How To Pay Off Debt With A Low Income

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pay off debt on a low incomeIf you have debt, you know the burden it brings, especially if you have a low income. Often, you need to make every dollar count.

That’s because you not only have to make timely payments to your borrowers but also need to make sure that you have enough left to support your entire family.

The good news is, you don’t have to live in debt for the rest of your life.

If you’re trying to figure out how to pay off debt with a low income, then follow the steps below.

It will get you started on the right track. And, if you stick with it, you’ll soon see your debt go down quickly.

But, you need to get started now.

Because debt keeps accumulating thanks to the interest rate it earns, each day you don’t act towards getting rid of it, makes it grow bigger. As a result, the longer it takes you to pay off your loans, the bigger the total amount you’ll end up paying them.

So, lets’ get started.

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How Much is a Low Income?

One thing I recently found out was that the U.S. Census Bureau actually has a way of estimating what’s considered as low income. Their definition of it is the “specified dollar amount considered to be the minimum level of resources necessary to meet the basic needs of a family unit”.

The way they calculate it is based on how many people there are in the family. The number of family members is then compared to the total income the entire household brings home before taxes. If the total falls below their estimated threshold, you’re considered poor.

Ouch. That’s harsh.

In any case, here are their estimates as of 2018.

  • Family of 3: $19,642
  • Family of 4: $25,900
  • Family of 5: $31,234
  • Family of 6: $35,925
  • Family of 7: $41,336
  • Family of 8: $46,231
  • Family of 9: $55,613

So, for example, if there are 5 people in your family and you make less than $31,234 a year combined, it’s considered low income.

My Thoughts

One thing I don’t agree with how the Census Bureau classifies you is that they group everyone all together. This means that is doesn’t matter whether you live. The same figures hold.

But, from experience, I know that the cost of living in San Francisco is a lot higher than in Birmingham, Alabama. This means that the same income doesn’t get you as much in San Francisco as it would if you lived in Alabama.

In fact, according to recent studies, if you live in San Francisco and earn $100,000 a year, you’re considered “low income”.

Holy crap!

In the New York Metro area, the figure is just under $60,000, according to Curbed.

Of course, these two cities are among the most expensive in the world. For our purposes, I just used them to show that where you live is a big factor that determines your cost of living.

Are You Considered Low Income Based on Where You Live?

If you want to make a quick check as to where your income stands based on how many people there are in your family and where you live, here’s a calculator from

It uses data from the Department of Housing and Urban Development for its calculations.

All you need to do is:

  • Pick your state and city
  • Then, use the sliders to choose the total amount your entire family earns before taxes
  • Finally, indicate how many members there are in your family

The calculator will tell you “YES”, you’re considered low income or “NO”, you’re not.

You can likewise, click on the “SHOW DETAILS” link to see the breakdown of income per number of people in a home.

That will give you a basic idea of where you stand.

Money May Not Buy Happiness, But It Keeps You from Being Miserable

“Money can’t buy you happiness,” is a term you’ve probably heard a lot. While that may be true, it’s what they don’t tell you about money that bugs me.

For me, money may not ALWAYS make you happy. But, It sure keeps you from BEING MISERABLE!

I can tell you that I worry and stress a lot more when I had very little money. In fact, back then, I always dreaded that time of the month when the bills came.

I do agree with the statement that money can’t always buy you happiness. I guess that’s why you hear about “rich peoples’ problems”.

However, because we live in a material world, you need money to survive.

Why bother with this?

Because most of us were raised to see money as something that’s not good. It’s often associated with greed and ostentatiousness. So, to a large degree, we avoid talking about it.

But, deep down inside, we all know its value. It helps you get things you want and need, with the latter being the most important.

When you’re hungry, money lets you buy something to eat. When your child gets sick, money lets you pay for the doctor and medicine to get them healthy again.

So, it’s important to embrace it for what it is. This mindset will help you enjoy the value of money.

And in doing so, you won’t feel guilty about wanting more of it to pay off your debt and have extra for savings so you can take care of your family the way they should be taken care of.

How Much Debt Do You Have? – Time for a Reality Check

Now that we have that out of the way, it’s time to take on your debt.

So how do you get rid of debt when you have a low income?

It all starts with a plan.

And, that plan begins with a reality check.

