If you aren’t earning a lot of money or you’re barely making ends meet, paying off your debt may seem impossible.
People fall into debt for a variety of reasons. Regardless of whether you have mounting credit card bills from past financial mistakes, student loans, medical bills, or something else, debt can feel all-consuming and completely overwhelming. Yet, did you know that it’s possible to pay off every last penny you owe? It’s not always easy, but with some determination and dedication, you can pay off your debt, save more money, and improve your entire financial situation.
Here’s how to pay off debt when you have a small income.
1. Create an emergency fund first
While you may be eager to jump right in and start tackling your debt, if you don’t have an emergency fund, this should be your first goal.
Without an emergency fund or financial buffer, any unexpected costs can derail your debt repayment process. Maybe your car breaks down and needs repairs, or you had a larger heating bill than you budgeted for. Whatever the case, when emergencies come up, you need money – and fast.
So, start an emergency fund now with a separate savings account. This way you aren’t tempted to use it for your day-to-day spending. If this feels overwhelming, start small. Even $500 saved up can help you out in a stressful financial situation.
2. Develop a “minimum needs” budget
A “minimum needs” budget is a budget that covers just your most basic living expenses, such as rent, groceries, and debt-repayment. It should be pretty bare-bones and should eliminate all non-essential spending.
To start your budget, you first need to determine the cost of your everyday living expenses.
These are bills you can’t cut out – bills that need to be paid every single month, like rent, groceries, and utilities.
As you create your budget, see if there is any way you can work to lower your bills. For instance, if you have an extra bedroom, can you find a roommate to save money on rent or your mortgage? Can you lower your grocery budget by clipping coupons and signing up for your grocery store’s rewards program? Perhaps you can consider cutting out cable to save hundreds, if not thousands, of dollars every year. Every little bit helps. The point of a minimum needs budget is to free up as much cash as you can. Every dollar you have to spare can be put towards paying down your debt.
To help you get going, start budgeting on a spreadsheet or use a budget app. And remember: no matter how you choose to track your money, the most important thing is to set a budget and stick to it.
3. Consider refinancing
If you have debt, it’s a good idea to find out if you can save money by refinancing your loans.
Refinancing your debt essentially means another company buys out your debt. In return, you start making payments to your new debt servicer, and this new company then collects your interest payments.
Refinancing companies typically offer you a lower interest rate to gain your business. This helps you because over time, you won’t have to pay nearly as much money in interest and can make a bigger dent in your principal loan balance.
Take it from me: it’s worthwhile to do your research and refinance if possible. A few years back, my husband and I refinanced some of our student loans and now pay a two percent lower interest rate than we were originally paying. This is saving us thousands of dollars in the long-run.
4. Set goals and find accountability
You can’t succeed on your own. Without solid goals and accountability, you’re much less likely to ever become debt-free.
In fact, in a study done by psychology professor Gail Matthews of Dominican University, it was found that sharing your goals with a friend is the key to accomplishing your goals. In her study, Matthews found that people who both wrote down their goals and had an accountability partner had a 76 percent success rate of accomplishing their goals. In comparison, there was another group in the study which was instructed to only think about individual goals. Only 43 percent of those people accomplished their goals.
So, practice writing down goals following the SMART method. With this method, your goals meet the following criteria – Specific, Measurable, Achievable, Relevant, and Timely. Once you’ve developed your SMART goals, share them with a friend or two. Ask a trusted friend or family member to check in with you and hold you accountable.
5. Focus on increasing your income
Cutting back on your spending certainly helps you pay off debt faster. But unfortunately, there is only so much you can cut out.
The best way to pay off debt quickly is to trim your expenses and increase your income at the same time. Then, use your freed up cash to throw extra payments towards your debt. There are thousands of ways you can increase your income. For you, maybe that means finding a higher paying 9 to 5 job. Or, you can start side hustling to earn a few extra hundred dollars each month. These are just a few ideas to get you started:
- Drive for Uber or Lyft
- Babysit on the weekends
- Start blogging or freelance writing
- Have a garage sale
- Mow laws
- Pick up part-time or seasonal work
Once you start earning more money, put the entire amount of extra cash towards your debt. You’d be amazed at how much faster you can progress when you can put $100, $500, or even an extra $1,000 a month towards your debt.
6. Give yourself a guilt-free allowance
Even if you’re taking all the right steps, it can take years to pay off debt. In order to stay in the debt-repayment game for the long-haul, it’s imperative that you give yourself a little break once in a while.
The idea here is to give yourself a small, guilt-free allowance each month. Because it’s already in your budget, this is money you can freely spend without feeling regretful. The concept of a financial allowance is a lot like dieting. People are more successful when they allow themselves a rest day and a cheat meal once a week. It keeps them from feeling deprived and prevents large, impulsive purchases later.
So, factor a little free spending into your budget. Whether you give yourself $15 a month to go to the movies or $30 for a night out with friends, the choice is yours to enjoy…guilt-free of course.
Improving your financial situation
Paying off debt isn’t easy, especially on a small income. But with grit, hard work, and a whole lot of commitment, it is possible to live a life free from the burden of debt. Are you ready to follow these 6 steps and get started?