The 10-Step Guide to Getting Out of Debt on a Low Income

Table of Contents

Did you know that the median annual income as of 2022 was only $44,225 dollars? Yep, pretty sad if you ask me. But that’s fairly average for a lot of people. What’s worse is that there are millions of people who make even less than that. Because $44,225 really isn’t a lot to start with these days. But even less than that? It’s hard to imagine.

But there are millions of people live on less than that. Between regular everyday expenses, kids, bills, groceries, rising costs due to inflation, and job wages staying pretty stagnant, it’s a lot harder to live these days. Those millions get crushed under the poverty level, barely scraping by on whatever they make and whatever they can afford.

If that’s you, it’s time to do something about it. Because life is rare and beautiful. You shouldn’t have to live like that. You shouldn’t stay in the cycle of poverty, debt, and low income status for the rest of your life. But it’s up to YOU to change that. Are you ready? Let’s go!

3 reasons why you need to get out of debt (especially on a low income)

You don’t have much money to work with

Because you don’t make a lot of money, you need to get out of debt so that you can have a little bit more money to work with. If your income is fairly small, in your situation, every single dollar counts. And if most of that income goes to debt, you’ll have nothing leftover to work toward your financial goals.

If you’re faced with that situation, like many people are these days, your expenses will probably be pretty high compared to what you make. You might not be able to cover them and then you’ll be forced to go into even more debt.

Not that the credit score matters all that much, but a ton of debt that doesn’t get paid back tends to make your credit score even worse. This makes people find alternative ways to borrow more money, which tends to be high-risk, high-interest debt. That debt is VERY hard to pay back and the cycle continues. This is why you’re broke and in debt.

It will help you increase your income

As you work to get out of debt, the amount of money you have to use for fixing your finances will grow. As you do more and more, it’ll feel like you got a raise.

With my 10-step plan, the goal is to both decrease expenses and increase income. So your expenses should go down as much as possible and you’ll work to increase your income as much as you want to work. This increased income is only limited to how much you can work.

So expenses/debt decreases + income increases = a surplus of money.

At first, when you start paying off debt, with no extra money, you won’t have much, if any, left over. The goal is to create a budget surplus to further your financial goals.

You will also work more and make more money to increase your income up further.

So if you make the right financial decisions, you’ll get to a point where a low income doesn’t matter as much because of how well you’re managing your money.

Your financial future depends on it

If you don’t fix your financial situation now, you’ll be broke with nothing when you get older and face retirement. You want to start getting out of debt now so that you can start investing for retirement. You want to take advantage of compound interest, so that you can build wealth over time. But you have to start NOW! Don’t wait or you’ll be sacrificing your financial future and retirement. Sacrifice now for a short period of time so that you can be financially free for the rest of your life.

Take note of your financial situation

Where are you at right now?

Take note of your financial situation right now as you read this. Is it bad? How bad? Do you have debt? How much debt? Wherever you’re at, you need to know so that we can change things up and start working toward financial freedom.

How do you feel about it?

Are you sick and tired of being broke? Fed up? Done with debt? Hate how you feel about it? This is how I felt. It’s very normal to feel this way. But it’s not okay to let your life stay like this. So do something about it!

Are you ready to change all of this and fix your finances?

It’s go time! Time to take your finances and transform them forever. You’re sick of this mess and are ready to pay off your debt so that you can start living the life of your dreams. Not some crazy, ultra-wealthy, rich life. But a better, more financially-free, high-quality life with no stress from debt and the opportunity to build something even better. That’s what I’ve done. Now it’s your turn.

The 10-step guide to getting out of debt on a low income

Step 1 – Have a BIG reason WHY

Having a BIG reason WHY you’re doing any of this is incredibly important. Why are you trying to get out of debt? Why are you trying to improve your finances? Make sure your reason is HUGE.

If you don’t have a BIG reason WHY, you’ll soon fall back into the old habits you were used to for so long.

This is what happened to me. I got out of debt just because I wanted to get out of debt. Over time, I fell back into debt again and had to do it all over. I soon realized that I needed a BIGGER reason WHY I wanted out of debt. And I soon found that reason.

