Are you trying to pay off debt, but you are a low income earner. Debt can be hard and can leave the feeling of no hope of getting out.
Some think they are going to be in the continuous cycle of having debt because they do not have enough money.
Getting out of debt involves eradication of unnecessary expenses because these little expenses add up every month and can be a struggle to pay off if care is not taken.
In this article, you will be educated on how to get out of debt as a low income earner.
What is a debt?
Debt is money that is borrowed and need to be paid. Debt also attracts interest – a percentage of the borrowed amount. This interest gives the lenders needed incentives to cover for your purchases. Debt might seem like a modern phenomenon but it is also the tool that predicts the invention of money.
Types of debt
Bad debt: Bad debt is money borrowed to buy things that will make you lose money. It limits the ability to build wealth and quicker to make you poor as a low income earner. Examples of bad debt are credit card debt, car loans and consumer loans.
Good debt: Good debt is when you borrow money to buy an investment or asset that is going to pay you for owing it. Good debt can also help you build a good credit history. Examples of good debt are real estate debt, business debt and student loans.
What does it mean to be in debt?
Being in debt means you are owing some amount of money, which you have been unable to pay due to some personal and general circumstances you might be facing. It is possible to be in debt, because you have been neglecting proper education about your finances.
What to do when you are in debt as a low income earner?
There are some things you can do when you are in debt as a low income earner. Some of these things includes;
- Be attentive to your emergency funds: Absence of emergency funds have pushed a lot of people in deep credit card debt or taking unnecessary personal loans. Having an emergency funds gives you a firm foundation while setting up your debt re-payment plan as a low income earner.
- Stop creating additional debt: It will be hard to get out of debt, if you constantly pile up more debt. Start buying things with your cash and stop using your credit card to make big purchases.
- Document your debt: Get a detailed list of how much debt you owe, put together a firm plan on how to repay your debt. Make a list of all your debt and include the amount you owe, your minimum payment and the interest associated with that debt. This will give you an overview of what you are expected to pay and possible way out.
- Create a budget: Having a budget is an essential key to getting out of debt. A budget will tell you how much you have coming in and how much you are spending from your money weekly or monthly.
- Create a debt repayment plan: This is when you should create the actual plans of your debt repayment. Use scale of preference and order of priority to pay off your debt. Some people prefer to start with the highest interest, while some prefer to start with the lowest interest. You can also pick up the option of paying off small debts and later focus on paying off big debts.
- Allocate extra money for your debt: Get a side hustle that pays fairly well, reduce your expenses and aim to increase the amount you are putting towards your debt. Related: How to solve financial problems as a low income earner.
Steps to get out of debt as a low income earner
1. Get your mind right: Have a deep knowledge about debt and what can easily slide you into debt without knowing. You need to start learning how to put debt off your table.
Stop trying to move your debt around because part of the process of getting out of debt is about changing your mind.
2. Know where you stand: Get all your list of debts and schedule how to pay them off. Do not be enticed by all these credit repair groups that tells you they will help you to magically wipe out your debt. Aim to be smarter when you are in debt.
3. Emergency fund: This is a barrier between you and debt. It is also a fund you have to protect yourself when the unexpected occur.
As a low income earner you need something that will stand between you and your credit. Without an emergency fund, you are going to use your credit to solve your problem, which will later turn to debt.
4. Track where your money is going and create a budget: Do not be too pre occupied with your daily activities and forget to track your spending pattern. By tracking your money, some funds may be available towards paying off your debt.
5. Create a spending plan: Write out what your next month spending plan is going to look like. Pull out your bank statement and take note of the amount you have spent so far. This way you can determine how much is available to service your debt.
6. Start small: When you are paying off debt as a low income earner, aim to start small. Typically when paying off debt, payment goes towards your interest first and anything left over goes towards your principal on your actual loan.
Paying an extra 5 to 10 dollars on your credit card debt each time you are making a payment will put money towards your principal, which will automatically reduce the amount of interest you have to pay in order to pay off your debt faster.
To sum up, getting out of debt as a low income earner requires taking effective management of your income more serious than ever.
Set a debt repayment plan that will push you out of your comfort zone and motivate you to take the action you need to pay off your debt faster.
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