Home » How to Get Out of Debt If You’re Living Paycheck to Paycheck
Written by:
Meghan AlardFinancial Literacy Specialist
When you’re barely scraping by month-to-month, getting out of debt can seem like a lost cause. When traditional debt reduction techniques (which you may have seen referred to as the snowball and avalanche methods) aren’t working with your current paycheck, it can feel like you’re headed for a financial natural disaster. This doesn’t have to be the case. Break the cycle with one of these two solutions that can lower your monthly payment, and keep the momentum going with the money tips that follow.
Solution 1: Debt Consolidation Loan
It sounds counterintuitive, but taking out a loan can be a great way to get out of debt.
This solution is ideal for consumers with good credit who owe less than $25,000. Basically, you get a loan to pay off all of your accounts and then just make payments on that loan. Consolidation loans allow you to stop high interest from piling up on your debts by paying them all off as soon as possible. Then, you only have to worry about the consolidation loan’s interest rate, which is usually much lower than what you had been dealing with before.
By extending the term of a debt consolidation loan, you can lower your monthly payments. Most loans have terms up to 48 to 60 months, depending on the lender you choose. If you need lower payments, simply see how long you can extend the term to achieve the lowest monthly payments possible.
The biggest problem with this solution is that you are still accountable only to yourself. You have to handle your budget and your loan payments on your own, which can be very difficult for those who are used to spending a lot on credit. Often, still having the freedom to spend will get consumers with consolidation loans even deeper into debt.
This is where Solution 2 comes in.
Solution 2: Debt Management Program (DMP)
A DMP will guide you toward debt relief, no matter what your budget is.
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 the creditors agree to the plan, you will start making one monthly payment to the credit counseling agency. 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 accounts when you join the program. This is to help you stop charging on those accounts, but it can be difficult to function without your main lines of credit. Also, keep in mind that a debt management program costs more and will take longer than debt settlement.
This leads us to the positive aspects of a DMP. Though it’s more expensive and takes longer, a debt management program is much better for your credit than debt settlement. 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 eliminated or reduced. 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.
Tips for Getting Out of Debt When You’re Living Paycheck to Paycheck
Low on cash? There are still things you can do to make it easier to get out of debt. Take a look at these tips to supplement the solution you chose.
Tip #1: Don’t wait.
The worst thing you can do for your debt when you’re living paycheck to paycheck is to wait to act on it. Interest charges will only continue to stack up the longer you put it off. Decide which solution is best for you as soon as you can.
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 keep you on track and ensure you pay off your debt on time without wasting money on unnecessary expenses.
Tip #3: Increase your income.
Add some extra money to your monthly budget with a side gig or other form of extra income. In addition to the extra cash you will have on hand from your lowered monthly payments, this can help boost your emergency savings fund.
Tip #4: Start an emergency fund – even if it’s just pennies.
Your most important budgetary item is obviously your debt. But if you run into an emergency and don’t have emergency savings, your debt will pile up even higher. This is why it’s important to always have a little extra cash saved on the side for the unexpected. Even if it’s just a couple bucks here and there, start contributing to a savings account.
Tip #5: Be patient.
Becoming debt free won’t happen overnight. Don’t quit a debt management program too soon, as you will still owe everything you did before. If you bail on a consolidation loan, it will be even worse.
Get the debt-free life you deserve! Find out how we can help you today.
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FAQs
Learn from others who successfully live paycheck-to-paycheck. Methods include aligning bill days more closely with paydays to minimize cash gaps, negotiating a reduction in healthcare bills, borrowing money from family or friends, or taking side jobs like yard work or childcare.
How to become debt free when living paycheck to paycheck? ›
- Take care of your Four Walls first.
- Cut extra expenses.
- Start an emergency fund.
- Ditch debt.
- Increase your income.
- Live below your means.
- Save up for big purchases.
- Remember your why.
7 Steps to Stop Living Paycheck to Paycheck
- Start by Creating a Budget. If you don't already have a budget, now is the perfect time to create one! ...
- 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.
Learn from others who successfully live paycheck-to-paycheck. Methods include aligning bill days more closely with paydays to minimize cash gaps, negotiating a reduction in healthcare bills, borrowing money from family or friends, or taking side jobs like yard work or childcare.