Here’s my BIG reason WHY: I’m sick of debt, tired of being broke and having nothing, sick of not being able to afford anything, sick of a negative net worth, my wife and I want to travel one day, I want to help my son go to college without loans, and my wife and I want to be a millionaires.

My why runs deep. It’s a picture of everything I want financially and where I want my family to eventually be. My WHY is HUGE.

So what do you want? Getting out of debt just to get out of debt isn’t good enough. Search deep to find your WHY so that you’ll have real motivation toward permanent change. Then fix your finances forever so that you can find that financial freedom.

Step 2 – Stop borrowing money

The next step toward getting out of debt on a low income is to stop borrowing money. But how do we do that? It’s pretty simple. You just stop borrowing money.

The first thing you do is to stop any borrowing, financing, or credit card use immediately. All you have to do is this simple move and you’ll eventually get out of debt. Because you have to stop the bleeding somewhere. Continuing to borrow while paying debt off is like shooting yourself in the foot while you’re running a race. It just doesn’t work.

You have to start making different decisions with your money. Instead of borrowing and financing, you need to start paying with cash or your debit card. And if you can’t buy it up front, you either patiently save up for it or don’t buy it.

You absolutely have to take debt off the table. Once you do that, you’ll start making progress quickly.

Step 3 – Financial goals

Next up, you NEED to have money goals for your finances! These financial goals are what you hope to achieve with your finances over the short-term and the long-term.

Start out by writing out these goals so you can hold yourself accountable. You want clear and specific goals, written out in front of you so that you’ll be more inclined to complete them. This will also be a daily reminder of what you’re aiming for.

There are 4 types of goals: short-term, medium-term, long-term, and legacy goals.

Short-term goals: these goals are relatively easy to achieve and can be completed in as short as a week on up to 36 months (3 years).

“I want to pay my first credit card off in the next 2 months.”
“I want to pay off all of my debt in the next 12 months.”

Medium term goals: these goals are a little harder to achieve and can be completed from 3 years on up to about 10 years.

“I want to complete my 4 year college degree without and debt or student loans.”
“I want to pay my house off in 5 years.”

Long term goals: these goals are normally very hard to achieve because they take an incredible amount of patience and discipline over the course of 10+ plus years on up to multiple decades.

“I want to become a millionaire in the next 20 years.”
“I want to buy a beach house in cash when I retire in 30 years.”

Legacy goals: these goals are normally the most fun and are goals that you wish to achieve by leaving a legacy or changing your family tree.

“I want to leave my son an inheritance of a million dollars or more.”
“I want to create a perpetual debt-free college scholarship that pays out one single $2,000 dollar scholarship every year for the next 50-100 years.”

Lastly, the beautiful thing about goals is that, even if you don’t achieve your goals exactly how and when you wanted to, you’ll still be that much closer to reaching those goals in the end. You’ll at least make some progress toward them and that can motivate you to keep going and achieving them fully.

As the great speaker Zig Ziglar once said, “if you aim at nothing, you’ll hit it every time.” So set some goals and get after it!

For more on goals, check out this post: “How to Make More Realistic Financial Goals This Year.”

Step 4 – Create a budget

The next important step in getting out of debt on a low income is to create a budget. The budget is important because it allows you to control your money, not let it control you. Right now, money comes in, money goes out, and you probably have no idea where it went. That’s not okay.

You need to know exactly how much you spend in a month. Start out this section by writing down all of your expenses in last 30 days. You can also check your bank account. Total up all expenses.

Next, you need to know your income – exactly how much you make per month AND per year.You’ll need your total monthly income for your budget.

Take this monthly income and minus all expenses now (monthly income minus monthly expenses).

Your expenses need to be less than your income. If they’re not, you need to start cutting your expenses down. If your expenses are more than your income, that is incredibly dangerous and can cause more debt. You’re living ABOVE your means at this point. You need to be living BELOW your means, or as they also say, living on less than you make. The concept is very simple.

