How to Pay Off Debt on a Fixed Income

Your debt is daunting enough on its own. But when you’re trying to pay it off with earnings that don’t equal or exceed your monthly bills, it feels even more formidable.

It Is possible to get out of debt on a low or fixed income,  but let’s not kid ourselves; it won’t be easy, and it won’t be quick. Still, with planning, patience, and perspective, it can be done.

How? For openers, it might help to keep the moral to the ol’ hare vs. tortoise fable in mind, the story in which the measured, methodical turtle outruns the speedy, cocky but easily sidetracked rascally rabbit: Slow and steady wins the race to get out of debt.

So, be methodical. Plan a strategy for paying off your debt and then stick to it. Be patient and don’t get discouraged by how long it takes. And keep the prize in perspective by tuning out the siren song of extra spending that leads to extra debt. Be the tortoise in this contest and you can get to a debt-free finish line.

Here, then, are some of the deliberate, measured steps it takes to pay off your debt even with a low income.

1. Build an Emergency Fund

It’s possible one of the reasons you’re in this predicament right now is that you didn’t have any savings stashed away to pay for a car repair you didn’t see coming, or a medical emergency, or a broken furnace in the dead of winter, or to make up for an unexpected job loss, or for any other unforeseen curveball your financial life threw at you. If you weren’t prepared, you probably paid for that emergency with a credit card, meaning you ran up more debt because you couldn’t pay it off at the end of the month.  If that’s the case, don’t let it happen again.

You can build an emergency fund in several ways. If you have a direct deposit system for your salary, you could channel a portion of your weekly pay into a separate account and let it grow that way. You could also arrange to automatically transfer a small amount from your checking account into that savings fund once or twice a month. If you have income from a secondary source such as a part-time job or a side gig, you could dedicate that revenue to your emergency fund while you’re building it up. And of course, when you have it on hand, you could plunk your spare cash into that account.

However you build it, don’t worry if the going is slow. (Remember, you’re the tortoise.) Get it to, say, $1,000, and then as you begin to reduce your debt in other ways, you’ll be able to augment it more quickly. Eventually, your safety-net fund should be big enough to cover 3-6 months of your living expenses in case of an emergency that major.

2. Confirm How Much You Owe

Knowledge is power. The more you know about your debt, the better equipped you’ll be to get out from under it. To that end, make sure you understand how much you owe and to whom you owe it. Make a list. Check it twice. Find out where you’ve been naughty in running up that not-so-nice red ink. That especially means your credit cards, but include your car payments, rent, or mortgage, outstanding loans, utility bills, medical bills, and anything else dragging you underwater.

Itemize the interest rates you’re paying on each of those debts. List the payment due dates and the minimum monthly payment amounts. Get organized.

One important and helpful way to understand your debt situation is to order your credit report. Each of the three major credit bureaus (Experian, TransUnion, and Equifax) will provide a free copy once a year. Among other things, your report includes your credit accounts and history, including your credit limits and balances as well as your payment record. It will also tell you about any inquiries into the state of your credit made by businesses within the last 30 days.

Once you have it, make sure you review your credit report to confirm it’s accurate. Match its information against the list of debts you’ve just compiled. And then use that knowledge to start your get-out-of-debt planning.

» Learn More: How to Find All My Debts

3. Create a Budget

Think of a budget as your roadmap out of debt. It will show you the way to cut how much you spend and increase how much you keep, even if the money you’ve got coming in doesn’t seem like enough. Budgeting and saving are the straight and narrow paths to avoiding new debt and eliminating the debt you already have, regardless of the size of your income.

And that’s just the start of the benefits of budgeting. A budget can also help you build the emergency fund we mentioned earlier. It can set you up to fully enjoy your retirement years. It can put you in control of your finances and more, all of which should take the stress out of your financial life.

Creating a budget doesn’t have to be complicated. The basics are simple: Make a list of all your monthly expenses and another list of all your monthly income, and then compare them. When you recognize the difference between how much you’re spending and how much you’re earning, you’ll be able to identify places to adjust on both sides of your budget to bring your expenses into line with your income.

