How to get out of debt with a low income

1. Create a realistic budget

If your goal is to pay off debt, having a budget is definitely an important first step, says Leslie H. Tayne, a finance and debt expert and the founder of Tayne Law Group.

A budget is a tool that gives you an overview of your financial situation at any given time. It shows you how much money you’re bringing in and paying out and serves as a guideline for how to spend your money. Most people budget monthly, but you can create a weekly or even quarterly budget if you choose.

Budgeting on a low income can be challenging, but the basic principles still apply. Your budget should consist of the following income and expenses. If you’re trying to pay down debt, any funds you have left over after paying your obligations should be funneled toward making extra debt payments.

What are the steps to create a budget on a low income?

A spreadsheet is a great way to create a budget from scratch. Then, once you’ve been manually managing your budget for a few months, you can use software or an app to automate it, Tayne says. There are a bunch of free or low-cost budgeting apps you can try, like YNAB, Monarch and PocketGuard.

2. Prioritize high-interest debt

Taking on high-interest debt means more of your payment goes toward interest rather than the principal, making it harder to pay off. High-interest debt refers to any loan, line of credit or other form of credit that carries a significantly higher APR compared with other types of debt. “Examples include credit cards, which average around 23% APR, and payday loans, which often come with fees that equate to more than 300% APR,” Tayne said.

The popular “debt avalanche” method focuses on paying off high-interest debt first. And for good reason: Over time, you can end up paying significantly more than the original amount you borrowed. Paying off this type of debt frees up more money in your budget to put toward other financial goals like saving and investing for the future, according to Tayne.

A closer look at the debt avalanche method

One strategy that works for a lot of people is the debt avalanche method. Using this debt payoff strategy, first list your debts by interest rate, from highest to lowest. “You’ll pay the minimum on all debts except for the one with the highest rate; you put extra money toward the highest-interest debt until it’s paid off,” Tayne explained.“Then pay the debt with the next highest interest rate.”

This method is best for people who want to minimize total interest payments and save the most money on interest in the long run, according to Tayne.

» MORE: Should I pay off debt or save?

3. Explore debt consolidation options

An alternative to paying debts separately is debt consolidation. When you consolidate your debt, you combine multiple debts into one place. The main goal of debt consolidation is to simplify debt management and reduce the overall cost of borrowing. Tayne explained, “Instead of managing multiple payments with varying due dates and interest rates, you make one fixed monthly payment.”

If you have good credit despite your debts, there are a few different types of debt consolidation you could qualify for:

• Personal loans: these can be found at your existing bank or online, but it’s essential to fully understand the terms and ensure you’re working with a reputable company before signing up.
• Balance transfer credit cards: The low or 0% introductory rate can drastically reduce the amount of money you’re paying in interest each month. It’s wise to pay off the balance before the introductory rate ends, though.
• Home equity lines of credit (HELOC): If you own your home, you’ve got equity built up, and you’re not in arrears on payments, you can borrow against your home’s value in order to pay down your debts. You’ll need to consult your mortgage company in order to apply for a HELOC. This is a great way to consolidate debt without a loan.

» MORE: How to consolidate credit card debt without hurting your credit

Pros and cons of consolidating debt

In many cases, consolidating debt is a legitimate way to ease the financial burden of multiple debts. Instead of paying your debts on your own, you’ll make a single monthly payment to the credit counseling agency, which will distribute that money to your creditors. The agency can also help you negotiate with your creditors to score benefits like lower interest rates, fewer fees and smaller monthly payments.

Here, we’ll take a look at some of the benefits and possible drawbacks you should be aware of before combining all of your debt into one place.

» MORE: How to consolidate debt without a loan

4. Increase income through side hustles

A side hustle or second job is a great way to increase income, which can help you pay down debt faster. Before taking on a side job, make a promise to yourself to use all the income strictly for paying down debt. In order to stay motivated, tell yourself you’ll only do the side hustle for a defined period of time, like six months or a year.

Here, we’ve listed some side job search ideas that you can start relatively quickly and easily.

• Driving for a ride-share service (Uber, Lyft)
• Food delivery (Doordash)
• Grocery delivery (Peapod, Walmart, Costco)
• Pet sitting or dog walking
• Mobile pet grooming
• Freelancing writing
• Package delivery (Amazon, UPS, FedEx)
• Restaurant host or server
• Babysitting
• Renting space in your home
• Filling out surveys
• Data entry
• Medical transcription
• Customer service or call center support (often remote)
• House cleaning
• Tour guide
• Notary public
• Personal trainer

5. Seek professional financial advice

If you still aren’t sure about the best way to handle your debt or if you’re struggling to keep up with the payments, it’s probably best to contact a professional. “There are many types of professionals, from credit counselors, to financial planners to debt relief attorneys. Many offer free consultations, so you can discuss your situation and find out how they can help you before committing to payments,” Tayne said.

As with any industry, there are scam artists out there who prey on those desperate to improve their financial situation. Reputable financial counseling agencies are often nonprofits, which must adhere to strict standards of quality and ethics, according to Tayne. Two accrediting organizations you can check with include the National Foundation for Credit Counseling (NFCC) and the Financial Counseling Association of America (FCAA).

» LEARN: What is nonprofit debt consolidation?

Bottom line

If there’s not much money left over after paying all your bills for the month, there are two actions you can take: cutting expenses or increasing your cash flow. Here are some ideas you can incorporate into your daily life in order to free up money for debt.

Ways to cut down on expenses

• Cut back on discretionary spending (like gym memberships, monthly subscriptions, dining out, etc.).
• Make and stick to grocery lists to avoid overspending and wasting food
• Negotiate with service providers like cable, TV and electric.
• Negotiate credit card debt to get lower monthly payments or interest rates.
• Set a limit for gifting (e.g., no gifts over $25 for a period of six months).
• If you rent, consider moving to a smaller unit.

Ways to increase cash flow

• Get a side hustle or second job.
• Sell items of value.
• Cut back on investing (for a short period of time).