How to Stay Out of Debt With a Low Income
Staying out of debt can be challenging, especially if you have a low income. But with proper planning and enough dedication, you'll beat all debt traps regardless of your income level.
Your financial independence is worth some sacrifices to begin living a debt-free life and progress towards your financial dreams. With that said, this article is a compilation of excellent tips that you can use to stay out of debt even if you have a low income.
How to Get Out of Debt on a Low Income
1. Stop Taking New Debt
When you take out a loan from one lender to pay another, you're essentially shifting debt around rather than paying it back. However, there may be some compelling reasons to do so. For example, you take a low-interest personal loan to consolidate your debts or start a new balance transfer credit card to benefit from a 0% APR offer (introductory rate).
But generally, you should not go for loans or apply for new loans when trying to get out of debt unless it is strategic. Otherwise, you may find yourself in an endless debt cycle.
2. Determine How Much You Owe
It's always tempting to overlook bills while you're struggling financially. However, you'll incur extra amounts if you don't sort them in time.
Unless you have a clear view of your whole financial position, it could be tough to determine ways to clear out debt with a low salary. That being said, you can make a list of all your outstanding debts; medical bills, credit card statements, utility fees etc. Put the interest rate, penalties for late payments, and any potential penalties next to the principal amount.
3. Set Up Your Budget
A budget enables you to precisely determine where your revenue is coming from and where you spend it. Begin by identifying your income sources, then list all the recurrent and fixed expenses. Fixed expenses may include bills that don't change monthly, such as car payments and rent.
Proceed by deducting your fixed expenses from the total income. The remaining amount you can use for variable expenditures such as buying clothes, groceries, servicing debts, and others.
Determine the amount to set aside each month for the variable expenditures you cannot do without, such as food, and then designate the surplus funds for debt repayment. Make a budget section for debt repayment, adhere to it, and raise it whenever possible.
4. Repay the Small Debts First
After summing up what you owe, the overall amount may be frightening. With a low salary getting out of debt can be challenging, but appreciating small achievements on the way is motivating, and gradually reducing what you owe can considerably ease anxiety.
You may also opt to try the snowball strategy, where you first pay off the smallest bills. For instance, sort the £150 balance at the repair store, then use the money to pay off the next smallest debt on your list.
Seeing those small amounts drop to zero will boost your confidence that you can someday live a debt-free life, and you'll scrape off your ledger faster than if you had started with the big debts.
5. Use Debt Avalanche Approach
After you've cleared off your lower expenses, you have a couple of options for dealing with your more enormous debts. The debt avalanche strategy is to meet the minimum repayment on every bill and then use the remainder to clear off the debt with the highest interest rate.
Lending rates increase your total debt monthly; therefore, paying your debt on time will leave some money back in your pocket.
With such a strategy, you save more of your monthly earnings, boosting your capacity to make more significant debt payments.
6. Look for a Side Gig
Look for ways to generate additional funds if you're still having trouble paying off debt without income. Various online gig opportunities can help you develop some much-needed income. Use that extra income to settle your debt when identifying inventive methods to utilise your spare time.
7. Find Debt Consolidation and Relief Options
Optimizing your credit score will yield fruits that will help you get off the debt trap faster. You will always be charged higher rates on credit cards to personal loans if you have a bad credit rating.
Furthermore, if you have weak credit, your alternatives for debt consolidation or loan transfer to low APR accounts are severely limited. If you're having trouble with your credit, several options are available to assist you to boost your score.
They comprise frequent monitoring of your credit reports for errors, keeping on top of repayments and paying the bills on time, avoiding regular applications for new accounts, and lowering your credit usage ratio.
Debt consolidation is typically a type of personal loan that settles all existing credit facilities and consolidates the sums into a lump sum payment to your new loan. Your debt consolidation loan's interest rate should be lower than all or some of your current obligations, providing convenience and cost-effectiveness for the new loan.
Debt Relief Services
Debt relief organizations can negotiate with lenders in your favour to reduce the amount of debt you owe. They frequently advise their clients to stop making payments if they can't settle the whole loan. It's a tactic of using leverage to persuade the lender to take some payment rather than none at all.
On the other hand, you can seek help from debt consultancy agencies such as Reform Debt Solutions.
To be in debt is never easy, particularly when you're attempting to pay it off on a limited budget. Nonetheless, there is reason to be optimistic; debt relief is conceivable.
Creating a rigorous and shortened budget addressing a single debt at a go meticulously and consistently are the keys to getting out of debt on a limited income. And beside