This article will guide you on how to get out of debt on a low income. How to get out of debt on a low income is a harsh reality for millions of Americans, especially those with low incomes. According to the Federal Reserve Bank of New York, U.S. household debt reached $17.5 trillion in 2024, with credit card balances exceeding $1.13 trillion, the highest on record.
For individuals earning below the national median income of $59,540 per year (U.S. Census Bureau), paying off debt can feel like an uphill battle. The pressure of mounting bills, high interest rates, and limited resources often leaves many in a cycle of financial stress.
However, living on a low income doesn’t mean you can’t break out of debt. With the right actions and consistent effort, you can take control of your finances and achieve financial freedom.
This article will explore five simple and effective steps to help you get out of debt, even on a low income. Whether you’re juggling credit card debt, medical bills, or student loans, these actionable tips will help you create a clear path toward a debt-free lifestyle.
How to Get Out of Debt on a Low Income
Let’s dive into the steps to transform your financial situation, one dollar at a time.
Getting out of debt on a low income can feel overwhelming. However, with patience and discipline, you can take control of your finances and work toward financial freedom. Here’s a practical five-step guide to help you eliminate debt, even on a tight budget.
1. Assess Your Debt Situation
You can only fix what you fully understand. Start by listing all your debts, including credit cards, personal loans, student loans, and any outstanding bills. Write down the balances, minimum payments, and interest rates. This will help you understand the full scope of your financial obligations.
To assess your debt, this list can be of help:
- List all your debt
- Calculate your total monthly income and expenses
- Subtract your expenses from your income
- Cut unnecessary costs
- Set some funds aside for debt repayment
What is the total amount owed, interest rates, and minimum monthly payments? For example, if you owe $2,000 on a credit card with a 25% interest rate and $5,000 on a student loan with a 10% interest rate, knowing these details will help you prioritize which debts to pay off first.
Calculate your monthly income and expenses once you’ve listed all your debts. Subtract your expenses from your income to see how much you can set aside for debt repayment.
When your expenses exceed your income, it is a sign to cut unnecessary costs, like subscriptions or dining out. Your honest assessment helps you know where you stand and creates a foundation for making informed decisions in the next steps.
2. Create a Realistic Budget
A good budget is crucial to get out of debt on a low income. Track your monthly earnings and spending to see where your money goes. Prioritize necessities like rent, utilities, and groceries while identifying areas where you can cut back. Examples are dining out, subscriptions, and unnecessary shopping.
Prioritize the necessities, but the remaining amount should go toward getting you out of debt, even with your low income. For example, if your monthly income is $800 and your essential expenses are $600, commit at least $50 to debt repayment while leaving $50 for small luxuries or emergencies.
The 50/30/20 rule (50% for needs, 30% for wants, and 20% for savings or debt) can help you structure your budget without feeling overwhelmed. Be honest with yourself and set amounts you can realistically maintain each month. You are here to break out of debt with your low income, and that is what matters.
3. Increase Your Income
If your income barely covers expenses, consider ways to earn extra money. Side hustles like freelancing, ridesharing, babysitting, or selling items online can help you generate additional income. You could also ask for a raise at work or look for higher-paying job opportunities.
Boosting your income, even slightly, can significantly accelerate your journey to getting out of debt. For example, offering weekend cleaning services or selling homemade snacks can bring in an extra monthly income.
If you have a particular skill, like writing, graphic design, or social media management, you can find freelance jobs on platforms like Fiverr or Upwork. Additionally, can you ask your employer for extra hours or overtime? Will you sell unused items like clothes, electronics, or furniture, which can provide quick cash?
Every extra dollar earned can be allocated to debt repayment. This will help you clear your balances faster without depending solely on your primary income.
4. Prioritize Debt Payments
Once you have extra income and a clear budget, no matter how low, the next step is getting out of debt. There are two popular debt repayment strategies:
- The Snowball Method: Pay off the smallest debt first while making minimum payments on the others. Once the smallest debt is gone, move to the next one.
- The Avalanche Method: Focus on paying off the highest-interest debt first while making minimum payments on the rest. For example, if you have a credit card debt with 25% interest and a personal loan with 10% interest, pay extra toward the credit card debt while maintaining minimum payments on the loan.
The snowball method provides psychological motivation and consistency to chip away at your total debt. The avalanche method saves more money in the long run. Which of the methods will work best for you? Pick the method that works with your current budget and stick with it.
5. Avoid Taking on New Debt
As you work toward getting out of debt on your low income, avoid taking on new debt. Use cash or debit cards instead of credit cards, and resist the temptation to finance unnecessary purchases. Look for ways to reduce expenses without sacrificing your quality of life. Examples are cooking meals at home, using public transportation, and shopping with discounts.
Breaking the cycle of borrowing to cover daily expenses will require your daily decisions. Create an emergency fund for unexpected expenses like medical bills or car repairs without relying on loans. For example, instead of using a credit card to pay for groceries at the end of the month, plan your meals and stick to a shopping list to avoid impulse buying.
If you’re tempted to borrow, remind yourself of your financial goals and how debt delays your progress. Using cash or debit cards instead of credit cards can also help you spend only what you have. Building the habit of living within your means is essential for long-term financial stability.
Conclusion
Being on a low income doesn’t mean you can’t get out of debt. You can work toward a debt-free life by assessing your debt, budgeting, increasing your income, prioritizing payments, and avoiding new debt. It will take the right plan and mindset.
The journey to becoming debt-free will test your patience and consistency. Celebrate small wins, like paying off a single bill or saving your first $100, to keep yourself motivated.
Even if your progress feels slow, every step forward brings you closer to your decision to get out of debt on your low income. With good money habits, you can break free from debt and build a brighter financial future.