As the cost of living rises, so too does household or consumer debt. In 2023, the total unsecured debt per UK adult stands at £4087. And while the price of food, energy, fuel, and everything else continues to rise, many people are struggling with how to get out of debt on a low income.
Dealing with debt when you have a low income can be challenging, but it’s not impossible. Many people find themselves asking questions like, “How do I pay off debt when I can’t afford the minimum payments?” or “What happens if you can’t afford to pay your debt?”
In this guide, we will explore practical strategies to help you regain financial stability and tackle your debt head-on.
Table of Contents
Assessing Your Debt Situation
Before you can start working your way out of debt, it’s crucial to have a clear understanding of your financial situation.
Start by evaluating your total debt and income. Calculate your debt-to-income ratio, which will give you a better idea of your financial health. This will help answer the question, “What to do if you have more debt than income?“
Creating a Realistic Budget
The foundation of getting out of debt on a low income is creating a realistic budget. Take a close look at your monthly expenses and distinguish between essential and discretionary spending.
Prioritize essential expenses like housing, utilities, and groceries, while cutting back on non-essential items. This is essential to living within your means.
This could mean canceling the gym membership you rarely use, quitting your least-watched streaming service, and shopping around for cheaper broadband, insurance, and energy suppliers. Often, looking at what you’re spending elsewhere can free up some cash to reduce your debt.
Debt Reduction Strategies
Now that you’ve established a budget, it’s time to tackle your debt. There are several strategies to consider, such as the debt snowball and debt avalanche methods.
The debt snowball involves paying off the smallest debts first, while the debt avalanche targets the debts with the highest interest rates. Choose the strategy that aligns best with your financial situation.
Increasing Your Income
Earning extra income can significantly expedite your debt payoff journey. Consider taking on a part-time job, freelance work, or a side hustle.
Even a small additional income can make a big difference in paying down your debt. Explore opportunities for side hustles and part-time work that fit your skills and schedule.
Seeking Financial Assistance
If you find that you’re still struggling to make ends meet, don’t hesitate to seek financial assistance. Credit counseling agencies can provide guidance and help you negotiate with creditors. Additionally, there are public assistance programs designed to aid low-income individuals in managing their debt.
In the UK, there are several debt charities like StepChange. Alternatively, you could speak to Citizen’s Advice. Anyone living in the United States can use Debt.org – America’s Debt Help Organization.
Building an Emergency Fund
As you work on reducing your debt, it’s crucial to establish an emergency fund. Having a financial safety net can prevent you from falling back into debt when unexpected expenses arise. Start by saving a small amount each month and gradually increase it over time.
Having money in a savings account will mean when you need a car or home repairs, you can tackle them without falling deeper into debt.
Avoiding Common Debt Pitfalls
Steer clear of common debt pitfalls like credit card misuse and impulse spending. Be disciplined with your finances and stay focused on your budget and debt reduction plan. Avoid falling into debt traps that can hinder your progress.
Although an offer may seem irresistibly good, if it’s not an item you actually need, it’s wasting money! Similarly, jumping at offers that let you build up cashback can make you spend more than you’d planned on non-essential products.
Determining When Debt Is Too Much
Sometimes, it’s challenging to gauge when your debt becomes unmanageable. A good rule of thumb is to keep your total debt below 36% of your income. If your debt exceeds this threshold, it may be time to consider more drastic measures to reduce it.
Managing Your Finances with Apps
In today’s digital age, managing your finances has become more accessible and convenient, thanks to the plethora of financial apps available. These apps can help you keep a close eye on your spending, track your budget, and stay organized in your quest to get out of debt on a low income. Some notable apps include YNAB (You Need A Budget), Mint, and PocketGuard.
Consequences of Not Paying Your Debt
If you can’t afford to pay your debts, you may face serious consequences, including legal actions and damage to your credit score. It’s crucial to communicate with your creditors and explore your options, such as debt consolidation or income-based repayment plans.
Often, it’s all too easy to ignore that letter, email, or notification warning you a payment is overdue. These problems won’t go away on their own. Talking to the lender can help buy you more time to solve the problem.
Many responsible lenders have well-trained, empathetic customer service advisors. These team members are often far more friendly than the automatically generated debt notices that drop through your door.
Not only that but with the growing levels of automation in the finance sector, accounts in default are often sent to debt-collection agencies based on decisions made by computers. Talking to a human may mean they can intervene and block the actions if you can agree on a solution together.
Don’t Ignore Debt
Getting out of debt on a low income requires determination and careful financial planning. By assessing your debt situation, creating a realistic budget, and exploring various debt reduction strategies, you can regain control of your finances.
Remember that progress may be slow, but with perseverance and discipline, you can achieve your goal of financial stability even on a limited income.
If you’ve overcome debts, let us know about any helpful strategies in the comments section at the bottom of this page, and subscribe for more updates.