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How To Get Out of Debt With Low Income
Getting out of debt is difficult when there is sufficient money coming in as income. However, when you have high debt and only a small amount of income coming in, debt repayment can be downright daunting. However, as difficult as it is, you don’t have to stay in debt forever if your income is currently low. There are many ways you can maintain a decent standard of living even as you pay down your debt in a low-income household. Here is what you need to know about how to get out of debt with low income.
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Stop Incurring New Debt
When you are in debt but have limited income, one of the first things you should do is stop taking out new loans and other debts. Borrowing more money simply shuffles debts around, which doesn’t help your credit situation. The situation would be worse because the new debt, along with the old, has interest, which could amount to a large sum of money if settled together.
Nonetheless, there may be a few exceptions to this rule, and where it actually may make sense to take on some additional debt. One example of a “good” loan to take on while paying down debts is to consolidate your debts into a personal loan with a lower interest rate. Another reason to get a new loan is to take advantage of a 0% APR introductory period on a new balance transfer credit card. In both cases, the borrower is in a better position.
Nonetheless, if there are no compelling reasons to obtain a new loan, you should avoid it. And, if possible, put a stop to all unnecessary spending.
Take an Inventory of your Financial Situation
After deciding to avoid further debt by refusing to take out additional loans, the next step is to assess your financial situation in order to determine the best course of action to take, focus on all of the debts you have and your lenders. The debts must be paid to the latter, and you must know the exact amount owed. You can begin this process by making a list of all outstanding credit card statements and utility bills, then tally them.
Then, for each credit card and bill, obtain and total the interest rates, late fees, and other penalties you must pay. Add this to the other figures to get a clear picture of your overall financial situation.
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Create a Budget
Making a budget is one of the most certain ways to get out of debt when you have a low income. When you create a budget, you will be able to track how your money is spent and earned while also asserting control over your finances.
To do so, begin with the fundamentals: make a list of your earnings and non-variable expenditures. Non-variable expenditures are not the same as fixed expenses and refer to goods and services with fixed charges. This is where you place your house rent, utilities, car payments, and other expenses.
After you’ve calculated your total fixed expenses, subtract them from your total earnings. The money you’ll receive should be used to cover your variable expenses, which include everything from food to clothing – as well as your financial deficit.
Variable expenses are unquestionably necessary, but you’ll also need to budget for debt. If you are unable to increase your revenue, it is best to demonstrate consistency by allocating a fixed amount of money for debt while attempting not to deprive yourself of essential variable goods and services. Keep it at a fixed cost that can be paid monthly or weekly.
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Build an Emergency Fund
It’s fine to attack your debt right away in order to get it paid off, but the first step should be to set up an emergency fund. Without something like an emergency fund, an unexpected expense or increase in costs may cause you to fall behind on your debt repayment, which will almost certainly set you back in your quest for financial independence.
Emergencies are both unexpected and common. Any number of unexpected expenses could arise in a given month, from a car or HVAC repair to a sudden medical expense that arises, all of which can strain your budget if you haven’t set aside some money to deal with these sorts of things. So, in addition to paying down your debts, try to save even a modest amount of money each month to build an emergency fund. Even having a few hundred dollars stashed in a bank account somewhere can take the sting out of a big bill that hits you unexpectedly.
Examine your Biggest Expenses to See Where you Can Save Money
Many people undoubtedly have favorite items to which they devote a significant portion of their earnings. However, if you are a low-income earner who is in debt, it is best to eliminate expenses that account for the majority of your spending.
It could be alcohol for some, food for others, and so on. Whatever it is, do everything in your power to keep the purse strings tied.
As long as your debt is increasing, chances are you won’t be able to live a debt-free life anytime soon. So, what are your options? Get a notebook and a biro pen, and make a list of your expenses, which could include utilities, food, housing, transportation, entertainment, and so on. After that, conduct a reality check to determine which areas are consuming the majority of your earnings.
You can also choose to live wisely by doing the following:
- Start eating out way less than you are right now, since it is usually more expensive than eating at home, regardless of the type of restaurant.
- Food purchased in bulk is always less expensive than food purchased at retail. So do your best to ensure that you buy a lot of food.
