How To Get Out Of Debt On A Low Income

*This post was created in collaboration with Alpine Credits

If you’re looking to get out of debt on a low income, it may feel like you will never be able to get out of debt. However, this doesn’t have to be the case.

When it comes to getting out of debt on a low income, there are always ways, even though it might not appear that way at first. In Canada, the average non-mortgage debt jumped to $21,183. But, there are still ways to get out of debt at speeds that you never thought possible before.

This article will look at a number of different tips and tricks to help you get out of debt fast, even with a fairly low income.

How To Get Out Of Debt Quickly On A Low-Income

With inflation rising, the costs of everyday items are also getting more expensive. This means your money won’t cover as much as it used to, leaving you with less in your pocket. Similarly, the reduction in your buying power can also make it more challenging to cover debt payments, as there’s less money left over.

Getting rid of your debt without a substantial income is definitely possible. Follow these steps to get out of debt quickly, even if you have a low income.

Step 1 How To Get Out Of Debt On A Low Income: Understand Your Finances 

Your first step is to find out exactly where you stand financially. How much money are you bringing each month? What are your regular monthly bill payments? What is your credit score? Do you have a realistic budget or can you create one?

Consider all these questions when learning to understand your finances.

How Much Income Do You Have After Taxes?

Your gross income is not what you should be looking at when determining your budget. Instead, you need to calculate your net pay, which you can do by deducting all income taxes, benefits, and other deductions from your gross pay. These items should be detailed on your pay stubs. 

You should also find out exactly how much you have in your savings account, as well as other assets you may have, such as investments and hard assets.

If you determine that your after-tax income is not sufficient enough to pay down your debt, consider whether or not it makes sense to dip into your savings. It might be beneficial to take this route if your debt comes with sky-high interest.

How Much Debt Do You Have?

To successfully get out of debt, it’s crucial that you know exactly how much you owe. Every dollar counts, especially when you’re earning a low income. 

Make a list of every single bill you pay and add up what you spend each month. Include the type of debt, the interest rate, and the outstanding balance. 

Step 2. How To Get Out Of Debt On A Low Income: Create A Budget

Armed with a list of all your debts, you can develop a realistic budget to help manage your finances. The more you can contribute to debt repayment, the faster you can get out of debt, even with a low income. 

Here are a few budgeting strategies you can use to help you get out of debt fast with a low income.

How To Get Out Of Debt On A Low Income: 50/30/20 Budgeting Strategy

The 50/30/20 budget method is designed to ensure that your finances stay on track. It works like this:

• 50% of your net income goes towards necessities, such as mortgage payments, rent, clothing, and groceries.
• 30% of your after-tax income goes towards conveniences, such as eating out, shopping, watching movies, and streaming services.
• 20% of your net income goes towards paying off debts and contributing to savings.

After you’ve itemized your net income and all your spending, find out what you have left over at the end of the month. If you have spare money, great. Otherwise, consider slashing items in your “wants” list and dedicate that money to paying off your debt. 

How To Get Out Of Debt On A Low Income: Envelope Budgeting Strategy

Also known as ‘envelope’ budgeting, cash budgeting involves the use of physical cash to make purchases and pay bills. If you’re the type to mindlessly spend when using digital currency or credit card, then using old-fashioned cash for purchases and expenses may help you keep your finances under control. With the cash budgeting strategy, you cash your paycheque rather than depositing it, then use the money to pay for your expenses. 

How To Get Out Of Debt On A Low Income: Budgeting Apps Strategy

There are several budgeting apps available to help you come up with an effective customized budget and keep tabs on your spending. These apps are linked to your bank accounts and consolidate all your financial data in one place. You can see how much money is coming in and what you’re spending with a quick glance at your mobile device.

Top Budgeting Apps To Get Out Of Debt On A Low Income

Step 3. How To Get Out Of Debt On A Low Income Choose A Debt Payment Strategy 

There are a couple of popular and effective strategies that are designed to help you become debt-free sooner, including the following:

How To Get Out Of Debt On A Low Income Using The Snowball Method 

This debt repayment strategy involves paying off your smallest debt first and making minimum payments on the remaining debts. This will help you get rid of one of your debts relatively quickly, which can help give you some confidence and a sense of accomplishment. Once you pay off the first debt, you can dedicate that extra money to paying off the next-smallest debt, and so on. 