And guess what!? If you’ve compiled and understand how much debt you owe (see: Step No. 2), you’ve made a strong start to creating your budget. You’ve already got a list of those expenses.

» Learn More: How to Budget

4. Stop Taking on New Debts

We’ve already told you an emergency fund will keep unexpected new debts at bay. But what about the temptations to overspend your means that don’t involve car repairs or hospital stays or a loss of income? You know, like those cool things you could buy because you’ve still got a little room on your high-interest credit card or, if you’ve already maxed out that limit, on a brand-new credit card for which you might qualify. Or like the new car that’d sure be a step up from the junker you’ve been driving. Or like the comfort level you could enjoy with a short-term loan until your next payday. Those kinds of temptations.

Resist! Resist! Resist!

How? Well, leave your credit card at home to avoid impulse purchases at the mall. Undo the automatic payments on your credit card accounts so you experience the severity of those bills when you hand-write the monthly checks. Spruce up the old heap so you can nurse your wheels through another winter.

Instead of spending that extra money, set realistic debt-payment goals and treat yourself every time you reach one of them by, say, visiting a museum, checking out a new library book, finding a free concert, or doing whatever you enjoy that doesn’t come at a prohibitive cost.

Save, don’t spend. And when in doubt, refer to your budget. It’ll keep you focused.

» Learn more: 10 Ways to Save Money

5. Debt Snowball Method

Being smart about how you pay down your debts means having a strategy. One plan that might work for you is called the debt snowball method, which involves listing the balances you owe on your debts from the smallest to the largest. You pay the minimum on all your cards and take whatever is left over and apply it to the card with the smallest balance.

When that first balance is paid off, you move on to the next smallest and pay as much as you can on it every month until you’re free of that debt, too, and so on as you work through your list. With each succeeding debt you eliminate, you free up more money to add to the monthly payments on the next one. As you move from one balance to the next, the rate your debt is being reduced speeds up, creating momentum in the way a snowball rolls down a hill.

Depending on the size of your balances, the snowball method might not be the quickest way to cut into your overall debt, especially if some of it comes with high interest rates that keep it growing. But with each balance you eliminate, it can provide reasonably quick and regular doses of positive reinforcement, helping you stay motivated to keep up the attack on your red ink.

6. Debt Avalanche Method

If you’re more inclined to go after that high-interest credit card debt first – and if you have the resources and patience to do it – then you might want to organize your payment strategy around the debt avalanche method. It, too, requires you to rank your debts, but this time you prioritize them by their interest rates. Start with the debt that carries the highest rate and work your way down the list to the lowest.

As with the debt snowball method, you make the minimum monthly payments on all your debts except the one at the top of your list, devoting as much as you can over the minimum to that one every month. By eliminating the highest interest rates first, you’re ridding yourself of your most expensive debts early in the process. Because it’s a top-heavy approach compared to the debt snowball method, this plan moves like an avalanche rumbling and hurtling down a mountain as you put more and more money toward your next lowest-interest debt.

You likely won’t see or feel progress as viscerally as you do with the debt snowball method, but the debt avalanche method should start saving you money sooner because it lightens the load of your interest baggage during the front end of your repayment plan.

7. Consider Refinancing

Because you did that good work early on in this process, you know exactly what kind of debt you’re carrying. (Yep, Step No. 2 again.) That means you know how much you’re being charged in interest, how much longer you’ll be paying off your balance, what the minimum monthly bills are, and what fees and penalties will be levied for late installments or early repayment. With all that knowledge at your disposal, you can shop around for better deals.

When you refinance your home, car or your student loan, a new lender pays off that current debt and issues you a new loan. A refinancing offer with terms more compatible with your low- or fixed-income level can save you money on the interest rate and the monthly payments, and perhaps on the fees associated with the new loan.

It works with your credit card balances, too, if you do the right research. You have several options for credit card refinancing, including transferring your balance (or balances) to a new card with a lower interest rate, taking out a loan that consolidates several of your credit card balances into one monthly payment, and using a 401k loan or a home equity loan with a lower interest rate to pay off your credit cards.

