The “debt problem” in America is not getting better. According to financial experts, around 80% of Americans are in debt. This means 8 out of every 10 people living in the United States are drowning in some form of consumer debt.
Now, let’s go straight to the point and address the elephant in the room. Can you figure out how to pay off debt when you are broke? You will probably say “NO” since you don’t have any strategy or idea for paying down your multiple debt balances.
However, that’s the reason you are reading this post! You will learn the simplest yet effective tips for reducing debt even if your income is low.
Most of the debt-payment tips shared here are basic day-to-day financial practices you can get used to. With time and consistent effort, you will wake up one morning without having to worry about making a minimum debt payment. You’ll be debt-free.
What Does “Being Broke” Really Mean?
Being broke means you are financially ruined or bankrupt. That is, you are not financially stable enough to pay for an apartment, wear decent clothes, or afford good food regularly. This is also known as being “d##d broke” or “flat broke”.
On the other hand, being broke could mean that you don’t have enough money to afford a luxury lifestyle. In some cases, it doesn’t mean you are in poverty. You simply just can’t afford to splurge your income as you’d like to. Hence, you have to focus on only your essentials so you don’t live beyond your means.
How Can I Get Out Of Debt When I’m Broke?
If you want to get out of debt when you’re broke, the most important thing is to try to be less broke; find a way to increase your income and get some extra cash coming in at the end of every month. With a fair amount of money in your bank account, you can start working towards paying off debt.
Common Reasons People Are In Debt And Broke
Everyone claims to have a unique story of how they ended up broke. However, there are some undeniable factors that are affecting the finances of millions of Americans. Here’s what you should know:
Low Income Or Underemployment
People with low-income or underpaid jobs find it very difficult to pay off their debt. The reason for this is obvious; they don’t have enough money to make monthly minimum debt payments and cover their bills at the same time. This means they are practically living paycheck to paycheck.
It’s a precarious situation that leaves one with a huge amount of debt waiting to be paid.
Poor Money Management
You have to get your finances on track before things get out of hand.
Examine your financial statements and track how you spend your income every month. When you fail to do this, you become financially overstretched and start piling up debt.
If you don’t take action to resolve this as soon as possible, you’ll find yourself in a debt trap. That is definitely not a good situation to be in.
High Cost Of Living
Every year, we try to fight inflation. It’s almost inevitable.
As the cost of living increases, people are compelled to resort to credit lines, hoping to pay them back eventually. But sadly, it doesn’t work that way. As long as your income is very low, you’ll max out your credit cards without having enough money to sort out the debt.
One way to cope with inflation is by drastically cutting down on expenses and increasing your income. Basically, you must have a good cash flow.
Emergency Expenses
When you are broke, it can be pretty difficult to build an emergency fund.
How can you save when you barely cover your monthly bills? So when you are faced with emergency expenses, the only obvious solution would be to get a line of credit or personal loan. This is why it’s important to be prepared for emergencies.
If you are too broke to save, then boost your income by working two jobs or running a side business. You can’t afford to let your financial life crumble when you can actually do something to prevent it.
Overuse Of Credit Cards
Almost everyone has a credit card. It’s often seen as the easiest way to pay for basic expenses without spending directly from your checking account or in case you’re broke.
Unfortunately, many people go overboard with credit cards. They overuse them and pile up huge debt balances at the end of the day. It’s not a safe way to manage your finances.
Even though it seems like the simplest solution to pay bills, you can’t deny the fact that you will continuously incur debt when given a line of credit.
12 Steps To Pay Off Debt When You Are Broke
It’s easier to manage and grow your financial resources when you no longer have to worry about debts. Your financial goals become realistic and you’ll regain your peace of mind. Here are helpful steps to pay off debt when you are broke:
1. Budget Your Income
This is put here as the first step because it’s one of the most fundamental aspects of improving your financial situation irrespective of how much money you make every month.
Managing your salary with a zero-based budget is a smart way to plan for every dollar in your checking account. Budgeting shows you how to spend money wisely and it encourages you to live below your means.
One common reason people shy away from budgeting is that it restricts their spending. However, that’s exactly the purpose of a budget. Curbing your spending will stop you from making irrational buying decisions that could put you in debt.
If you want a more comprehensive guide on budgeting, here’s a post that explains how to budget money in 5 simple steps.
2. Reduce Your Living Costs
If you want to learn how to pay off debt when you are broke, make sure you examine your spendings thoroughly. You need to find out if you have been spending too much on groceries, transportation, giving, or entertainment. Once you realize your spending isn’t moderate, you have to cut back heavily on expenses.