What percent of people who make $100,000 live paycheck to paycheck? ›
According to PYMNTS Intelligence, 62% of U.S. consumers now live paycheck to paycheck, and that includes 48% of consumers earning more than $100,000 annually.
What is the 50 30 20 rule? ›
The 50/30/20 budget rule states that you should spend up to 50% of your after-tax income on needs and obligations that you must have or must do. The remaining half should be split between savings and debt repayment (20%) and everything else that you might want (30%).
How do I pay off debt if I don't make enough money? ›
SHARE:
- Step 1: Stop taking on new debt.
- Step 2: Determine how much you owe.
- Step 3: Create a budget.
- Step 4: Pay off the smallest debts first.
- Step 5: Start tackling larger debts.
- Step 6: Look for ways to earn extra money.
- Step 7: Boost your credit scores.
- Step 8: Explore debt consolidation and debt relief options.
One missed paycheck would put someone living paycheck to paycheck in a difficult spot. When you're living paycheck to paycheck, it's difficult or impossible to save, let alone invest. This makes you even more vulnerable in times of emergency or lost income.
How many Americans live paycheck to paycheck? ›
A majority, 65%, say they live paycheck to paycheck, according to CNBC and SurveyMonkey's recent Your Money International Financial Security Survey, which polled 498 U.S. adults. That's a slight increase from last year's results, which found that 58% of Americans considered themselves to be living paycheck to paycheck.
How to pay off debt when you are broke? ›
- Step 1: Take Inventory of Your Debts. ...
- Step 2: Create a Realistic Budget. ...
- Step 3: Avoid Any New Debts. ...
- Step 4: Try the Debt Avalanche Method. ...
- Step 5: Consider the Debt Snowball Method. ...
- Step 6: Increase Your Income. ...
- Step 7: Negotiate a Better Rate. ...
- Step 8: Increase Your Credit Score.
Surviving on $1,000 a month requires careful budgeting, prioritizing essential expenses, and finding ways to save money. Cutting down on housing costs by sharing living spaces or finding affordable options is crucial. Utilizing public transportation or opting for a bike can help save on transportation expenses.
How many rich people live paycheck to paycheck? ›
Even so, Americans are still finding themselves feeling crunched after a period where wealth-building proved difficult. A separate study from PYMNTS of more than 4,200 consumers found that 62% of total consumers and 36% of those making more than $200,000 feel like they're living paycheck to paycheck.
How can I retire if I live paycheck to paycheck? ›
Invest in your future by contributing to retirement accounts, such as 401(k) plans and/or individual retirement accounts (IRAs). Maximize your savings with bank accounts that offer high annual percentage yields (APYs), such as a high-yield savings account, certificate of deposit (CD), or a money market account.
What paycheck is considered rich? ›
Data from the U.S. Census Bureau was used in the report. For Californians hoping to join the prestigious club, residents would have to bring in an average income of $613,602, a nearly 40% increase from 2017, when the average income needed for the top 5% of earners was $447,207.
How many Americans have no savings? ›
Many, it turns out, are not. A new Empower study reveals more than 1 in 5 (21%) Americans have no emergency savings — money set aside for unexpected financial events such as job loss, home and car repairs, and medical bills. Nearly 2 in 5 (37%) couldn't afford an emergency expense over $400.
Why are Americans struggling financially? ›
What are Americans' main financial challenges? Over the past two years, more respondents cited inflation as the reason for their financial difficulties than any other cause. Inflation reached a 40-year high of 9.1% in June 2022 and has yet to return to the Fed's target of 2%.
Are you poor if you live paycheck to paycheck? ›
People living paycheck to paycheck are sometimes referred to as the working poor. Living paycheck to paycheck can occur at all different income levels. The working poor are often low-wage earners with limited skills but can include those with advanced degrees and skills.
How to pay off credit cards when you live paycheck to paycheck? ›
If you are living paycheck to paycheck with little to no wiggle room, consumers can consider how to bring in extra cash such as a “side hustle, freelance work or even a different job which is easier said than done.”
Can rich people live paycheck to paycheck? ›
Sizable portions of high earners live paycheck to paycheck.
The increase in consumers living this financial lifestyle is evident across income brackets. The share of consumers living this financial lifestyle and annually earning more than $100,000 has increased from last January, currently standing at 48%.
