How to Pay Off Debt on a Low Income and a Tight Budget in a Year
Do you know what steps to take to get out of debt when you are broke? Getting out of debt when you are on a low income and tight budget can really be tough but it is possible. Debt can be to our advantages sometimes mostly when it is a good debt.
Good debt can help you in many ways. You can use it in advancing your education, starting a small business, investing in real estate, and so on. In other words, a good debt can help make strong foundations of your future financial status.
Getting out of Debt Without Money
But imagine taking a debt and surpassing the expected payment date. If you have ever been in such a situation, you understand the pressures that follow. Your creditors will be threatening to ensure you are blacklisted from getting subsequent loans. You will be forced to live a desperate life of diverting much of your income to paying debts.
However, you can avoid debt embarrassments no matter the financial status you are in now. So, whether you are on a low income or living under tight budgets, the following steps explained below will help you get out of debt within a year.
Step One: Understand Your Debts and Financial Status
Before you even think of how to repay your debts, it is prudent to know your current financial situation. It is equally necessary to write down all your debts, especially if you owe different creditors.
List the interests and installments you are supposed to pay and their deadlines. A notebook or an excel spreadsheet in your computer can help in organizing your debt. Even though the step acts primarily to organize and record your financial status, it goes a long way into saving your time and making faster references.
You have to be honest here and write down all the debt alongside the amount. Aside that, record your earnings and all your expenses, then proceed to the next step.
Step Two: Start Budgeting Wisely
Perhaps, budgeting is one of the weakest points in managing your finances. However, it helps you become more proactive in managing your income flow. Proactivity demands that you take charge of your money, not the money controlling you. As a matter of fact, budgeting is among the primary components of financial literacy.
One mistake that most low-income earners make is to ignore the power of budgeting. As a result, they end up spending more than what they earn each month. Such trend only serves to pile debts. But since you are already on a tight budget, budgeting wisely means:
- You don’t create another liability
- Accounting for every penny spent
- You have money to pay debts every month.
As you budget, take care of first things first. Your basic needs. Decide what is necessary. The next step expounds more on cutting unnecessary expenditure.
Step Three: Cut your Expenses
Cutting your expenses is a crucial step in ensuring you pay your debt within the shortest time possible. At times, you might be forced to live under your usual means. But if you limit your cash outlet to only what is necessary, you will pay your debts and stabilize your finances within a year.
Consider cheap alternatives. For instance, the type of food you eat, your transportation methods, entertainments, type of housing, your shopping trends, daily habits, and the services you subscribe. You can cut your expenses in various ways:
- Start cooking for yourself if you are used to buying meals frequently.
- Shop what you will use. Don’t buy too much groceries or perishables that will go bad unutilized
- Buy new appliances, clothes, or household items if they are necessary, and you will spend less money
- Unsubscribe from services like magazine issues and gyms. You can start daily workouts without hiring a personal trainer, or use cheaper means of acquiring information like the internet
After reducing your expenses, reconsider your budget and identify how much income you are left with each month. The standard budgeting is monthly. However, you can budget weekly or bimonthly especially when your income is irregular. For example, when doing contractual, part-time, or freelancing jobs.
Step Four: Plan
By now, you know what you need to pay your creditors, you are familiar with budgeting, and you have reduced expenses. You have started noticing higher balances after every income. So it is your best time to start planning how you will repay the loan.
Formulate a financial roadmap with clear goals. Know what you need to earn to complete your debt. Then, decide on the minimum cash required every week, bimonthly, or monthly to achieve your mission. Planning will help you through the last step of getting out of your debt within a year.
Step Five: Diversify your Income Earning Sources
If you are full-time employed, don’t just rely on your monthly salary. If you are part-time employed, don’t over-rely on your remunerations. Instead, spot different money making opportunities.
For instance, start a side hustle to supplement your primary income. You can also begin working overtime or take a part-time job. The most lucrative side hustle can be online working: writing jobs, transcription, website designing, coding, etc.
One advantage of these opportunities is that you don’t necessarily need prior knowledge; you can succeed from your passion for learning and determination. You can also sell unnecessary stuff that you no longer need.
These five steps will help get you out of debt within a year even if you have low income. Remember to remain focused to the end, and continuously identify new opportunities of increasing your revenue.
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Oluwamayowa holds an MBA degree from Obafemi Awolowo University.
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