, which can make all the difference when you’re eliminating debt on a low income.
7. Avoid taking on new debt
When you’re paying off debt on a low income, nothing will demotivate you faster than eroding your progress by taking on new debt. In fact, this can quickly become the classic “one step forward, two steps back” scenario. This is how people end up with high interest revolving debt for their entire lives.
Do whatever you can to avoid spending money that isn’t in your bank account. If you take my previous tips about setting priorities to heart, this should be easy. After all, you shouldn’t be spending much money discretionarily at all if you have high interest debt.
8. Explore debt consolidation
This next tip is firmly in “talk to a financial advisor first” territory. If an advisor deems debt consolidation to be a valid option for you, though, it can be very helpful.
At a high level, the idea behind debt consolidation is that you take out one large loan at a relatively low interest rate and use it to pay off your other loans. You’ll subsequently have just one monthly payment that carries a lower interest rate than your prior effective rate across all loans. This may help you pay off debt faster (and be less stressed in the process).
Debt consolidation comes in many forms, including:
- credit card balance transfers
- line of credit balance transfers
- home equity loans
- car title loans (generally a horrible idea – see this NerdWallet article to learn why)
If you’re not disciplined, though, debt consolidation can be disastrous. There’s nothing stopping you from paying off multiple credit cards with a debt consolidation loan then racking up a balance again and ending up worse off than before. This is why working with a financial advisor is so important. They can help you take whatever steps are necessary to stay on track.
9. Explore debt relief
Debt consolidation is just one form of assistance you can apply for. There’s also debt relief, which typically entails having a third party negotiate a smaller lump sum payoff with your creditors.
For example, let’s say you owe $10,000. A lender might be willing to accept, say, $8,000 as a lump sum payment from a debt relief firm rather than waiting a few years for you to pay the full balance. You would then need to repay the debt relief firm per whatever agreement they reach with you.
This can be a great approach to pay off debt fast with a low income. It can shave thousands of dollars off your balance owing.
As with debt consolidation, though, make sure you consult a financial advisor first. Check out this article from the Financial Consumer Agency of Canada for an idea of what can go wrong if you work with a malicious debt relief firm.
10. Negotiate directly with your lenders
If you have a history of making payments on time, your lenders might be willing to offer direct assistance. For example, some lenders might waive interest or defer payments for a set period of time. This can stop the bleeding and give you a chance to make headway on your debt.
Once again, it’s important that you work with a financial advisor to understand the terms of any debt relief your lenders provide before accepting them. Some forms of debt relief can negatively impact your credit score, which may be undesirable based on your financial goals.
11. Look for ways to save money on essentials
By this point on my list of tips for how to pay off debt fast with a low income, you should have a solid understanding of your financial situation. If you’ve cut back on discretionary spending and increased your income yet still aren’t eliminating debt as fast as you’d like to, it’s time to evaluate your essential costs.
Strategies worth considering include:
- looking for coupons on essential purchases (i.e. groceries)
- switching to a cheaper internet or cellular service provider
- adjusting your diet to accommodate cheaper foods (check out this list from Healthline for ideas)
- downgrading your vehicle
- downsizing your home
- applying for student financial assistance (if applicable)
How to pay off debt fast with a low income: Conclusion
If you’ve set a goal to pay off debt fast with a low income, I hope this article has been helpful. While there’s no denying the difficulty of achieving this, it can be done with patience, determination, assistance, and good guidance.
For more of my articles about debt, click here.