How to Get Out of Debt on a Low Income

Living with debt can be overwhelming, especially when you are managing it on a low income. It is a common struggle to feel trapped, with little hope of financial freedom. But do not worry—there are practical strategies to help you get out of debt, even with a tight budget.

Today, we will cover the steps to help you get out of debt on a low income and the different payment strategies you can try.

Steps on How to Get Out of Debt on a Low Income

1. List Out All of Your Debts

The first step in tackling debt is to figure out how much you owe. Make a list of all your debts including outstanding balances, interest rates, and minimum payments.

And do not forget to include all of them! Start with your largest debts, such as student loans or car loans, and work your way down to smaller debts like credit cards. This helps you figure out which debts to tackle first, lets you see your progress, and makes it easier to plan your repayments.

2. Track Your Income and Expenses

Understanding your monthly income and expenses is key to figuring out how much you can put toward paying off your debt. Start by adding up all your monthly income from different sources. Then, subtract your necessary expenses like housing, utilities, and groceries. From there you can start to subtract regular variable expenses, which could be entertainment, hobbies, shopping, or eating out. These are the costs that vary each month and are not necessary—even if they are difficult to give up!

What is left over after subtracting your regular spending is what you can use to tackle your debt each month. If you do not have any money left over, then it is probably time to reevaluate where you can cut costs and move things around.

If you want to understand if your debt is in a healthy range compared to your income, you can use a debt-to-income calculator. This tool looks at how much money you make versus how much you are spending. It takes into account of your rent or mortgage, car payments, credit payments, and any other debt payments you have.

3. Identify Essential vs. Non-Essential Expenses

Try to avoid overspending. Start by focusing on the must-haves like housing, utilities, and groceries. Once those are covered, take a closer look at your other spending habits, like entertainment and dining out. Spotting areas where you are spending too much can help you save more money to pay off your debts.

For instance, if you notice you’re subscribed to multiple streaming services, try cutting down to one or two favourites. Or, if you’re eating out a lot, aim to cook more meals at home. Small changes like these can add up and make a big difference in your debt repayment journey.

4. Set a Realistic Budget with SMART Goals

After you have tracked your income and expenses, it is time to set clear and achievable budget goals. Decide exactly how much money you can put towards paying off debt each month and try your best to stick to it.

To do this, make sure your goals are SMART! What does this mean you may ask?

• Specific: Your goals should be as detailed and specific as possible. Having a goal that is too general can lack direction and make it difficult for you to work towards.
• Measurable: You should have a way to measure and track towards your goal. This makes it easier for you to know how much more you must go to hit it.
• Achievable: Is your goal attainable or are you being too optimistic? Ensuring that your goal is achievable helps make sure that it is one that is within reach.
• Relevant: Your goal should make sense and be aligned with what you want to hit.
• Time-bound: If you do not put a timeframe to your goal, then you will not feel as motivated to hit it. That is because you will think you have all the time you need, but setting a deadline will keep you motivated to take action now.

For example, instead of saying, “I want to save money,” set a goal like, “I will save $50 a month by eating out less. I will aim to do this consistently by the end of the year”.

Now apply the SMART goals to help you understand the breakdown:

• Specific: It is specific enough that you know exactly what the goal is and what your next steps are.
• Measurable: $50 is the amount you will want to save each month. If you are currently saving up $20, you know that you should work to increase that by $30.
• Achievable: Since the difference is $30 and you know this is reasonable based on your current income and expenses, you know that this is doable.
• Relevant: Reaching this goal will help you save money that can be used towards paying off your debt, which is relevant to what you want to achieve in the long run.
• Time-bound: You know that you want to save $50 by the end of each month and that you want to do this consistently by the end of the year. Adding these time frames acts as deadlines to help keep you determined.

5. Explore Government Assistance Programs

Depending on your situation, you might qualify for government assistance programs that offer financial relief. Look for programs in your area that help with housing, food, or utility bills. These can free up more of your income for debt repayment.

6. Find Ways to Save Money

When you have a lower income, the best way to keep more of your money is to find ways to save when you are shopping. Here are some ways you can save money each month:

• Downgrade your accounts: If have paid subscriptions or pay extra for an upgraded account, like Netflix or your bank account, consider downgrading to the free plan if available. This can save you an average of $10 a month depending on what the monthly fees are.
• Start using coupons: You can find coupons in your weekly grocery flyer or within apps, such as Flipp.
• Find cashback deals: Have you heard of tools like honey or maybe your favourite store has a free cashback or rewards program? These are great options for you to get cash or rewards back on the purchases you are already making.
• Take advantage of promotions: There are always different sales and promotions that happen throughout the year around holidays, like Labour Day or Boxing Day. These are the key times to find ways to save money on your things such as your monthly phone or internet bill.

Try Different Payment Strategies to Help You Get Out of Debt

Methods You Can Try to Pay Off Your Debt

When it comes to tackling debt, there are a couple of methods you can use. The two that you may have heard of are the snowball and the avalanche methods.

With the snowball method, you start by paying off your smallest debts first, then working towards paying off your larger debts. The positive feeling after you tackle your small debts and seeing the numbers come down can be very motivating. As you pay them off, this motivation starts to snowball and help build momentum to tackle the larger ones.

For example, if you have three debts with balances of $500, $2,000, and $10,000, and you use the snowball method, you will start by paying off the $500 debt first. This gives you a quick win and motivates you to tackle the next debt.

In comparison, the avalanche method focuses on paying off debts with the highest interest rates first. With the avalanche method, you would start with the debt that has the highest interest rate, even if it has a larger balance, which can help you save on interest payments in the long run. Plus, it will feel good to knock out the large debts!

Pay More than Your Minimum Payments

Credit cards and loan payments tend to have a minimum payment required by the due date. While this sounds great because you think just paying off that amount will be enough, it is not. When you only make the minimum payments, interest will start to build up on the remaining amount as time goes by. Most credit cards have interest fees of 20% and upwards, so it can get hefty!

Whenever you can, put extra funds towards paying off your debt and making more than minimum payments. This can help reduce the time it takes to pay off your debt, while also letting you save money on interest in the long run.

If you are unable to pay off your bills in full or completely pay off your debt, do not stress about it. Even small amounts, like an extra $20 or $50 per month, can make a big difference over time. Something is better than nothing, and we are here to help you with that!

Understand Your Options

If you are struggling to make progress on your own or you are constantly asking yourself how you can get out of debt with a low income, you should consider consulting with debt solution experts. They can provide guidance on debt management plans, repayment plans, and other debt-relief options that might be suitable for your situation.

Working with a debt expert like a Licensed Insolvency Trustee (LIT), who are authorized by the government to manage debt solutions and help people facing financial difficulties find ways to get out of debt, is a great option for you. They have in-depth knowledge of Canadian insolvency laws and are authorized to file debt solutions, such as consumer proposals and bankruptcies.

While all the options may seem overwhelming, they are here to work with you. They can offer free advice, and a solution personalized to your situation.

How Farber Can Help You Get Out of Debt

At Farber, we believe that everyone deserves a chance to turn their debt stress into debt relief, regardless of their income level.

Our team of debt solution experts can help you explore options tailored to your unique situation. We will work with you to create a manageable debt repayment plan, while also giving you the support you need to build a healthier relationship with money.

Getting out of debt on a low income is challenging, but it is not impossible. By understanding your debt situation, creating a realistic budget and choosing the right debt repayment strategy, you can take control of your finances, starting today!

Connect with us today for a free consultation — we are happy to help.