Student loan consolidation is a good refinancing option if you take out more than one federal student loan, as many need to do to get through school. The new loan in this kind of refinancing comes from the government and only applies to federal loans, but it should reduce your interest rates and your monthly payments if you qualify.

Remember, the key to any successful refinancing strategy is knowledge, both about your current debts and the terms of the new loan offers. Do the research!

8. Negotiate with Creditors

Yes, you owe creditors money. And sure, they insist you pay back what they’ve loaned you. But that doesn’t necessarily mean your creditors aren’t sympathetic to your plight. They might listen to you if you need help getting out from under your debt. What’s the harm in asking?

Talk to your creditors about the possibility of lowering the interest rate on your loan or reducing your monthly payments, or even suspending the requirement that you make regular payments. There’s a good chance they’ll work with you, especially if the alternative is that you might default. From their perspective, something in the way of a return on their loan will be better than nothing.

Word to the wise: Don’t wait to reach out for this kind of help. Do it before your creditor turns your debt over to a collection agency.

Even if the situation isn’t as dire as a possible default, your creditors might surprise you and be willing to restructure the terms of your debt to them. Of course, your case for that will be stronger if you’ve been a good borrower with a track record of making your payments on time.

» Learn More: How to Negotiate with Creditors

9. Improve Your Credit Score

Let’s say your low income has convinced you to refinance one of your debts or consolidate several of them into a new loan, and now you’re ready to research your options. Here’s what you’ll find: The higher your credit score, the better your offers will be. When your credit score is good, the offers will come with lower interest rates, smaller monthly payments, and fewer strings attached, all of which are important ingredients in the paying-off-your-debt recipe.

That’s just the start to the benefits of a good credit score. A strong credit score can save you money in other ways, too. For example, it might get you out of paying a security deposit for your utilities. It might help you get a better, higher-paying job. It might lower your insurance premiums.

Remember when we urged you to ask the three credit bureaus for your free credit report? (That’s Step No. 2 yet again!) Your credit score is calculated based on what’s in those reports, but it won’t usually be included as part of the free report. To find out your credit score, then, you can check with your bank or credit card issuer. You can also search for a free credit score service on the web.

So, what are good credit scores and how do you go about improving yours? The bottom of the range of credit scores is 300; the top is 850. Lenders tend to make better offers to people whose score is over 740, while their best offers generally go to those whose credit score is over 760.

If you need to bump yours up, be smart about your debts. This will sound like one of those ‘well duh’ statements, but make your payments on time and keep your credit card spending down. There are other more subtle ways to improve your credit score, too, such as limiting the number of credit cards for which you apply and keeping old accounts open even when you’ve paid them off and no longer use them. But a history of consistent payments and moderate credit card spending are the two biggies.

» Learn More: How to Increase Credit Score

10. Find Ways to Earn Extra Money

Cutting your spending is the best way to pay off your debt with a low income, but that only affects half of the budget you’ve created. The other half – your earnings – can play a role, too. Every additional dollar you bring in makes a difference.

You can make extra money to pay off debt in many ways, starting with the job you already have. Maybe it’s time to let the boss know you deserve a raise. Or maybe you can request some extra hours (if, that is, you’ll get paid for working them). What’s the harm in asking?

It’s worth a look at your spare time, too, and how you use it. Can you devote some of those idle hours to a part-time gig as, say, an Uber or Lyft driver, a dog-walker or pet-sitter, or a handyman? People always need that kind of help, and they’re willing to pay for it.

Take stock of what’s in your garage and your basement. If you can live without some of that stuff, hold a yard sale and make some money off it. Do you have a hobby such as knitting or woodworking or drawing? Check out websites that serve as marketplaces for those things and try to make a few bucks that way.

If you have special knowledge about a particular area, you might find others who want to learn it. Teaching through an online tutoring company is a great opportunity to earn some extra dough.

You probably won’t get rich enough this way to eliminate your debt in a jiffy. But remember: Every little bit helps.

» Learn More: Side Jobs to Make Extra Money

11. Explore Other Options

As we mentioned early on, most steps for getting out of debt with low income require planning, patience, and hard choices on your part. None of them is a quick fix; all of them involve sacrifices. Cutting back on your spending isn’t much fun, and generating extra income is a lot to ask when you’re already working hard enough. You can do those things. They just won’t be easy.