Begin by avoiding any unnecessary payments. If you have a gym membership you rarely use, stop paying for it. Stop subscribing to premium music and movie streaming platforms when there are several free options out there.
Reducing your cost of living leaves extra money in your bank account, and this can help to contribute more toward your debt payment.
3. Start A Business
Increasing your income is one of the sure ways to pay off debt when you are broke.
Starting a small business can help you achieve this goal. While you retain your current job, look for a side hustle that brings extra cash weekly or monthly.
Sometimes, you can’t do this alone. You may have to partner with a friend or family member to establish the business so the weight of being an entrepreneur doesn’t get overwhelming.
There are many business ideas you can start with, especially on the Internet. Dropshipping, e-commerce, or affiliate marketing are feasible money-making ideas you can try.
4. Get A Part-Time Job
If you aren’t interested in starting a business, you can find a part-time job instead. There are different types of flexible side jobs you can do to complement your full-time job.
You can work as an Uber driver, walk dogs for people, or deliver Pizzas. As long as it’s a legit job that helps you earn more money every month, go ahead and do it. This is one of the simple tips to pay off debt when you are broke. Don’t neglect it.
5. Ditch Credit Cards For Good
This won’t be an easy decision, but it’s one of the best things to do if you don’t know how to pay off debt when you are broke.
Cut up all your credit cards, literally! You don’t need a credit line to survive. That’s a lie the credit card industry feeds people to trap them in debt.
Remember you’re never paying back the exact amount you borrowed. You lose money on the interest rates. Hence, it’s best you learn to live without credit so you gain full control of your finances.
6. Pause Investing
Investing in your retirement or saving for your children’s education is essential. But when you are in a critical situation with debt payments, you have to temporarily suspend your investing to free up some money. You have to channel most of your income to paying down debts.
Bear in mind that it’s just temporary. As soon as you become debt-free, you can resume contributions to your retirement investments. That would also be the ideal time to build an emergency fund to protect your finances.
7. Don’t Compare Yourself With Others
When learning how to pay off debt when you are broke, avoid the comparison game. Stop comparing your financial situation with that of others.
Just because your friend gets a car loan doesn’t mean you should change your car as well. Everyone has a different paycheck with different responsibilities to cater to. You have to focus on doing what works for you; living within your means to pay down debt.
Even when you eventually become debt-free, that’s not an excuse to try to keep up with the Joneses. In two decades, when other people are still struggling with debt, you’ll be financially free.
8. Try Couponing
Couponing has been helping people save money on groceries for decades.
Regularly check your newspaper or shopping sites for coupons and buy things as they are on sale. This will save you a ton of money and help you get out of debt even faster. However, you don’t have to buy anything just because there’s a coupon on it. That would simply amount to impulse buying.
So, just look for the essential items with coupons and pay for them. This is a very brilliant strategy for how to pay down debt when you are broke.
9. Cut The Cable
While trying to get out of debt, you have to be comfortable with being uncomfortable. It’s only going to be temporary. So, you should reduce your love for watching TV. Instead of paying for cable every month, get an old-school antenna or a much cheaper cable alternative.
If you have been spending $100 on cable, that money can now go toward your debt payment each month.
10. Stop Dining Out
If you still want to eat out while learning how to pay off debt when you are broke, then you are contradicting yourself.
Even though going to restaurants is more exciting than eating at home, remember you have to cut back on your expenses. It’s time you fell in love with preparing your own meals. There are thousands of recipes you can learn on YouTube for free.
Also, create a meal plan so you don’t have to constantly worry about what to eat.
11. Create A Grocery Shopping List
One of the reasons people buy things impulsively is that they don’t shop with a list. Then they overspend and burst their budgets. You can choose to write down your grocery needs so that when you get to the store, you can buy everything you need without going overboard.
If writing seems tedious, you can use a grocery list app on your mobile phone. Apps like AnyList and Mealime are amazing options for creating grocery shopping lists.
12. Enrol In A Hardship Program
Mortgage lenders and auto lenders are known to offer hardship programs sometimes. Although this doesn’t work out for some people, you might be lucky. It’s one of the common strategies on how to become debt free when you are broke.
Gather the courage to ask your creditor to lower the monthly minimum payment. This might be your last option, especially if you are almost defaulting on payments. Bear in mind that it could also affect your credit score because the interest compounds.
Quick Summary On How To Pay Off Debt When You Are Broke
When you are in debt, it’s important you pay what you owe on time. Your credit score is always on the line for any loan, mortgage, or credit card you accept. If you fail to make payments, your credit history could be damaged.
Notwithstanding, as much as you’re trying to figure out how to get out of debt when you are broke, make sure you do it within your means. Don’t take in more debts while paying down your existing balances.
Pin this for later!
