Ways to Get Out of Debt on Low Income
1. Figure Out What You Owe
The first step to tackling your debt has to be knowing what you owe. If you’re unaware of how much money you owe and to whom, you cannot plan a practical and accurate course of action to pay off your debts.
You can reach out to credit reporting agencies to retrieve your credit reports. These will show your amounts owed to various lenders and can be a great starting point for understanding your situation. However, these reports only sometimes paint the complete picture, so you should gather information from your bills and online accounts to ensure you know the full extent of balances due along with interest payments.
2. Create a Budget Plan
Trying to spread your money out everywhere it needs to go when working with a low income can feel impossible. But, finding a way to budget your money is essential to taking back control of your finances.
To make a budget plan, you need a few essential pieces of information about your monthly finances: your income, your “needs” spending (bills, food, medical expenses, etc.), your “wants” spending (entertainment, eating out, etc.), and your minimum debt payments. With this knowledge in mind, you can formulate a budget that should adhere to your needs and wants while simultaneously allowing you to chip away at your debt.
There are also methods you can use to create budget plans to help you get started moving your funds in the right direction. Let’s take a look at an example.
The 50/30/20 Method
This is a relatively simple way to set up a reasonable monthly budget. Even if you stick with this particular ratio only for a while, it may be helpful as a starting point while you learn to gauge your spending.
The numbers in this method’s name refer to your income percentages. They can be broken up as follows:
- 50% of monthly income for needs.
- 30% of monthly income for wants.
- 20% of monthly income for debt payments.
As you assess your current spending habits, you may find that more than 30% of your income goes to “wants” spending. If that’s the case, you should try to find places in that category where you can cut your spending to instead devote a chunk of your income to your debt payments. On the other hand, if you have more than 20% of your monthly income left over after assessing your wants and needs, you might be able to get ahead on your payments or pay off your debt faster.
3. Find Ways to Cut Spending
As if budgeting wasn’t already tricky enough. The challenging part kicks in when you’re forced to find places to cut your spending. As creatures of habit, we quickly become accustomed to living a certain way. This may lead us to convince ourselves that some of our wants are needs. When you assess your monthly spending, consider the costs essential to your living a happy and healthy life.
Surprisingly, one of the first places you can look to cut spending is your “needs” spending. Your car or rent payments may be unreasonably high. If you can downgrade to a cheaper vehicle or move to an apartment with a lower rent rate, you may be able to free up your cash flow without sacrificing as much from your “wants” spending. You should also aim to lower your utility bills when possible by reducing your water and energy usage.
However, you will still need to make more intricate cuts, especially if you want to pay off your debts quickly. Here are some ways to cut back on your monthly “wants” spending without drastically changing your lifestyle.
- Cook at home instead of eating out.
- Cancel unwanted, unused, or redundant subscription services.
- Shop with a list to avoid impulse purchases.
- Use cash instead of cards.
- Work out at home or outside instead of spending on a gym membership.
- Seek out free entertainment like beach visits, hiking, concerts, etc.
- Be on the lookout for coupons and sales.
- Look for ways to lower your phone, Internet, or cable bills by switching providers or managing your plans.
4. Look for Extra Income
If you’re stuck finding ways to cut your spending or simply want to take a faster track out of debt, you may want to seek out additional sources of income. Those not currently employed full-time may be able to pick up another part-time job or more shifts at their current position.
Full-time workers can find opportunities for a little extra cash too. You can grab some part-time shifts, drive for a ride-sharing service, or even find work online as a freelancer. Career advancement is always a good option to consider, too. Even if you have to shift career paths slightly, you may be able to find a job with more hours or a higher salary than your current work. And, who knows? You might enjoy a change of scenery.
5. Avoid New Debts
And, of course, all the budget planning, extra income, and spending cuts in the world mean nothing if your debt only continues to increase. It’s easy to fall into the trap of payday loans and other services that claim to help you manage your debt. But, in the end, most people who resort to these methods out of desperation wind up with more debt than when they started, trapped in a cycle of ever-accumulating payments.
When trying to take back control of your finances, your best bet is to avoid new sources of debt at all costs. In addition to services like payday loans, this also includes over-using your existing credit cards or signing up for new cards. Though you may find temporary relief by relying on funds from another credit agency, you will end up in a more bottomless pit when the time comes to repay new loans on top of the old ones.
6. Debt Consolidation
Dealing with multiple monthly debt payments to different lenders adds to your financial stress. The interest payments spread out among your other cards might eat up even more cash than necessary.
If you find yourself in this situation, debt consolidation may be a helpful solution for you. This method allows you to combine multiple payments into one manageable monthly payment, reducing your interest costs and lowering the monthly payment rate. In this way, you can pay off your debt much faster than if you continued only to make minimum payments to multiple lenders.
7. Negotiate Your Debts
Consider legal pathways like debt negotiation or bankruptcy if you feel completely overwhelmed by your debt payments. In both cases, you should consult an attorney to ensure the choice is right for you and your finances’ unique situation.
Filing for bankruptcy eliminates all or part of your debt and may involve a repayment plan. However, it can leave a lasting mark on your credit history and potentially hurt your future credit and job opportunities. The two types of bankruptcy are as follows:
- Chapter 7: Completely clears your debt.
- Chapter 13: Establishes a debt repayment plan to follow over a few years.
Debt negotiation, on the other hand, will not have as much of a negative effect on your future credit. You and your attorney will work with your lenders during debt settlement to reach a more manageable lump-sum payment or repayment plan. In many cases, you may end up paying less than what you originally owed, as most credit agencies would rather receive some of your payments than none via an option like bankruptcy.
A debt negotiation or bankruptcy attorney can help you understand the differences between these options and make an educated decision between them. At Sadek & Cooper Law Offices, we understand the immense stress of dealing with the non-stop harassment of debt collectors. With years of experience handling debt settlement and bankruptcy cases in the Philadelphia area, our attorneys are prepared to use their wealth of knowledge to assess your financial situation and help you develop an effective debt management strategy.
Contact our office today: 215-545-0008
Contact our office today to set up a free, confidential consultation with one of our experienced lawyers. We will be with you every step of the way as you take back control of your life and your finances.