How to get out of debt on a low income: a guide

If you’re wondering how to get out of debt on a low income, stop here! We’ll share everything you need to know to succeed.

Laura Gariepy
May 6, 2024

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When you have little cash left over each month, saving or achieving other financial aspirations can be challenging. Your dream of paying off your credit cards, student loans, and other debt seems far-fetched.

Fortunately, your debt freedom goal may be closer than you think. While it may not be easy, getting out of debt on a low income is possible.  This post will explore tips to help you get started today.

How to get out of debt on a low-income

Understand your cash flow

Before you do anything else, you should know precisely how much cash is flowing through your bank account – and where it’s going. To do this, review your last three bank and credit card statements and write down how much money you earned and spent during those months. 

Be sure to break your spending into specific categories: rent, utilities, groceries, insurance, debt payments, subscriptions, dining out, etc. It’s essential to account for every dollar. That way, you can easily spot potential areas to cut back.

Do you earn more than you spend? If so, you’re in better shape than you thought. You already have a few spare dollars to allocate to your debt or tuck into your savings account. However, if you spend more than you earn, try to stop the bleeding fast. Taking on more debt each month only moves you further from your goal.

Create a budget

Once you understand your current income and expenses, it’s time to choose a budgeting method to help you pay off your debt. Your budget, or personalized spending plan, will show you what to do with your money and guide your prioritization and decision-making process.

There are lots of budgeting approaches you can choose, such as:

  • Zero-based budget: Every dollar has an assigned job, leaving you with no money left over each month. 
  • 50/30/20 rule: The rule states that 50% of your income goes toward your essential expenses, 30% toward items you want, and 20% toward your savings and debt repayment goals.
  • The envelope system: Each envelope (physical or digital) represents a spending category, such as groceries. You put cash into it and can spend up to that amount during the month. 

Each of these budgeting strategies has pros and cons. For instance, the zero-based budget may feel too limiting, while the 50/30/20 rule may not put enough money toward your debt.

Remember: Your situation is unique. If none of these budgeting strategies fit your life, feel free to customize them or create one.

Build a safety net

Next, you need to establish and fund an emergency savings account. The cash you save here is only for urgent and essential expenses, such as home or car repair, medical copays, or regular bills if your income becomes unstable. The money can help you cover these necessary costs without swiping a credit card or taking out a loan.

Some experts suggest stashing away a few months' worth of living expenses. If that seems like an impossibly large amount, initially aim for $1,000. 

You can build your account balance gradually, with small, regular deposits. Eventually, a few dollars each month will turn into a substantial sum. 

You can speed up your savings efforts by automatically depositing a percentage of your paycheck into that account. That way, you won’t even have to think about moving your money around (and you’ll be less likely to spend it on other things).

Assess your debt

Before you get into the logistics of how to get out of debt on a low income, you need a firm grasp on your debt situation. Gather all of your financial documents, and create a list of your debts that include:

  • The type of debt (i.e., credit card, mortgage, student loan, etc.)
  • The name of your creditor (i.e., CapitalOne)
  • Your current balance
  • The interest rate
  • Your monthly payment
  • The payment due date

Then, add up how much you owe across all of your accounts. The figure may be painful or scary, but facing it is an important step toward resolving it.

Consider putting this information into a spreadsheet. You can sort your debt by interest rate or balance, which can help you choose and follow a repayment strategy.

Prioritize one debt at a time

Once you understand what you’re dealing with, you can plan how to tackle your debt. Experts recommend targeting one debt at a time for aggressive repayment while you make minimum payments on the others.

But how do you decide which debt to prioritize? You could take one of two approaches: debt snowball or debt avalanche.

With the debt snowball, you hyperfocus on your account with the smallest balance first. Once you pay it off, you shift your attention (and dollars) to the next smallest balance, repeating the process until you’re debt-free. 

This method gives you a quick sense of achievement, building momentum to carry you throughout your debt repayment journey. However, this strategy doesn’t account for your interest rate, which significantly impacts the cost of your debt. That means you may end up paying more over time.

On the other hand, with the debt avalanche, you laser in on your account with the highest interest rate first. This method can help you save a lot of money in interest. However, if your account with the highest interest rate also has a high balance, paying it off may take a while, which could be discouraging.

Neither approach is right or wrong, and both will ultimately get you to your goal. Choose the one that appeals to you or feels right for your situation — you can always change course later if needed.

Reduce your monthly expenses

If money seems tight, look for opportunities to reduce your spending and free up cash for your debt. The possibilities to eliminate or lessen your expenses are virtually endless, but here are several options:

  • Move to a lower cost of living area.
  • Get a roommate.
  • Use public transportation or carpool.
  • Shop sales and use coupons.
  • Purchase generic goods instead of name-brand.
  • Visit thrift stores to buy used items like clothing or furniture.
  • Call your cellphone, internet, and insurance companies to negotiate lower bills.
  • Cancel subscriptions you don’t use (or don’t love).
  • Enjoy free entertainment and hobbies, such as hiking or reading at home.

