5 tips for paying off debt for low-income households

When it comes to money, one of my rallying cries is this: “Personal finances are personal.” This is especially true when I offer debt payoff education to people with low or lower middle-class incomes. Lower income earners have a different experience of becoming financially stable than higher income earners because of mathematical and economic circumstances, and not because of moral failings or poor decision making.

If you have less money to put toward debt, or if you’re just focused on surviving until the next paycheck, the timeline and strategy for paying off your debt will take a different shape than someone making more than $100,000 a year deserves. Personal finance is personal, which means the debt payoff strategy that works best for you will also be personal.

The average income in the US was $56,368 in 2022, while the average debt burden is more than $100,000, according to the Census. Our collective credit card balance has skyrocketed in recent years, and delinquencies are now increasing as well.

Fortunately, there are productive steps you can take to get your finances on the right track, even if you’re not making a lot of money right now. Here are five ways to start paying off your debt on a low income.

Prioritize a one-month emergency fund

When your income is low, life emergencies become financial emergencies. A blowout could mean losing reliable transportation to work. An after-hours visit to the vet can lead to high-interest credit card debt. A terminally ill relative thousands of miles away can mean missing a farewell.

Because lower-income people do not have the same economic resources as high-income people, priority should be given The emergency fund is even more important for their financial foundation and peace of mind. An emergency fund with at least one month’s worth of expenses will provide a safety buffer, preventing further debt and allowing flexibility in dealing with unforeseen circumstances.

This approach gives you at least one month to resolve your issues, rather than worrying about money and prolonging your debt payoff journey by adding extra charges to your credit card. This is a more common challenge than you might think; A questionnaire from Bankrate found that only 44 percent of people would actually tap into their savings if they were faced with a $1,000 emergency.

Trim your monthly expenses from top to bottom

They say a small leak can sink a ship. While that is certainly true, the bigger concern should be a hole in the hull. The most important items in a monthly budget are usually housing, transportation, utilities and food costs. Instead of pinching pennies for a coffee habit, tackle these bigger costs first. Here are suggestions for reducing spending in those areas, plus a few other tips to consider.

Housing: Housing is often our largest monthly expense. Consider getting a roommate, which can reduce rent and utility costs. Living with family also has many benefits, the biggest of which is a substantial reduction in the cost of living.

Transport: Join Costco or Sam’s Club for discounted gas prices and combine all your shopping and outings to use less gas throughout the month. Shop around for a cheaper car insurance plan – I use it Gabi to compare prices. Also use public transport if it is available to you.

Utilities: Call service providers to ensure you get the most affordable prices. Ask for discounts based on your identity or career – there are sometimes discounts for active military, veterans, first responders, teachers, seniors and AARP members, to name a few. Also use a discount cell phone provider – I use Mint Mobile.

Food: When you do eat out, avoid alcoholic drinks, which are often significantly more expensive, and try out happy hours at local restaurants and dives. Skip DoorDash and UberEats or pick up your own food when ordering takeout to save on costs. Make a meal plan and stick to it, shop at discount grocery stores, and take advantage of their grocery pickup service if they have one to reduce impulse purchases. Also consider preparing a meatless meal at home once a week.

Entertainment: Choose matinee films, free local events and/or Groupon discounts. Cancel unused subscriptions and share the cost of streaming services with loved ones. Take advantage of your local libraries and museums that have free membership; they often have free events and speakers.

Finally, I recommend GoodRx for all your prescriptions, allowing consumers to save up to 80% on medications.

Automate your money

Many companies, including student loan providers, will give you a break if you set up automatic payments. By setting up automatic payments, you don’t waste time talking to machines. You don’t have to drive anywhere to pay your bills on time and you won’t accidentally miss a payment.

I recommend automating everything you can for bills, savings, and investing. When life gets busy, you don’t have to worry about whether your personal finances are in trouble.

Try a side hustle

Depending on your specific situation, asking for a raise from 9 to 5 may not be an option. If earning more in your current career or job is not possible, you will have to think of alternatives.

My best tip for side hosting is to make sure it’s something you enjoy or are already skilled at. I did all kinds of odd jobs and got burned out because I didn’t enjoy what I was doing. If you’re going to work extra, it might as well be at a job you enjoy.

Thanks to the gig economy, every kind of side hustle you can imagine exists. My favorite is dog sitting. Robber is an online dog daycare service that connects pet parents with pet sitters, walkers and boarders. I’ve been able to make thousands of dollars a year doing this, which has gone towards paying off debt, saving, investing, traveling, Christmas gifts and more. Other gig economy platforms include Care.com for nannies, DoorDash for delivery drivers, and Fiverr for artists and service-oriented professionals.

Take inventory of your resume and evaluate your transferable skills. You might be surprised at how much extra money you can make.

Choose a sustainable method for paying off debt

There are several ways you can pay off debt. My preferred method for low-income people is the snowball method.

Simply put, the snowball method prioritizes paying off the debt with the lowest total amount owed by paying the minimum on every other debt you have and allocating your leftover money to the smallest balance. Once the debt with the lowest total amount owed is paid off, apply the amount you paid on that debt to the next lowest debt on your list.

Here’s a hypothetical example in which someone has two debts: a credit card balance and a car loan.

Under the snowball method, this person would spend all of their excess income paying off credit card debt first, while continuing to pay the minimum on the car loan each month. Once the credit card is paid in full, this person would reallocate their additional debt payments to the car loan.

The snowball method creates momentum on your debt-free journey, something low-income people need to keep making progress.

Remember: paying off debt is a marathon, not a sprint

It’s easy to get discouraged when you see someone pay off $120,000 in debt in one year. Their story is not your story. Their debt-free journey is not your debt-free journey and their situation is not your situation, so their timeline will not be your timeline. If you have a low income, it will take more time to save and pay off debt… and that’s okay.

This isn’t a sprint to see who can work the most, cut the most, or sacrifice the most to become debt-free as quickly as possible. Stay in your lane and concentrate on what you are doing. The most important thing is that you follow a sustainable plan and make progress while also living a healthy life.