How to Stay Debt Free on A Low Income

Couple managing the debt

According to a 2019 survey, seventy-eight percent of Americans live paycheck to paycheck. Further, three in four working Americans are in debt. This struggle can make life without debt seem impossible. But, is it?

When unplanned expenses inevitably arise, it is all too easy to turn to credit cards or payday advance loans to cover the cost. Once you spend more money than you have, though, debt becomes a costly, often cyclical trap where interest and fees can result in a final expense much higher than the original price.

It is a slippery slope that many Americans slide down: Taking advantage of easy credit lands many Americans in debt, living beyond their means, and using credit for instant gratification purchases they could not otherwise afford.

So, how can you stay debt-free when you have a low income?

1. Choose Cash

Avoid falling into the “buy now, pay later” mindset that often goes hand-in-hand with seeking credit. If you want to use credit cards for the cash-back benefits or to build your credit, you may consider responsible credit use. However, in using credit cards, it is important to avoid making any purchases that you do not have cash in the bank to cover.

If you can let go of your credit cards, cash is a great option to keep you out of debt and help you save money. It is usually more difficult to part with your hard-earned money when you have tangible cash in hand to physically part with at purchase. In using a credit or debit card, overspending is easy to do because we do not actually see money change hands or our balance instantly change.

To control your spending, limit the cash you have on hand and only use cash to purchase discretionary items. Think of it as an allowance. Try taking a specified amount of cash out of the bank each week, and do not allow yourself to spend beyond that amount.

If you choose to rely on credit and debit cards instead of cash, consider a self-imposed spending limit. Some banks and credit card providers have programs that can send you a text or notify you when you are close to your spending limit for extra accountability. 

2. Build Up Your Savings

Unplanned expenses are inevitable. It is important to prepare for the cost of emergencies – from car repairs to emergency room visits – without having to turn to credit cards, cash advance loans, or high-interest payment plans.

Without money in savings to cover emergency expenses, you will have no choice but borrow – thus acquiring debt. Build up your savings account now so you will have funds available when you need them. This way, when there is an unplanned expense, you can take the money out of your savings and then work to build it back up for the next emergency – rather than having to make payments repay an interest-collecting balance from borrowing.

Whether you can stash a few dollars a month or a few hundred, make saving money a priority. Consider setting up an auto-draft from your paycheck to your savings. Most employers offer the option to split your direct deposit between bank accounts. Automatic contributions from your paycheck will set you up for success and because the money will be deposited automatically before ever reaching your hands as take-home pay, you probably will not even miss it. Instead, you will appreciate having money in the bank to cover that emergency expense when it happens.  

3. Review Your Budget

It is important to know what your expenses are and the balance of your debts. You may want consider adopting a zero-sum budget. This kind of budgeting allocates every penny of your income to bills, debts, and savings so there is nothing left to spend on non-essentials. Though an extreme way to budget, this is an excellent way to take control of your money and really prioritize your spending.

Your income may be lower than you like now, but it will eventually increase from job raises or a new job. When you get a raise, avoid giving your budget a raise. This will give you more money to throw into savings or pay down debts if necessary.

4. Reduce Your Expenses

Reducing your expenses is arguably the easiest way to put more money in your pocket. To cut back on costs, you should take steps to avoid unnecessary fees, limit discretionary spending and household expenses, and avoid overpaying for things.

  • Avoid unnecessary fees by paying your bills on time. If this is something you struggle with, consider enrolling in automatic bill pay. This may even lead to extra savings as some providers offer discounts to those enrolled in automatic bill pay.

  • Try purchasing generic products and prescriptions when possible to save money. Use free music streaming services rather than paying the monthly subscription cost of a premium account. Consider streaming your TV online instead of paying for cable.

  • Eschew instant gratification purchases. Plan your purchases ahead of any shopping excursion to prevent impulse buys. You can have a self-imposed single-item spending limit and wait time to help with this. For example, if you wait twenty-four hours before purchasing any single item with a price tag exceeding $100, you may determine the purchase is not as important as it was in the moment at the store and you may decide not to spend the money. 

5. Invest in Your Future

Finally, look to invest a percentage of your total income. This investment may be the money you are putting into savings for your emergency fund, or long-term formal investments like a 401(K), taxable brokerage account, or tax-advantaged retirement account. If your employer offers a matching contribution for your 401(K), make sure you are maxing out that benefit. It is essentially free money! To determine what other investment options are best for your family, consider meeting with a financial planner.

Your income does not have to determine your debt. By following these five simple tips, you can take steps to avoid debt regardless of whether you bring home six figures or you are living on minimum wage. It is absolutely possible to stay debt-free on a low income. There are debt consolidation programs for bad credit which will work closely with you to find a path that is tailored to your specific financial situation.