By that I mean, you need to account for all your debts. I’m not going to sugar coat it for you. It’s going to sting. And, it will probably hurt your ego.

But, I’d rather you tear off the band-aid now so that you can start moving towards the path to total debt elimination.

Doing so lets you sacrifice in the short term to enjoy the long term. That is, living a debt free lifestyle.

So, here’s how to do it.

Step 1: Calculate All Your Debt

This means getting the total of everything you need to pay back. This includes the principal (original amount you borrowed) and the interest that comes with it.

Start by collecting all your paperwork. This will help you get everything in order. Try to keep everything in one folder so it will be easy to find any details later on.

Include everything!

Student loans, car loans, credit card loans, personal loans, and other borrowings. You can tally them all up in a spreadsheet or a plain piece of paper.

Also, take note of your mortgage. You can separate this from the other debt because mortgages are meant to be paid over a long period of time. But, do take note of how much you need to pay monthly. This expense is more immediate. So, you need to have enough money to pay for them regularly.

Step 2: Know Your Debt-to-Income Ratio

Your debt to income ratio is the total of all your monthly debt payments divided by your total pre-tax monthly income.

  • So, the first thing you need to do is tally up all your debt payments for the month. This includes your mortgage or rent payment, student loan payment, credit card balance, and interest, and others. Everything that you need to pay to someone else goes here.
  • Next, add up your earnings from all your income sources. This will depend on how many jobs you have and how many people earn money in your household each month.

Finally, divide the total monthly debt payments by the total gross income you receive. That’s your debt to income (DTI) ratio.

To make things easier, you can use this DTI calculator from

Why Bother with Your Debt to Income Ratio?

The debt to income ratio is a figure banks and other borrowers use to gauge whether someone is fit to lend money to. Basically, it tells them how well you’re likely able to make your monthly payments.

If the total earnings per month is less than your total monthly debt payments, that’s a bad sign.

  • Ideally, financial institutions like seeing a debt-to-income ratio of under 36%.
  • A ratio between 36 to 49% is still okay because it tells them that you earn a little more than twice than your monthly debt payments. But, it keeps them wary because you may come up short if unexpected expenses suddenly pop up.
  • Lenders start getting worried when your ratio hits 50% or higher. That’s because the figure still doesn’t account of taxes and other monthly salary deductions. That means there’s a likelihood that you may miss payments from month to month, especially if unexpected costs happen.

For your purposes, you want to use it as a gauge to see what you need to focus on. This lets you put the majority of your efforts on debt reduction or making more money.

If you have a high DTI ratio, then it tells you two things.

  • Either you have a high amount of monthly debt payments
  • Or, your income is low.

Depending on which one you can fix first or is easier to fix, that’s where you start.

But, should you come to the point where you’ve maxed out one of the two options, for example, you’ve already done everything to reducing monthly debt. Then, it’s time to start working on the other item. IN this case, that’s increasing your monthly take-home earnings.

Your Goal

That said, there are two approaches to paying off debt.

  • Bring down the total debt and interest payments so that it gets to a point where you can cover it with your income minus taxes and other home expenses.
  • Or, bring up your monthly earnings so that it can cover your monthly debt payments, even if they’re high.

Of course, you can work on both at the same time as well. This lets you do a little of each on both sides to help improve your debt to income ratio. But from experience, I’ve noticed that as human beings we’re better at putting all our efforts into one endeavor.

When we multitask, we tend to be at best mediocre in both, which doesn’t help you.

Ways To Pay Off Debt With A Low Income

Now that you know exactly where you stand and what you need to do, it’s time to look at specific ways to pay off debt on your current income.

Make Extra Cash

Bringing in more money always solves debt and savings problems. And, because you’re currently making a low income, odds are that adding to it will quickly help you cover your monthly debt payments.

Here are a few things you can do.

  • Get a part-time job. Part-time jobs are regular types of jobs you formally apply for. They typically have some type of schedule you need to adhere to. Although nowadays, more and more employees are offering flexi-time. Seasonal jobs also work well for part-time gigs.
  • Find a side gig. Side gigs are less formal than part-time jobs. But they work just as well. You get to do them in your free time. And, find anything that can help add to your take-home pay.
  • Earn money online. This is one of my favorite ways because you don’t need to get out of the house to do it. This lets you spend more time with your kids while still making extra cash on the side.