Living frugally while in debt can help you get out of debt faster. Plus, you may develop good money management habits that last a lifetime, potentially keeping you out of debt in the future.

Increase your cash flow

You may wonder how to pay off debt fast with a low income. The simple answer is to make more money! Once you’ve optimized your spending as much as possible, explore generating extra cash to expedite the process.

There are lots of ways you can increase your cash flow. Depending on your situation, you could:

  • Work overtime at your current job.
  • Ask for a raise.
  • Apply for a promotion.
  • Get a higher-paying job at a different company.
  • Find a part-time or seasonal job (i.e., retail during the holiday season).
  • Start a side hustle, like dog walking or driving for a rideshare or delivery service company.
  • Launch a freelance business and offer services like content writing, graphic design, social media management, or photography.

If you own your home, you may be able to use it to bolster your income. You could rent out your entire house (if you have somewhere else to live) or a single room. You can even rent out your garage.

Caution: Before seeking tenants, be sure to research landlord laws in your area and create a legally sound leasing agreement.

Negotiate with your creditors

Your creditors want you to pay them, so they may be willing to help if you ask. Depending on the company’s policies and your account standing, you may be eligible for a modified payment plan, a lower interest rate, or other assistance.

Important: If you’re behind on your bills or soon will be, contact your creditors immediately. They’ll be more likely to work with you if you’re upfront about your financial situation.

Explore debt relief options

If you’re still overwhelmed by your account balances, you might want to explore debt relief options, such as debt consolidation or debt settlement. With debt consolidation, you take out a larger loan (usually with a lower interest rate) to pay off multiple smaller debts (usually with higher interest rates). For example, you might take out a personal loan to pay off your credit cards.

Consolidating your debt could help you save money in interest. In addition, it streamlines your bill-paying process because you’ll only have to send money to one creditor.

However, you generally need good credit to qualify for a debt consolidation loan. Plus, you need to ensure you’re not just shuffling your debt between financial products. You must have the self-discipline to repay your new loan without racking up more debt on your now-empty credit cards.

When you consolidate your debt, you repay the entire balance owed. On the other hand, if you settle your debt, you may be able to become debt-free while only paying a fraction of the balance.

During debt settlement, you stop paying your creditors and instead send money to a debt settlement firm. Once you’ve sent the company enough money, it will negotiate with your creditors to ask for a lower balance. Your debt could be reduced by 50% or more!

However, there’s no guarantee that your creditors will agree to a settlement deal. Plus, every month you don’t pay them will further damage your credit score, and you could eventually get sued. And, even if the debt settlement company negotiates a successful deal, it will charge you a fee, lessening your savings.

The bottom line: If you’re already behind on your payments, debt settlement could be a viable way to get out of debt on a low income. But if your accounts are in good standing, you may want to go another route.

Refinance your debt

If you’re a homeowner with equity, you can use your home’s wealth to pay off debt. Home equity is how much your property is worth minus how much you owe on it. So, if you have a house valued at $600,000 and your mortgage balance is $400,000, you have $200,000 in equity.

Cash-out refinance

One way to leverage your equity is to refinance your mortgage with a cash-out refinance. With a cash-out refinance, you get a new, larger mortgage that pays off your first home loan and puts money in your pocket. 


Another option is securing a home equity line of credit (HELOC), which is considered a second mortgage. A HELOC functions like a credit card, and you only have to repay the portion of the credit line that you use. 

With a HELOC, you may only need to make interest payments during the draw phase (often the first ten years of a 30-year term), which can help your budget. You may still qualify for a HELOC with bad credit if you have significant equity in your home and are willing to accept a higher interest rate. 

In either case, you’ll have to pay closing costs and fees, which can negate any potential savings from paying off higher-interest-rate debt. Plus, if you initially purchased your residence several years ago, your new mortgage or HELOC may have a substantially higher interest rate than your original home loan.

Home equity investment

If a cash-out refinance or HELOC won’t work for your situation, consider a home equity investment (HEI). With an HEI, you get a single lump sum of cash in exchange for a share of your home’s future appreciation. 

Unlike the cash-out refinance and HELOC, an HEI doesn’t have stringent eligibility criteria, making it easier to obtain. Plus, there are no monthly payments — you repay your investment via home sale, refinance, or another source of funds anytime during the term (often 30 years).

Stop taking on new debt

The fastest way to undo your repayment efforts is to take on new debt. While it may seem tricky to avoid doing so, it’s possible if you keep these best practices in mind:

  • Don’t purchase something if you can’t pay for it in cash.
  • Avoid lifestyle inflation. If you get a raise, use it to pay off debt or bolster your savings.
  • Save up for significant expenses in advance. For example, start putting money aside for holiday gifts in January so you won’t be tempted to borrow in December.

Sometimes, life happens, and it seems impossible to get through the situation without using your credit card or taking out a loan. In that event, try to shop for the best financial product available and only borrow the amount you need.

Final thoughts

We’ve explored how to get out of debt on a low income. While the journey to debt freedom may be long and arduous, it’s completely doable and worth it. Just take one step at a time and celebrate your progress along the way!

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