So if you need to cut your expenses back, check out this post as soon as possible: “101 Ways of Creatively Cutting Expenses to Save a Ton of Money”

Next up, it’s time to create the budget. But what kind of budget do we use? The best budget to use to track your expenses is zero-based budget. I love this budget because it helps you track every single dollar, doesn’t allow for any waste, and it can help you reach your financial goals much faster (if used correctly).

For more, check out this post: “7 Ways a Zero-Based Budget is the Best Budget for Your Money.”

So what do I use to create this zero-based budget? I recommend that you use Mint.com, EveryDollar.com, or a Microsoft Excel spreadsheet to create your budget. I’ve tried all 3 budgeting methods and they all work great. However, I prefer the Excel spreadsheet. While a bit simplistic, I like seeing all my numbers right in front of me in one easy spreadsheet.

If you’re having doubts because you don’t like budgeting, remember this: the budget is permission to spend your money. You control the budget. So if you want to buy something, just put it in the budget. I give myself permission to buy fast food and put it in my budget. That way, I don’t feel bad about spending that money!

Lastly, I just want you to know that you don’t have to be perfect with your budget. But you do have to do a budget. You’ll suck at this at first, but just do it. Over a couple of months, you’ll improve and within 3-6 months, you should’ve mastered your own personal budget!

Here are “37 Ways to Give Yourself a Raise in Your Budget (#27 is Crazy!).”

Step 5 – $1,000 dollar starter emergency fund

Before you start this incredible journey to get out of debt on a low income, you HAVE TO have a $1,000 dollar starter emergency fund in place. This $1,000 dollars is extremely important and will help you out if a small emergency hits. It’s going to rain, so have your rainy day fund ready.

Once you commit to getting out of debt, start putting together your $1,000 dollar starter emergency fund. This needs to be done in 1 month! Get it done as fast as possible.

Again, this money is there to help you with small emergencies or to help you offset something that costs a couple thousand bucks. The $1,000 dollar starter emergency fund is not meant to be a fully funded emergency fund, just a buffer while paying off debt.

Now I know you might be uncomfortable with only having $1,000 dollars in the bank while you’re paying off debt. You may ask, “can I increase it?” No. This starter emergency fund is meant to be uncomfortable. Use this discomfort to give you motivation to get your debt paid off as fast as possible.

For a great how-to guide, check out this post: “How to Create a $1,000 Dollar Starter Emergency Fund in 1 month!“

Step 6 – Get out of debt (as fast as possible)

Next up, it’s time to get out of debt!! You also want to do this as fast as possible. It might take you awhile, but go as fast as you can when getting out of debt. This needs to be “high intensity, scorched earth, run as fast as you can” speed towards debt freedom. It needs to be gazelle intensity.

If you don’t know what gazelle intensity is, here you go: “Gazelle Intense is the term Dave Ramsey came up with to describe the speed and intensity you should have when paying off debt,” according to his website. Check out their article here.

Because I hate debt. It robs you of your hard earned money and keeps you from building wealth. And you need to get out as fast as possible so that you can have a chance of building wealth over time.

First, list all debts smallest to largest and total it up. List every debt – car loans, student debt, credit cards, financing, and anything else that you owe money on. Add it all up to find out your total debt (debt A + debt B + debt C = total debt). It’s important that you know EXACTLY how much debt you have total.

Now that you know your total debt, I want you to set a realistic goal for your debt payoff. Take your total debt and divide it by how much you can pay off every month (example – total debt of $10,000 dollars and you can pay off $500 dollars per month – 10,000 dollars divided by $500 dollars = 20). You should be able to pay off your debt in 20 months. So set this as a goal for yourself.

“I want to pay off my $10,000 dollars of debt in 20 months or less.”

Once you start paying on debt, I want you to pause investments TEMPORARILY. People get so infuriated when I tell them this, but it’s just temporary so that you can have access to every single dollar. You’re only pausing for a short period of time – just long enough to knock out your debt and build up your 3-6 month fully funded emergency fund.

You should already have all of your debts listed out smallest to largest. At this point, I want you to attack the smallest debt with a vengeance. You will also pay minimums on everything else while you’re attacking the smallest debt.