Here’s a list of things you can do online to make extra money to boost your income.

  • Start a blog
  • Make money by selling things online
  • Teach a skill you know
  • Be a tutor
  • Teach foreigners English
  • Earn by answering surveys online
  • See things you don’t need any more

Cut Your Expenses

In addition to debt, the other major source of money outflow is your expenses. When it comes to expenses, I’ve found everything starts with your mindset.

Here are a few things to keep in mind.

  • You need to believe you can bring your expenses down.
  • Don’t feel ashamed that you’re downsizing or living below your means. It’s a choice. And, your ego is just a stumbling block to you getting to where you need to be, debt free.
  • Keep in mind that this is only temporary. When you pay off your debts, you’ll be able to have a lot more extra (unused) money to yourself.
  • Embrace a simpler lifestyle and find more ways to enjoy life without spending money

Next, it’s time to start reducing your monthly expenses. Here are some simple ways to reduce them. Individually, they may or may not save you a lot. But, collectively, they will help your debt payoff efforts quite a bit.

  • Turn off all lights and appliances when they’re not being used. Unplug them as well.
  • Change your home’s bulbs to LED or CFL bulbs
  • Get a programmable thermostat to cut heat and cooling expenses
  • Cancel unnecessary memberships and subscriptions like cable and gym
  • Make your own food instead of eating out
  • Buy in bulk when it makes sense
  • Consider commuting instead of driving
  • Walk or ride a bike when you’re going somewhere near
  • Negotiate for lower interest rates on your credit card
  • Consolidate your student loans
  • Move to a higher interest rate savings account
  • Refinance your home or car loan to get a better rate

Start Paying in Cash

One thing I realized when I started to pay everything in cash is that it stings more than when you use your credit card.

When you’re in a saving mindset, every time you surrender cash to someone else makes you feel it. It also reminds you of what your ultimate goal is, paying off your debt.

More importantly, each time you spend unnecessarily, you’re taking money out of your debt payoff plan and spending it on something that may not be essential.

This hurts no doubt. But, it also helps keep you on your toes so you don’t forget what your main goal is.

Learn to Budget

Creating a budget is vital because it makes sure that you don’t end up spending more money that you’re bringing in on a monthly basis.

If you do spend more than you make regularly, what happens is you’ll eventually need to borrow money to cover your living expenses. And that only increases your debt, not reduce it.

The good news here is that you’ve already done a lot of the work towards creating your budget.

When you calculated your debt to income ratio, you already have the total of your monthly income and your monthly debt payments.

The only thing missing is your monthly expenses.

So, your goal here is to keep track of all your costs each month. This means tallying everything including your bills, food expenses and anything else you buy.

When you have that, add your total expenses to your total monthly debt payments. The sum is the total amount of money that leaves your hands each month.

Ideally, this total should be equal to or less than the total amount of money you bring home, be in salary, commissions or other earnings.

This allows you to pay your family’s living expenses plus your debt payments without resorting to borrowing more money.

In this section, your goal will be to apply some of the things listed in the “Cut Your Expenses” section above.

Hopefully, by doing cutting enough costs, you’ll be able to balance your budget. That is, your total take-home pay minus total debt payments minus total expenses equals zero.

If the number is positive, then even better. That means you’ve saved extra money that can go into paying off debt, so you get out of debt faster.

Try the 50/30/20 Budget Rule

If you aren’t sure where to start with controlling your expenses, try the 50/30/20 Budget Rule.

This is a popular guideline you can follow to help tell you how much money you should spend on certain things. It basically gives you a starting point on where to spend your after-tax income.

Here’s the breakdown. Spend:

  • 50% of your take-home pay for necessities (needs). This includes debt payments, utilities, groceries, housing (rent or mortgage and repairs), gas and other necessities.
  • 30% of your take-home income for wants. These are the things you want to have but not necessarily need, including shopping, eating out and gym memberships. If you’re trying to pay off debt faster, you can reduce this section from 30% to 20%, 10% or even 0% depending on how much you’re willing to sacrifice to reach your financial goals.
  • 20% of your monthly income on savings. If you have a lot of debt, you may use the bulk of your savings to pay it off. This helps you save more in the long run because debt earns more interest than your savings account ever will. So, paying your loans actually helps you save more money. The only exception here is your emergency fund. Never touch this because you never know when anything may happen. And often enough, bad things happen at the worse possible times. So, it’s better to be safe than sorry.

