There are thousands, and thousands, and thousands, of blogs and articles out there with titles along the lines of “Learn how John and Jane paid off $120k of debt in 16 months!”
If you click on these stories, though, 99% of the individuals and couples highlighted either have a high income, a dual income household, relatives who subsidized their lifestyles, or some combination of all three.
Rarely do they have low income.
Don’t get me wrong, paying off debt is a good story for anyone, but these stories are totally worthless for those who have a low income.
I’ve seen firsthand how even a few thousand in credit card debt can feel insurmountable for someone who has low income and no cash savings. To someone with a high income it may not feel like that much debt to pay off, but that’s because they have much higher income.
I oftentimes think of student loans in these terms. For someone making $300k a year, having student loans of $150k may be manageable. But for someone making $40k, student loans of $150k may seem like an impossible challenge.
I’ve said before there is a huge empathy problem in personal finance, and this is never more obvious than when we are talking about debt. I will never make statements like “income doesn’t matter” (an actual quote from a personal finance personality). It absolutely does.
Let’s move into some practical things you can do to deal with debt on a low income. Some of these may seem basic, but they are necessary for creating a debt plan and validating that you are taking the right actions.
Analyze your Income and Expenses
Paying down debt requires positive cash flow – the more the better. This is why income matters.
But income is only one side of the equation. Expenses are the other side. If you are spending $2k a month on restaurants and drinks, but are struggling to pay down debt (or are actually accumulating more of it), it’s important to recognize that this expense is one of the underlying reasons why you are struggling.
Which brings me to a basic exercise, but one that a lot of people don’t do: analyze your income and expenses.
Income is the easy thing to analyze, especially if you receive a regular paycheck. Take a look at the past three months. How much income went into your bank account, on average? That’s the key number, as this is after taxes are withheld and other expenses are taken out (i.e. health insurance premiums, retirement account contributions, etc.).
In the same way, pull together all your expense data from the past three months. It may not be perfect, as you likely will miss some or most of the transactions where you used cash to pay, but it’s still a good general starting point. Assign all of the spending to various categories such as rent/mortgage, transportation, groceries, and so on.
Here’s an automated budget spreadsheet I use to pull my monthly expense data.
Once you’ve pulled together your expenses, see how much cash you had at the end of the month. I would recommend looking at this both with and without debt payments. If you are consistently spending more than you earn even before any debt payments are factored in, there clearly needs to be some changes to your spending.
With that in mind, let’s pivot to reviewing your debt. Once we do that, we’ll return to your income and expenses and see what opportunities there are for optimizing each.
Review your Debt
Since publishing Student Loan Solution I’ve given a number of workshops on student loan debt. One of the first things I recommend people do is grab all the information about their student loans (i.e. the loan servicer, interest rate, type of student loan, etc.) and put it in a spreadsheet.
In the same way I recommend people do this with all their debt. It will be difficult to know what the best options (or even what options are available to you) unless you are aware of all the details of your debt. I created this spreadsheet for student loan debt in particular, but there is a tab within the spreadsheet where you can drop in all your debt information, not just student loans.
Before doing this, take a deep breathe. If you’ve avoided totaling up all your debt, the amount will potentially be shocking. Regardless of how much debt you are in, or what type of debt, there are options available to you. You are doing the right thing by trying to figure out what those options are.
Consider your Options & Ask the Difficult Questions
When thinking about your options, the first thing I recommend people do is take a high level look at your income, expenses, and debt. Even if you cut your expenses drastically, will you still be unable to make progress on your debt? Are you at the point where it seems like no matter what you do next the amount of debt you are in seems impossible to pay down?
If this describes you, it’s time to talk to a debt counselor and/or a debt lawyer. You can find a certified debt counselor through the National Foundation for Credit Counseling, or NFCC. I also personally know Leslie Tayne, a debt lawyer and founder of Tayne Law Group, P.C., who may be worth talking to. Ultimately what going this route will do is have a third party in your corner who can renegotiate your debt terms. That can mean things like lowering the amount you owe (i.e. $75k to $25k), adjusting the interest (i.e. zero interest), or other possible changes to your debt.
For various reasons this isn’t the ideal approach to take, but in some cases it can make sense and act as a lifeline that allows eliminating your debt regardless of how high or low your income is. There are other options to consider:
- Look for Opportunities in your Spending
Since you gathered three months of expenses and bucketed those expenses by category, go through each category and think about whether there are opportunities to spend less. You also need to bring your priorities into the equation. For example, if you are going to be miserable without your daily Starbucks, it makes sense to look at other categories (like clothing, entertainment, etc.) before cutting Starbucks out of your spending.Ask yourself the tough questions as you go through this process. Is there an opportunity to move into a less expensive apartment? Or can you cut your entertainment budget by 50%? Go category-by-category, and try your best to balance your priorities with sacrifices.
- Don’t Forget about Income
It’s easy to overlook income. After all, for many who are on a relatively low income (teachers, therapists, social workers, etc.) there may not be much opportunity to increase your income, or the type of work you are doing is meaningful and taking a higher-income job would mean switching careers or leaving work that you enjoy. My wife is a therapist and works with a specific population. She could potentially make more money elsewhere, but she would be working for a different employer and population.With that being said, if you are able to negotiate higher pay at your current employer, it’s something you should seriously consider. At the time of this writing the economy is doing really well and employers are struggling to recruit and retain employees. It’s much easier for an employer to give a current employee a reasonable bump in pay rather than lose them to a competitor. Here is how to find and compare salary data, the first step in negotiating a raise.
If you are “maxed out” at your current employer, a situation many find themselves in, you can consider starting a side hustle. I personally have greatly benefited from starting a blogging side hustle, both at my 9-5 and outside of it, and have trouble imagining what my life would look like today if I hadn’t taken the plunge. There are countless side hustles (here’s 50+ online and at-home side hustle ideas) and it can be difficult to decide which one to chose. To help you find the right side hustle for you, get my book Hustle Away Debt from your library or on Amazon.
- Don’t Overlook Strategic Opportunities
What I mean by “strategic opportunities” is opportunities that are specific to your situation. For example, with student loan debt you may be eligible for Public Service Loan Forgiveness, or PSLF. In fact, my wife and I are working down that path right now. Not only is PSLF a somewhat reasonable timeline of 120 monthly payments, it bases your monthly minimum payments on your discretionary income, which make the payments reasonable. It also gives a huge incentive to invest for retirement, setting you up nicely once you receive loan forgiveness.This does bring privilege into the equation, but if you are able to live with minimum or no rent for a period of time by moving in with relatives, it can give a big boost to your finances. If you are privileged enough to have an opportunity like this, be sure to have a solid plan before taking the plunge, including a move-out date.
When it comes to dealing with debt on a low income, or any income, keep your “why” at the forefront of your mind. What would eliminating debt mean to you? Whether that means being less stressed about money, being able to save for a house, or just a general feeling of accomplishment, stay focused on your “why” to fuel your motivation.
You may want to check out my Personal Finance Checklist, which touches on many of these same topics and provides a step-by-step list of what you should focus on to improve your finances.
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