You want to do anything and everything you can to pay off debts including:

Work overtime – most jobs offer some kind of overtime. My job allows 5-10 hours per month. Some jobs offer unlimited overtime. So take advantage of whatever you can get.
Take extra jobs – if you can’t get overtime, find an extra part time job. You may only make $10-20 dollars per hour, but you can really work as much as you’re able to.
Side hustle – side hustles take a little bit of work to get started but can net you $30-40 dollars an hour depending on what you do.
Increase income – find any other way that you can to increase your income. If you’d like some good ideas, check out this post – “27 Ways to Make Money While in Debt: #8 is Super Easy!”
Decrease expenses – on the flip side, you should also do anything and everything you can to decrease your expenses. For that, check out this post again – “101 Ways of Creatively Cutting Expenses to Save a Ton of Money”
Check out one more post – “47 Creative Ways to Pay Off Debt”

Once you pay off the smallest debt, take all of the money you were paying on the first debt and add it to the money you were paying on the next biggest debt. Then do that on the next and then the next. This is called the Debt Snowball, or the amount of money that you have to pay off or use toward debt. You Debt Snowball grows as you pay off each debt.

Work your way up the debts list until you get to the final biggest debt and pay that off. Once you pay off the final loan, you’re left with a large pile of money at the end.

After you’ve paid off all of your consumer, non-mortgage debt, you are now debt free and can start working on your 3-6 month emergency fund. Also between the extra money in your snowball and your budget, you can continue cash flowing everything (paying cash for what you buy). this is easy to do once you’re not living in debt anymore.

Step 7 – 3-6 month fully funded emergency fund

Once you’re out of debt, it’s REALLY important that you start building your 3-6 month fully funded emergency fund.

You need to have an emergency fund of 3-6 months of all required and necessary expenses (how much it costs for bills, groceries, and other expenses times 3 months, 4 months, 5 months, or 6 months). How much you save is up to you.

But you do need to decide on how much for your family:

Stable job: if your job is fairly stable, you want at least a 3 month emergency fund.
Less stable or self employed: if your job is not as stable or you’re self-employed, you need to have a 6 month emergency fund.

My family: we have 2 stable, state employment incomes plus more income coming in from my blogs. So with that, we decided to have a 3 month emergency fund ($3,000/mo expenses times 3 months = $9,000 dollars). We just upped it a bit and decided on a total of $10,000 dollars.

Quick note: get this done as fast as possible. Same intensity level as step 5 and 6. Try to get it done in less than 6 months.

Once you’re done, move on to investing. But only after you finish your emergency fund completely. Having this in order will help you stay out of debt and live a much better life.

For more, check out this post: “How to Create an Epic Emergency Fund With Any Income”

Step 8 – Invest 15% percent & start kids college fund

In step 8, you’re starting up or unpausing you’re investing as well as setting up kids college.

Invest 15% percent

Once you’re out of debt, you want to set up your investments at 15% percent of your gross take home pay (total before taxes). So that’s why you need to know your total yearly salary before taxes are taken out.

So 15% percent…but why? Well, 15% percent is a good, solid amount of money every single month and is enough for anyone to become wealthy. Even if your income is low, once you get out of debt, you can start investing and building wealth with as little as 15% percent.

For example, just $100 dollars per month, from age 20 to age 60, is $584,000 dollars. Half a million bucks from less than $5 dollars a day. Anybody can afford that.

So stop believing that this can’t be you. ANYONE can become wealthy in our world today. It might take you some time, but you CAN do it.

So where do you invest? I recommend a 401(k) with a match, a Roth 401(k), or Roth IRA with good growth stock mutual funds that have long track record of success. Pretty simple.

A quick way to remember: “Match beats Roth beats Traditional.”

If you’re looking for a good investment professional, I recommend Dave Ramsey’s SmartVestor Pros very highly. My wife and I are personally working with an advisor that we met through this program and have been for awhile now. You can check out their SmarVestor Pro page here on Ramseysolutions.com.