Still, if you’ve tried it all and aren’t getting the results you need, you might want to investigate bigger-picture alternatives to re-structure chunks, if not all, of what you owe. They won’t eliminate your debt, but they can provide some relief from the monthly bill-paying crunch while you continue to do your part to chip away at it.

Here are some of the other options for reducing debt on low income:

• Debt Management Plans. Nonprofit credit counseling agencies have agreements with credit card companies to lower interest rates and bring monthly payments down to a more affordable level for their clients. By working with one of the nonprofits on a debt management program like that, your debt can be paid off in 3-5 years.
• Balance Transfer Credit Cards. We mentioned these in Step No. 7 about refinancing. If your plastic has put you in over your head, you can move those debts on to a balance transfer credit card that comes with a 0% interest rate for a limited time, usually 12-18 months. You’ll still owe as much as you did and you’ll still have to make a monthly payment, but you won’t be paying any interest. That should give you a fightin’ chance at cutting your debt down to size for a while. At the end of the promotional period, though, that 0% interest rate skyrockets.
• Debt Consolidation. Like a balance transfer credit card, debt consolidation moves several of your outstanding financial obligations into one loan. You borrow enough money from a bank, credit union, or online lender to pay off all your credit cards at once, making a single monthly payment on the new loan at a reduced interest rate.
• Debt Settlement. Before you turn to debt settlement, remember that you can try to negotiate with your creditors on your own. (See Step No. 8.) But if all else fails, you can turn those negotiations over to a for-profit debt relief company that tries to convince your creditors or a collection agency to reduce your debt. While that’s happening, you stop paying your creditors and instead make payments into an escrow account managed by the for-profit, which it eventually uses to pay off the renegotiated amount. There are four downsides: Fees to the for-profit company are required, results aren’t guaranteed, your outstanding balances continue to grow with interest and late fees for the monthly payments you don’t make, and the debt settlement process usually isn’t kind to your credit rating.
• Personal Loans. By shopping around, you should be able to find a personal loan that comes with a lower interest rate than your credit cards carry. If you do, you can use it to pay off at least some of your higher-interest balances as in debt consolidation and save money that way. But beware of unreasonable loan terms from predatory lenders.

What is a Fixed Income?

You might not be drawing Social Security just yet, but you will someday. (Well, you will, assuming the government figures out how to keep the Social Security Program solvent long enough.) When people live on Social Security, their paychecks are for the same amount every month. No bonuses. No promotions. No raises except for annual cost-of-living adjustments to keep pace with inflation. Their incomes are fixed. And usually, their incomes are fixed at a number considerably lower than the salaries they made during their working years.

While Social Security collectors are the most common examples, other people live on fixed incomes, too, when their only earnings come from standard pension payouts, retirement savings, disability benefits, or investments that yield a steady return. Most people on a fixed income are older or disabled.

In most cases, a fixed income is synonymous with a low income. We’ve used those terms interchangeably in this story because the difficulties of climbing out of debt essentially are the same whether one’s income is fixed or low.

» Learn More: Paying Off Debt After Retirement

Work with a Credit Counselor

We’ve just given you a lot to digest, and we’ve tried not to sugarcoat it because we know getting out debt with a shortage of resources is an imposing challenge. It requires difficult decisions and a committed dedication to succeed. But we can leave you with some encouraging words: You don’t have to do it by yourself. Guidance from a professionally certified credit counselor from a nonprofit credit counseling agency such as InCharge Debt Solutions is out there for the asking.

Credit counseling will help you review all your options, from building an emergency fund (Step No. 1) to creating a budget (Step No. 3) to exploring debt management plans (Step No. 11) and everything in between. Counselors at nonprofit agencies will discuss your unique financial situation, examine your income and expenses, review your credit report, and help you develop a personalized plan to solve your money problems. And their initial counseling sessions are free of charge.

Anyone experiencing problems with debt can benefit from a free counseling session that comes without an agenda. Counselors at nonprofit agencies are required by law to offer consumers the best debt relief option for them.