Get Rid of Expensive Habits

We all have expensive habits. If you’re a foodie, you like to try new places to eat. If you enjoy cars, you probably spend more than you should sprucing up and making your automobile look nice.

Whatever it is, it’s costing you extra money.

Now, it’s always good to have interests. They make life fun and interesting. But, when you’re trying to pay off debt on a low income, these expensive habits can get in the way.

If you don’t want to ditch them altogether, you can just reduce the time and money you spend on them for the meantime. This will let you focus your energy on your savings as well as your primary goal, which is to get out of debt.

But, if these habits are vices like smoking. You’re probably better off getting rid of them completely.

Sell Excess Stuff You Don’t Need Anymore

If you’re like me, you probably have a lot of things you don’t need or use anymore that’s still around. I was surprised that I kept a lot of things that were easily a few years old.

You can make a few quick bucks by selling these things on eBay or Craigslist. They’ll let you raise extra cash you can use to pay off debt.

I remember being surprised at how much stuff I had lying around collecting dust.

I can tell you that getting rid of them felt great. For one, it cleared up space at home and it also reduced clutter. Best of all, you get some money for things you don’t really use anymore.

Use Any Extra Money That Comes Your Way to Pay Off Debt

Every now and then, we get lucky enough to receive money from unexpected sources. This could be from a promotion or bonus. It could also be any refunds from the IRS or somewhere else.

Whichever the case may be, resist the urge to spend that blessing and use it towards paying off debt.

Pay the Highest Interest Debt First

One way to help lower the burden of monthly debt payments is to get rid of the highest interest debt first.

This means finding the biggest dollar amount you pay each month to borrowers and pay off that load as quickly as possible.

The reason this works is that by chipping off the total amount you effectively reduce the interest you need to pay next month.

When you’ve finished paying off the biggest amount, move on to the next one until all your debt is paid off.

Use the Debt Snowball Method

The debt snowball method is the opposite of the previous debt repayment plan. With this method, you start with the smallest debt first with the goal of paying it off quickly.

Because it’s smaller, it’s easier to pay the entire amount sooner. This gives you some confidence. And, it also frees up extra money you can use to pay off the next smallest debt.

As you keep going up the list, it becomes a snowball that gathers momentum because you have more free money to pay off your remaining debt faster.

Both methods work, it’s just a matter of preference.

Move to a Cheaper Place

if you don’t own your home, you’ll probably notice that rent takes a big chunk of your monthly income.

Most people spend between 17% to 30% of their monthly income on housing. That’s a lot.

More important, data from the U.S. Census notes that people who spend over 30% of their gross income on housing become overburdened by the cost. This makes it hard to cover your other expenses and debt.

So, if you’re spending more than 30% of your pre-tax income on rent or mortgage, it’s probably time to move.

Similarly, you can also move to a smaller place or cheaper part of town to reduce housing costs. This will free up extra cash you can use to pay off debt.

Move Back Home

This is probably not something you don’t want to hear. But, it’s one of the best ways to free up extra money so you can pay off debt faster.

Think about it. Your rent or mortgage is probably the biggest expenses/payment you make on a monthly basis. Wouldn’t it be nice to save that extra money to get rid of your loans?

Once you do, the money you used to pay for interest payments will be freed up. So, you can then use this extra cash to move out of your parents’ place for good.

Again, this is another example of the battle between your ego and being practical.

Sink into Your Emergency Fund

I leave this for last because it can be dangerous to draw money from your emergency fund. So, don’t use this unless you’ve got nowhere else to turn.

Your emergency fund is essential because unexpected things can happen at any time. If they do and you don’t have money set aside, then things can get really troublesome.

Ideally, you should have at least $1,000 in your emergency fund.

  • If you’re the only breadwinner in the family, you need to have 6 months worth of living expenses set aside. This way, should anything happen, you have enough money to shore you up for half a year.
  • If you and your partner both bring home incomes, you can go down to as little as 3 months of expenses set aside. Ideally, 6 months is better. But, because should something happen to one of you, the other will still be able to support your family. So, the risk isn’t as big as when you’re the sole breadwinner of the family.

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