When you’re barely scraping by month-to-month, getting out of debt can seem like a lost cause. You might feel like you’re heading for a financial disaster if traditional ways of paying off debt, like the snowball and avalanche methods, aren’t working with your current paycheck. This doesn’t have to be the case. Break the cycle with one of these two solutions that can lower your monthly payment. Then, keep the momentum going with our money-saving tips.
It can feel like you’re always just barely getting by when you’re living from paycheck to paycheck and have a lot of debt. Twenty-eight percent of Americans say they live from paycheck to paycheck, so if this sounds like you, you’re not alone. When you spend all of your money on basic needs, it can seem impossible to get ahead on paying off your debts. But if you plan ahead and manage your money well, you can get out of debt even if you don’t have a lot of money.
Take Inventory of Your Debts
The first step is to get a complete picture of what you owe. Make a list of all your debts with the remaining balance and interest rate for each one. This includes credit cards personal loans medical bills, student loans, and anything else you owe money on. Seeing it all written out can help you visualize the mountain of debt you need to tackle. Don’t let it overwhelm you though – every journey starts with a single step.
Build a Realistic Budget
Now it’s time to get down to business with your income and expenses. Track every dollar coming in and going out over the next month. Yes, this means literally every coffee, household item, cash tip, etc. After a month you’ll have a detailed picture of your spending habits, which will make constructing a realistic budget much easier.
A budget isn’t meant to make you feel poor; it just helps you decide how to spend your money based on your priorities. Distinguish needs from wants and allocate money accordingly. Before you spend money on things you want, put money into savings, pay for things you need, and pay off your debts. Apps like EveryDollar and Mint can help you keep track of your spending and make a budget.
Increase Income If Possible
Bringing in more money each month accelerates debt payoff. A side gig like rideshare driving, tutoring, freelance writing, etc. lets you earn extra cash without a huge time commitment. Or you may consider finding a higher paying full-time job, taking on overtime hours, or renting out a spare room. Even an extra $200 a month makes a noticeable difference when you’re living paycheck to paycheck.
Reduce Expenses
Freeing up more money in your budget for debt payments can also be achieved by cutting back expenses. For example downsizing to a smaller living space selling an extra vehicle, or switching to cheaper options for things like cell phone plans, cable packages, and groceries. It all adds up. Meal planning helps reduce food spending while still eating well. And finding free entertainment like hiking or borrowing books from the library allows more money to be allocated towards debt.
Direct Extra Money Toward Debt Payments
Any extra money you make or money you find in your budget should be used to pay off your debt as quickly as possible. The debt avalanche method focuses on paying off high-interest debt first. The debt snowball method, on the other hand, starts with small balances to build momentum. Use whichever approach keeps you motivated.
Automate payments for at least the minimum on all debts to avoid late fees. Then add any extra money you have that month to the focus debt you’re trying to payoff. Online debt calculators can tell you how much faster you’ll become debt free by increasing payments.
Build Up a Small Emergency Fund
An emergency fund is crucial when living paycheck to paycheck with no financial cushion. Before throwing all extra money at debt, first save $500 – $1,000 in a high yield savings account as a starter emergency fund. This provides a buffer between you and high interest debt when unexpected expenses come up, like car repairs or medical bills.
Once you have a small emergency fund, you should pay off your debts again. Don’t stop making the minimum payments on your debts. Instead, put extra money toward one debt at a time until it’s paid off completely. Stay motivated by tracking your progress and celebrating each payoff.
Explore Debt Management Options
If you need help managing high interest credit card debt, a non-profit credit counseling agency can set you up on a debt management plan (DMP). They negotiate with creditors to reduce interest rates, waive fees, and consolidate multiple payments into one monthly payment. There is typically an enrollment fee and monthly maintenance fee. Make sure the organization is accredited before enrolling in their DMP program.
For private student loans, some lenders offer modified repayment plans to help struggling borrowers avoid default. You may be able to temporarily lower required monthly payments. Check if any of your student loan servicers offer assistance programs. Federal student loans also have income-driven repayment plans to consider.
Maintain Financial Discipline
Succeeding with a paycheck to paycheck budget takes discipline and sacrifices. Avoid taking on any new debt that isn’t absolutely necessary. With time and commitment to your budget and debt payoff plan, you can overcome what feels like an impossible situation. Stay focused on the end goal of becoming debt-free and use that as motivation to power through the tough choices required to get there.
Living paycheck to paycheck and owing money can feel hopeless and stressful. But many others in your situation have found a way out of that dark valley through strategic money management guided by discipline. Stick with the plan even when progress seems painfully slow. With time and perseverance, you’ll watch each debt balance go to zero and gain financial freedom!
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Solution 2: Debt Management Program (DMP)
In a debt management program, a certified credit counselor will guide you through the process of paying off all of your debt in full. They will find a monthly payment you can afford on your budget and negotiate with your creditors on your behalf to lower your interest rates. Once all of your creditors agree to the plan, you will only have to pay the credit counseling agency once a month. A debt management program is NOT a loan. It’s more like a professionally assisted repayment plan.
Before starting a debt management program, know the pros and cons. There are a few downsides to a DMP. First, it closes your credit card accounts when you join the program. This is to help you stop charging on those accounts. It can, however, be difficult to function without your main lines of credit. Also, a debt management program costs more and will take longer to complete than debt settlement.
This leads us to the positive aspects of a DMP. A debt management plan is better for your credit than debt settlement, even though it costs more and takes longer. Additionally, your monthly payments may be lower. You’ll be put on a strict budget and monthly payments will come out of your bank account automatically. Future penalties and fees are no longer a problem, and interest charges are either reduced or eliminated altogether. For someone living paycheck to paycheck, a DMP is often the best option to get out of debt.
Do you need help finding the right solution to get out of debt? Request a free, no-obligation evaluation.
Tip #2: Pay close attention to your budget.
Tracking your spending is an essential part of getting out of debt, no matter which method you end up using. A good budget will help you stay on track and make sure you pay off your debts on time, without spending money on things you don’t need.
How To Stop Living Paycheck-To-Paycheck (Without Getting A Second Job)
FAQ
How to pay off debt living paycheck to paycheck?
To pay off debt while living paycheck to paycheck, prioritize creating a budget, cutting expenses, and increasing income. Focus on high-interest debt first using methods like the debt avalanche or snowball.
What is the best option when you live paycheck to paycheck?
Break The Paycheck-to-Paycheck Cycle: 7 Tips to Start Saving SmarterStart by Creating a Budget. Cut Expenses and Increase Income. Build an Emergency Fund. Stop Accruing Debt. Open a High-Yield Savings Account. Join a Credit Union. Use Free Financial Wellness Resources.
What percent of people who make $100,000 live paycheck to paycheck?
Approximately 42% of Americans with household incomes of $100,000 or more report living paycheck to paycheck, according to NerdWallet.
How to pay off $5000 in debt in 6 months?
To pay off $5000 in debt within 6 months, focus on a combination of strategies like debt consolidation, paying extra each month, and potentially using a debt snowball or avalanche method.