With one less debt on the books, your debt load may be easier to manage. Then, you can work up to the biggest debts until you finally pay them all off.  

How To Get Out Of Debt On A Low Income Using The Avalanche Method

Alternatively, you may want to adopt the avalanche method, which involves paying off the debt with the highest interest rate first. With a high rate, you’re spending more on interest than principal. By paying down this debt first, you can work towards saving more money on interest over the long haul. 

Keep in mind that if your highest-rate debt has a very high outstanding balance, it might take a while before you pay it off. 

Should You Use The Avalanche Or Snowball Method To Pay Off Your Debt?

With the avalanche method, you first pay off the highest interest debt, so you can pay less interest over time. With the snowball method, you pay off the smallest debt first, which can help you gain some momentum with your overall debt repayment plan. 

While both may work quite well, the avalanche method can help you save more in interest payments when you have large amounts of debt. By switching which debts to pay off first, you can save a lot of money.

How To Use Debt Consolidation To Get Out Of Debt On A Low Income?

Qualifying for a debt consolidation loan to get out of debt on low income may be difficult since you’re unlikely to be able to cover the payments. Luckily, there are alternative options available for low-income earners looking to consolidate their debt:

Tap Into Your Home Equity 

If you own a home and have accumulated a sizable amount of equity over your time of ownership, consider using the equity to consolidate your debt. You may have multiple debts to deal with, many of which may come with very high interest. By consolidating your debt using a home equity loan or home equity line of credit, you can reduce your bills to just one low-interest payment each month.

Benefits Of Using Your Home Equity To Consolidate Your Debt

• One manageable payment. Rather than juggling several bill payments, reducing them down to just one can help simplify your debt management. 
• Lower interest. You may be able to get a low-interest rate on a home equity loan since your home serves as collateral. This valuable asset reduces the risk for the lender, who may be more willing to offer you a lower rate as a result. You can then use the borrowed funds to get rid of all that high-interest debt.
• Lower payments. A home equity loan can help lower your monthly payments since you’ll likely secure a lower rate and longer loan term compared to the existing debts you currently hold. 

Credit Card Balance Transfers  

If you carry high-interest credit card debt, you may be able to transfer it to a balance transfer credit card with a very low rate to help you focus your contributions on the principal rather than the interest. 

Credit card balance transfers can help you get out of debt on a low income because they typically offer a very low-interest rate – even 0% interest – during the introductory period. During this time, you can work hard to pay off as much debt as possible while taking advantage of the low promotional rate before the period expires. 

Keep in mind, however, that if you don’t pay down the full credit card balance by the end of the introductory period, the outstanding balance will be charged the regular purchase rate, which can be quite hefty. 

Tips On How To Get Out Of Debt On A Low Income

If you’re someone with low income and a lot of debt, you may want to consider these tips: 

Negotiate With Your Lender

One way to whittle down your debt despite a low income is to negotiate with your creditors for lower interest rates. Odds are, some (or all) of your debt comes with very high-interest rates, which means a big chunk of your payments are going toward interest instead of the principal. 

If that’s the case, consider speaking with your creditors to try and negotiate a lower rate. Many lenders are willing to help if you’re struggling to make payments. Moreover, with a positive track record of payments, your creditors may be more willing to work something out with you, especially if your marginal income is making it difficult to keep up with payments. 

Add A Temporary Source Of Income, AKA A Side Hustle

If you find it difficult to cut your spending even more than you already are, then you might have to look at making more money. If you have more money, your debts will be easier to eliminate. While this isn’t always an option for everyone, there are a ton of things you can do to make some extra money. 

You can try taking on more hours at work, renting out items or a room in your home, finding a second job or doing odd jobs, taking online surveys, and more. Even just selling some items for some cash to throw at the debt can help.