- Sell your vehicle if you can do without it. A car, while an asset, can also be a liability. The average American spends around $10,000 per year on their cars, and if you are one of them, you can re-allocate those funds towards debt repayment. If you live in a large city, you could start relying more on public transportation instead of the car you sold to get around, too.
- Other expenses, such as gym, cinema, and other entertainment subscriptions, should be eliminated if you are struggling to pay off debt on a low income. This is because, no matter how minor they appear to be, if you add them up commutatively, you’ll see how much you should have saved.
- The last but not least way to live smart when in debt is to become a smarter shopper, and try to make every single penny count. Use coupons, search for sale items, and start visiting thrift shops instead of big box stores for your clothing and household items; you’ll be shocked at how much money you can save, and then use to start paying down your debts faster.
Use a Balance Transfer Credit Card
As a low-income earner, one way to pay off debt is to use a balance transfer credit card.
Essentially, this means that you will be transferring your debts from one credit card to another in order to clear all outstanding balances. In most cases doing so will give you a lower (often negligible) interest rate, which will help you pay down your debt balance faster. However, ensure you know the terms and conditions for your new credit card; many balance transfer credit cards raise their interest rates considerably after a low introductory period.
Priority Should Be Given To Paying Off The Smallest Debts
Debt, like most other financial products, begins small and grows over time. This can be terrifying to see when it reaches a large value, but it doesn’t have to be.
However, if you learn to use milestones, paying off debt can be less difficult. Even so, make sure that your total number of creditors does not increase, as this will only add to your financial stress. Furthermore, while staying focused on the goal, pay off small debts as this is what causes deficits to accumulate over time. This is referred to as the debt snowball method.
If you have an amount of $150 or more, your best bet is to direct it toward paying off the next available small debt. This can be accomplished by listing them in a book (you can use that chart you made at the beginning of this process) and settling them one after the other while keeping track of the progress. When you’ve made significant positive progress, you’ll be more likely to believe in yourself and what you’re capable of.
So, the idea of paying off debt is not to allocate massive sums of money to exorbitant expenses, but to start with the smallest debts you have and work your way up. This technique is sometimes referred to as the “debt snowball.”
Tackle Increasingly Larger Debts
After dealing with minor debts, the next step is to take on paying off larger debts. It will take longer, of course, to clear these debts, because they are bigger. However, since you have already paid off the smaller debt balances, you should have more money to allocate towards these bigger debts now. While tackling the larger debts, it may make sense to use some of the other techniques mentioned earlier, such as balance transfer credit cards and debt consolidation loans.
Look For Ways To Supplement Your Income
Earning a little extra money is one of the most effective ways to get out of debt with a low income. If you’re not sure where to begin, you can start by looking into opportunities in the service sector. There are a lot of job openings in this professional economy, and there are a lot of them. Content writing, graphics and design, web development, interpretation, scripting, food delivery, surveying, and many other services are available.
All you have to do is identify the job role that you are good at and give it a shot, but you must be competent enough. Earning these extra funds will ensure that you pay off your debts as soon as possible.
Explore Debt Relief Options
One way to get out of debt is to use the debt relief process. With debt relief, you can hire a debt settlement company to work on your behalf to address all of your outstanding debts with your creditors. The debt relief agent will work to arrange better repayment terms for you or reduce the amount you have to repay; in some cases, they can eliminate the requirement for you to continue paying back some debts altogether.
However, there are drawbacks to using debt relief. You will have to relinquish control of your finances while the debt relief agent interacts with your creditors, and it could affect your credit rating. Additionally, there is no guarantee that a debt relief agent will obtain better terms with your creditors, too. Finally, if your debts are so high and your income so low that there is no way you’d be able to pay back even reduced debt levels, most debt settlement companies will not be willing to work with you. So, ensure you understand the advantages and drawbacks before you consider using a debt relief company to assist you with addressing all of your debts.
Getting out of debt on a low income is not easy, but is possible if you’re willing to put the effort in. As indicated throughout this article, paying down your debt with a modest income will require you to make some sacrifices and reduce some non-essential expenses. It also entails developing budgets and setting long-term objectives. You will be able to regain financial independence if you stick to these goals consistently. So, what are you waiting for? Start assessing your financial situation, make a plan, and begin paying down all of those debts as soon as you can!
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