When it comes to money, one of my rallying cries is this: “Personal finance is personal.” This is especially true when I offer debt payoff education to folks with low or lower middle class incomes. Lower income earners have a different experience becoming financially stable than higher income earners because of math and economic conditions, not moral failings or poor decision-making.
When you have less money to allocate toward debt, or you’re solely focused on surviving until the next paycheck, your debt payoff timeline and strategy are going to take a different shape than someone who makes over $100,000 a year. Personal finance is personal, which means the debt payoff strategy that works best for you will be personal too.
The median income in the US was $56,368 in 2022, whereas the average debt load is over $100,000, according to the Census. Our collective credit card balance has ballooned over the last few years, and delinquencies are on the rise now too.
Fortunately, there are productive steps you can take to get your finances on the right track, even if you’re not earning 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 blown tire could mean losing reliable transportation to work. An after-hours vet visit could mean high interest credit card debt. A terminally ill family member thousands of miles away could mean missing a goodbye.
Since lower income earners don’t have the same economic resources as high income earners, prioritizing an emergency fund is even more crucial to their financial foundation and peace of mind. An emergency fund with at least one month’s worth of expenses will build a safety cushion, preventing furthering debt and allowing flexibility when dealing with unforeseen circumstances.
Unsure of what amount should be in your emergency fund? Add up housing, utility, transportation and food costs for one month and start there. For example:
|
Housing |
$2,250 |
|
Car payment |
$450 |
|
Car insurance |
$150 |
|
Gas |
$150 |
|
Internet |
$80 |
|
Electric bill |
$45 |
|
Water/Trash |
$175 |
|
Food |
$650 |
|
Total |
$3,950 |
With this approach, you’ll have at least one month saved to sort through whatever your troubles are, instead of worrying about money and prolonging your debt payoff journey by adding additional charges to your credit card. This is a more common challenge than you might think; a survey from Bankrate found that, when presented with a $1,000 emergency, only 44 percent of people would actually leverage their savings.
Trim your monthly spending from the top down
They say a small leak can sink a ship. While that’s certainly true, the bigger concern should be a hole in the hull. The top line items in a monthly budget tend to be housing, transportation, utilities and food costs. Instead of pinching pennies over a coffee habit, tackle these larger costs first. Here are suggestions to decrease 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 decrease rent and utility costs. Living with family also has many benefits, the largest being a substantial decrease in your cost of living.
Transportation: Join Costco or Sam’s Club for discounted gas prices, and combine all of your errands and trips outside of the home so you use less gas throughout the month. Shop around for a more affordable car insurance plan — I use Gabi to compare prices. Also use public transportation if it is available to you.
Utilities: Call service providers to ensure you have the most affordable pricing. Ask for discounts based on your identity or career — there are sometimes discounts for active duty military service people, veterans, first responders, teachers, seniors and AARP members, to name a few. Also use a discount cell phone service provider — I use Mint Mobile.
Food: When you do go out to eat, avoid alcoholic beverages, which are often marked up considerably, and try out happy hours at local restaurants and dives. Ditch DoorDash and UberEats or pick up your own food if you’re ordering takeaway to save on fees. Make a meal plan and stick to it, shop at discount grocery stores and utilize their grocery pickup services if they have them to decrease impulse shopping. Also consider making a meatless meal once a week at home.
Entertainment: Opt for matinee movies, free local events and/or Groupon discounts. Stop unused subscriptions and share streaming service costs with loved ones. Utilize your local libraries and museums that have free membership — they often have free events and speakers.
Lastly, I recommend GoodRx for all of your prescriptions, which can give consumers a savings of up to 80% on medications.
Automate your money
Many companies, including student loan providers, will cut you a break if you set up automatic payments. Setting up automatic payments ensures 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 won’t have to worry about whether your personal finances have fallen by the wayside.
Try on a side hustle
Depending on your particular situation, asking for a raise at your 9-to-5 may not be an option. If earning more in your current career or job isn’t possible, you’ll have to think of alternatives.
My top tip for side hustling is to make sure it’s something you enjoy or are already skilled at. I’ve done all kinds of odd jobs and got burnt out in the process because I wasn’t enjoying what I was doing. If you’re going to work extra, it might as well be at a job you like.
Thanks to the gig economy, there is every kind of side hustle you can think of in existence. My favorite is dog sitting. Rover is an online dog care service that matches animal parents with pet sitters, walkers and boarders. I’ve been able to make thousands of dollars per year doing this, which has gone to debt payoff, 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-based professionals.
Take inventory of your resume and evaluate your transferable skills. You may be surprised at how much extra money you can make.
Pick a sustainable debt payoff method
There are several ways you can pay off debt. My preferred method for low income earners 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 toward the smallest balance. Once the debt with the lowest total amount owed is paid off, you apply the amount you were paying towards 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.
|
Debt |
Total Amount Owed |
Min. Monthly Payment |
|
Credit Card |
$2,457 |
$57 |
|
Car Loan |
$12,873 |
$350 |
In the snowball method, this person would put all their excess income toward paying off the 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 toward the car loan.
The snowball method creates momentum on your debt free journey, which is something low income earners need to continue making progress.
Remember: Debt payoff is a marathon, not a sprint
It’s easy to become discouraged when you see that someone has paid off $120,000 of debt in one year. Their story isn’t your story. Their debt free journey is not your debt free journey and their situation isn’t your situation, so their timeline will not be your timeline. When you’re on a low income, it takes more time to save and pay off debt… and that’s OK.
This is not a sprint to see who can work the most, cut the most or sacrifice the most to get to debt freedom the quickest. Stay in your lane and focus on what you’ve got going on. The most important thing is that you follow a sustainable plan and make progress while also living a healthy life.