Starting kids college fund

Next up, if you have kids, you need to start a college fund for them. This is fairly straightforward and can be a great head start for kids once they hit college age.

All you have to do is open up a 529 College Savings Plan in good growth stock mutual funds. This is easy to do and can be completed by your financial advisor as well.

As for how much, the amount depends on how old your child is, when they’re going to school, and how much you can afford to invest. If you can’t afford to invest for yourself and put money into a 529, just invest for yourself. Because it’s guaranteed that you’re going to retire…but it’s not a guarantee that your kids will go to college.

However, just try to put something in – even $50 dollars per month. That’s better than $0 dollars. $50 dollars per month, every month, for 18 years can be an easy $30,000 dollars to help your kids when they’re getting ready for college (which can easily pay for a 2 year community college degree, by the way).

Whatever you decide, set an amount and stick to it every month. Stay consistent and you’ll be rewarded.

We put in $100 dollars every month, like clockwork, and expect our son’s college fund to be worth around $80,000 dollars or more when he turns 18. It may not cover everything, but it’s better than nothing. We also plan to increase our contributions, so hopefully this will net even more!

But if this doesn’t apply to you, move on. Only open a 529 if you currently have a kid.

Step 9 – pay extra on mortgage and get mortgage paid off

Did you know that if you continue living this way, getting debt paid off, increasing income, and investing, you can easily build wealth and become a millionaire? Yep, if you don’t believe it now, you will soon.

Next up is to tackle the mortgage. If you currently have a mortgage, you need to start paying extra on it to get it paid off completely. If you’re working toward buying a home, make sure to do it the right way:

Your mortgage should cost you no more than 25% of your take home pay (after taxes taken out) on a 15-year fixed rate mortgage.

If you’re currently in a house, it’s time to get it paid off! Don’t listen to stupid people. Get your house paid off and take away all of the risk of keeping your mortgage.

So if you want to stay out of debt, and have more money to work with, it’s important to get your house paid. This will free up A LOT of money on top of the money that you aren’t putting towards other debt anymore!

So start paying extra on the mortgage.

Also, if you can get a decent interest rate, try refinancing from a 30-year mortgage to a 15-year mortgage. It may be worth it. That can cut your time down by 15 years and save you tens of thousands in interest charges over those 15 years.

My family: we pay an extra mortgage payment every single month – $1200 dollars – and we plan to have our 15-year mortgage paid off in about 5 years.

Target payoff date: August 2026 – we started paying extra in August 2021.

I highly encourage you to pay extra on the house, but once you’re debt free, you can use a little bit of money to spend and enjoy. Once you’re out of debt, you simply need to continue being intentional with money (instead of being gazelle intense with money).

Step 10 – Build wealth, give, and have fun!

We’re still currently working on step 9 and we can’t wait to be totally debt free. At this step, you have no debt and your house is completely paid off.

At this point, you should be debt free and your income should be higher. You will also notice that you’re very good with your finances and managing your money…mainly because all of this takes years to get through. Worth it? I’ll talk you when I get to this last step. But steps 1-9 have been worth every second.

Once you’re here, and after your home is paid, you need to max out investments, use some of your money for charity and giving, and use some to have fun.

In order to keep living your best life, and stay out of the debt cycle you were so used to, you need to do the following things:

Continue investing. Max out your retirement account if possible.
Continue budgeting.
Continue living without debt.
Continue living below your means.
Continue being intentional with your money.
Save up for everything.
Never borrow money again.
Build wealth.
Give generously.
Spend and enjoy some of your money and…
Swear that you will NEVER live in debt EVER again.

If you do every step as I’ve outlined above, you can be extremely happy, improve your income, eliminate your debt, and be extremely wealthy down the road. All you have to do is start.

The final say

It doesn’t matter what your income is. And it doesn’t matter how much debt you have. The only thing that matters is what you’re going to do about it. You have to believe that you can change course and fix your finances. Because it’s not up to anybody else. It’s up to YOU. You’re the only one that can do it. So what’s it going to be? Low income, a massive amount of debt, and no financial future? Or crushing that debt, increasing your income, and building the life of your dreams? The choice is yours.