Stop acquiring new debt
Determine how much you owe
Create a budget
Payoff the debts with the highest interest rates first
Start paying off the large debts
Look for ways to increase income
Up your credit scores
Step 1: Stop acquiring new debt
If you borrow money from Peter to pay Paul, basically you’re shuffling debt around instead of paying it off.
Don’t apply for new lines of credit unless you have a strategic plan and reasoning behind doing so.
Note though, opening new lines of credit can be wise if used correctly, like opening a new balance transfer credit card and taking advantage of a 0% APR introductory period or consolidating your debt into a personal loan that has a lower interest rate.
Think about it, if you don’t stop opening new lines of credit for no reason you could find yourself in way more debt than you started with, don’t do it, bro.
Step 2: Determine how much you owe
Thisperstoin order to become debt free a few years ago.
Make a list of every outstanding debt and add up what you owe along with their interest rates and any possible penalties you might have to pay.
I know this might be a daunting thing to do, but without having an exact clue of your situation, it’s not even going to be possible to pay the debt off especially on a low income.
Step 3: Create a budget
A budget allows you see where your income is coming from and where it’s going. Write down all your sources of income and your expenses. I know, it’s not fun.. but it has to be done.
After getting your income and expenses figured out, subtract the difference between the two.
What is leftover? If none is left, focus on cutting expenses and increasing income.
Then, ideally you want to start forming an emergency fund worth 8+ months of your expenses.
Next, put an item in your budget for debt repayments, stick to it.
Why this matters: You’ll need a cushion for emergency purposes. Paying off debt is tough when you hardly have money to pay bills consistently. Having some cushion, even if it’s only $1,000 in a savings account makes it easier to pay off debts and even pay extra on your debts each month in order to pay off the balances faster.
Step 4: Pay off the debts with the highest interest rates first
After adding up everything you owe, the total number might look intimidating. Getting out of debt on a low income isn’t easy, but it’s possible.
Some people may say pay off debts with the smallest balances first, I personally say pay off debts with the highest interest rates first.
Interest charges can rack up fast, which leaves you giving lenders free money for nothing. Pay those high interest debts down.
Step 5: Start paying off the large debts
Once you’ve paid off the debts with high interest, there are several approaches you can take to pay off the large debts.
One approach is the debt avalanche method, where you make the minimum payments on each bill, then use the rest to pay off the largest debt with the highest interest rate.
With this method, you’re keeping more of the money you make each month, increasing your ability to make larger debt payments.
Why this matters: Shifting your focus to debts with larger balances helps you save on interest.
Step 6: Look for ways to increase your income
If you’re still struggling with how to pay off debt on a lower income, it's important that you begin to look for and create opportunities to increase your income. Some easy, but time-consuming options are Uber, UberEats, Shipt, InstaCart, Turo, or DoorDash. I know people who make $20 an hour in small towns doing UberEats, which could make a big difference for you.
Why this matters: Even if you only increase your income for a short period, the extra funds you earn could help you get out of debt much faster.
Step 7: Up your credit scores
Improving your credit score can also help you get out of debt. When you have a low score, you almost always pay higher interest rates on everything from credit cards to personal loans.
Also, when you have bad credit the options for consolidating debt or transferring your debts to lower APR accounts are much more limited. If you’re facing this challenge, there are multiple ways to help improve your credit score. Check out our blogs, Youtube channel, and our DIY Credit Repair eBook.
Gem: Check your credit reports to make sure there are no mistakes or violations, stay on top of payments and pay your bills on time and in full every month, not applying for new accounts too often, and keeping your credit utilization ratio under 10%.
Why this matters: A higher credit score can get you to access debt consolidation products with more competitive terms and lower interest rates.