Consider Downgrading Your Car

One of the largest sources of debt for most people (outside of a mortgage) is a car payment. Oftentimes, people purchase a car outside of their price range and end up stuck paying hundreds of dollars a month for many years. 

If you want to get out of debt quickly, it’s a good idea to downgrade your current car to a cheaper one. By selling your car, hopefully, you will be able to cover the remaining debt you owe. You may even have enough left over to purchase another car with a much lower monthly payment.

Pay More Than The Minimum

Do your best to make more than the minimum monthly payment on your credit card bills. Making minimum payments will barely make a dent in your debt. Instead, it will take years and even decades to pay off your credit card debt at this rate since most of your payment will go towards the interest portion rather than the principal. To pay off your credit card balance quickly, make the biggest payment you possibly can. 

Stop Appling For New Credit Or Using Credit

You may be tempted to apply for a loan to help you pay your bills and keep you afloat just a bit longer. But adding more debt will only make things worse, especially if you opt for a high-interest loan, such as a payday loan, to help you cover your bill payments. Increasing your debt load will make it more difficult to pay off all your debt. 

Cut Costs

Look at all areas of spending and see where you can cut back. For instance, you can scale back on streaming services, avoid eating out, use coupons when shopping for groceries, or opt for a more affordable cell phone plan. You may even want to consider more drastic measures, such as trading in your car for a cheaper one or even downsizing to a less expensive home. 

Other Debt Relief Options To Get Out Of Debt On A Low Income

If you’re unable to qualify for a debt consolidation loan or a home equity loan due to your credit score, you may need to seek a more aggressive approach to handling your debts.  Here are a couple of debt relief options to consider: 

Get Out Of Debt On A Low Income With Credit Counseling 

Credit counsellors work with consumers to develop a plan to manage their finances and debts. These professionals can help you come up with a debt management plan to pay off your debts based on your current financial situation. They can also negotiate with your creditors to see if they’re willing to halt collections or late payment fees while you are working on your debt management plan.  

Get Out Of Debt On A Low Income With Debt Settlement

Debt settlement may be something to consider if your current income is not adequate enough to cover your bill payments. This involves coming up with an arrangement with your creditors to pay back less than what you owe. 

However, there is no guarantee that a debt settlement will work. Plus, it comes with fees to complete the process, which you may not be able to afford on a low income. 

Get Out Of Debt On A Low Income With A Consumer Proposal

A consumer proposal is a legal arrangement made between you and your creditors in which you repay a portion of your debts over a specific time period of no more than 5 years. The process is facilitated by a Licensed Insolvency Trustee (LIT). Your debts will be considered forgiven by the end of the proposal. 

Keep in mind that your credit score will suffer for a few years after filing a consumer proposal. Your credit report will include an R7 rating, which will remain on your report for up to 6 years from the filing date, or 3 years from the completion date, whichever comes first. Once this period ends, you can start rebuilding your credit. 

Get Out Of Debt On A Low Income Through Bankruptcy

Bankruptcy is a last resort when it comes to relieving yourself from your debts. Like a consumer proposal, bankruptcy is a legal process that is administered by an LIT. The process offers protection from creditors and a discharge of your debts by the end of the bankruptcy term.

However, your credit rating will take a hit. An R9 rating – the lowest possible credit rating – will be noted on your credit report and will remain for up to 7 years. Until you’re discharged from bankruptcy, it may be impossible to take out loans or credit cards.

Additional Reading

Debt Relief – What are your options?

Do You Have Too Much Credit Card Debt?

Can You Consolidate Tax Debt in Canada?

FAQs On Paying Down Debt On A Low Income

Bottom Line About Getting Out of Debt Quickly On A Low Income

While getting out of debt on a low income can be difficult, it is possible. It may take some time, but with consistent effort and a strict budget, you will be able to get out of debt. Be sure to consider the various debt solutions that may be within your reach, such as a debt consolidation loan or a credit card balance transfer. Your ability to get out of debt on a low income and attain financial freedom is closer than you may think.