Travelling King - Finance Planner turning holiday dreams into a reality!
Money Matters

How To Pay Off Debt Quickly Even If Your Income Is Low

How To Pay Off Debt Quickly Even If Your Income Is Low

If there is one main excuse used for a failure to pay off debts, it would be a “lack of income”. Unfortunately, many people live right at their means, spending their entire check without leaving anything for savings or debt repayment. That’s not the worst part; statistics show that many people live beyond their means – spending up all of their check and using credit to dig themselves even deeper into a debt grave. Becoming debt free is a goal shared by a large portion of the adult population, but unfortunately, the majority will never pay off their debts. It takes money to get out of debt, and if there is no money left behind after everything is paid, then getting out of debt is impossible, right? Well, not exactly.

Turns out that there is a key to getting out of debt, and it’s not making more money. In fact the key to paying down your debts is the same key to succeeding in anything: set a plan and stick to it. Unfortunately for most, even those with high incomes, sticking to a plan is much harder than it seems, and most people who start out with high hopes for better credit end up back at square one very quickly. We want to help you avoid the pitfalls of paying down debt, and in the following post, we’re going to teach you exactly how to create the perfect debt-reduction plan and give you a few great tips to boost this plan right from the beginning. !

How to Build A Plan That Fits Your Life

If you search online, you will find a million “one-size-fits-all” debt reduction strategies from people who have managed to pay down their debts in the past. While it is highly recommended that you get information from people who have been through the debt reduction process, the caveat is, no two financial situations are the same. “Save 30% of your income” sounds great for someone who has a high income, low expenses and sufficient disposable income, but could be disastrous for someone whose low income barely covers their bills every month. The first thing to know about creating a debt reduction plan is this: for it to work, it has to be right for your particular situation. Here are some tips to build a plan that is right for you:

1) Know What You Owe

No matter how large or small your income is, you’ll never be able to fix your credit if you don’t know where you stand. The first step to building any credit reduction plan should be to pull your credit report and find out exactly how much you owe, and who you owe it to. Look through your credit report and confirm the accuracy of each account listed. If there are any accounts that you don’t recognize or that show incorrect information, dispute these items with the three major credit bureaus.

2) Choose a Realistic Goal

You will never meet a goal that you haven’t defined — and the easiest way to lose motivation is to set a goal so large that it can’t be realistically achieved. If you have a large financial goal, such as getting out of debt completely; break it down into smaller objectives. Maybe your long term objective is to eliminate your debt, but what can you do this week, this month or this year? By breaking your goal down into shorter-term objectives, it will be much easier to stay motivated and keep track of your progress.

What are realistic goals? These are goals that you can achieve quickly – in a month or a few months as opposed to a few years. For example:

  • Karen, who owes $40,000 in credit card debt wants to completely eliminate her debt over the next few years. As a first step, she sets the objective of reducing debt by $1,000 in a 30-day period. Once she accomplished that goal, she realized that she could pay even more going forward and changed her debt-reduction payment to $1,500/month. Each month’s success was a small victory that inspired her to stay on course in the next month.
  • Mark wants to drastically improve his credit score, but has to pay down almost a dozen accounts! Looking at it as a whole, it seems like way too cumbersome of a task to take on, so he focuses on a smaller goal – pay off two of accounts within a 3 month period. He succeeds. Over the subsequent 3-months, he pays off 3 more accounts. What seemed like an impossible task six months ago is now halfway complete and Mark is excited about being able to reach his full goal within the next 6 months.

3) Examine Your Expenses

While it is true that many have very little disposable income, it is also true that for many, disposable income exists but isn’t managed properly. Closely track how you spend your money over a month. Are there things that you buy habitually that you could really live without? Could your daily big-chain latte be replaced by machine coffee from home? Can you replace costly work lunches by bringing your own food? For most of us, if we look hard enough we will find some area where disposable income is being leaked.

Take a look at your monthly bills and decide whether you need all the services you are paying for. If you do, consider whether there are other service providers who can offer the same level of service for a cheaper price. The goal here is to reduce your amount of spending and increase your disposable income so that you know exactly how much you can afford to pay towards your debt reduction goals each month.

4) Create and Commit to Your Plan

At this point, you will know exactly how much you owe, what your goals are, and how much of your income you can afford to put towards those goals each month. Schedule your payments down to the day and down to the dollar. Have a plan that shows the exact date that you will meet your goal if you stay the course of sacrificing your planned amount each month.

When it comes down to getting out of debt, discipline is the part that separates the winners from the rest. If your commitment and dedication to your plan waivers and you can’t put yourself back on track, you will never reach your financial goal. Committing to your plan means sacrifice, and it means paying your creditors when you’d rather purchase something else. Always remember, it was you who got yourself into your specific credit situation and it will be you who will get yourself out.

Kickstart Your Plan with a Spending Fast

It isn’t easy making the shift from having less than ideal financial habits to having the positive financial habits that are truly needed to substantially reduce your debt. Sometimes the best way to make yourself adopt the right habits is to force yourself to eliminate the wrong ones. Instead of thinking about what non-essentials you can eliminate this month; a spending fast requires that you go cold turkey and eliminate them all. A spending fast is when you literally pause all spending outside of the things you need to survive – rent, food, utilities, and etc. A spending fast forces you to abandon your bad habits, put additional money away, and helps give your debt payoff plan a boost. A spending fast can be difficult, and well, it’s supposed to be. To help you as you kick off your plan, here are a few spending changes that you can make immediately:

  • Eat Cheap: You’d be surprised at how much the average person spends on fast food, carry-out and dining out. Learn to live without these luxuries during your spending fast. When it comes to your spending fast diet, think two things: nutritious and cheap. Cut out any expensive snacks and avoid visiting any restaurants – remember, when you eat out, not only do you have to pay more for food, but you’ll also have to pay a tip!
  • Eliminate Luxuries: During your spending fast, skip your monthly massage, your weekly carwash, your standing nail appointment and all the other luxuries you’ve grown accustomed to. Find ways to get around this – wash your own car, ask your husband/wife to rub your back; anything you can do to keep from spending. You’ll be able to get back to enjoying these luxuries soon enough, but during a spending fast always remember, every dollar sacrificed is one less dollar that you will owe to your creditors.
  • Choose Free Entertainment: People love being entertained, and we pay a significant amount to achieve it. Entertainment can be expensive – taking your family of 4 out to the movies can easily become a $75+ trip. During your spending fast, find free entertainment options instead – visit a park, go sightseeing, search for any free museums or art gallery showcases in your area. Expand your options and explore new things, just try not to spend any money while doing it!

Putting It All Together

If you’re committed to paying off your debt – put together your plan, stay committed and kick it off with a disciplined spending fast. It isn’t difficult to pay off your debt, but it does take dedication and consistency in implementing a well-formulated plan. Assess your own financial situation and implement these tips, and you’ll be right on your way to paying down your debts in no time!

Article written by:

Matt Collins is a financial educator and the owner of Loans Now. As an entrepreneur in the lending industry, he has worked with tens of thousands of individuals; helping them locate the perfect unsecured loans, bad credit loans, and other lending products for their particular situation. Matt has consulted dozens of businesses over the last 15 years and has been featured in Experian, Consumer Credit, and several other online financial publications.