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How to become Debt Free while on a Low Income

I became debt free in February 2020, just before the pandemic! And during that time, I only earned just above National Minimum Wage. Many people told me that I was crazy for even attempting it, and that I’d never manage it in this economic climate.
All I can say is that I’m glad I never listened to them!
It may have taken me longer than some couples, but the result was the same, Debt Freedom!
These are the steps I took to become Debt Free while on a Low Income.

1. You need to know your numbers.

Finance

Finance

This is by far the scariest part, and the reason that many people do not even start their Debt Free Journeys. It can be scary to see exactly what you owe to people written down. The reality of that number can be enough to pretend you did not see it, and run on the opposite direction, choosing never to look at your debts again.

I promise you, if you have the desire to face this, you will not be seeing that number for long.

2. Know your Income and Expenditure.

Finance

Finance

Have you ever thought ‘I don’t know where my money disappears to every month’? This exercise will show you exactly where your money goes!

Next, go through the previous months bank statements. Write down all your income for the month. This may include things like:
  • Wages/Salary
  • Tax Credits/Benefits
  • Child Maintenance
  • Rent from Lodgers/Older Children
  • Second jobs
Now assign different categories for everything you have spent. Examples could be
  • Bills
  • Direct Debits
  • Entertainment
  • Childcare
Now split all your expenses into either ‘Necessary’ or ‘Not Necessary’.
So items like utilities would go into the ‘Necessary’ section, and those cups of coffee you buy in town would go into the ‘Unnecessary’ section.

3. Start Cutting Things Out!

Finance

Finance

So, from your ‘Not Necessary’ list, you now know what you need to cut out, or cut down on. Some ideas to help might be

  • Invest in a good coffee flask and make all of your ‘on the go’ coffee from home
  • Get rid of multiple streaming services – Stick to one, or start reading!
  • Reduce/Stop your Sky or Cable subscriptions
  • Sort through what clothes you already have so you don’t buy anymore
  • Have a skincare and Makeup audit. Do not buy any until you’ve used up what you already have.
  • Think of free things you can do with your children instead of taking them on expensive days out
  • Invite your friends over to your house in the evenings instead of going to a bar or pub. If everyone brings a bottle, it works out much cheaper
Whatever it is that you currently waste money on, you can find a way around it – you just need to get creative sometimes!

4. Write Your Budget.

Budget

Budget

This part is quite simple, and there are plenty of budgeting templates available online to help you with this step. Essentially you write down all your income and expenses, then see what you have leftover.

There are many different methods for writing a budget, and you can learn about a few of them on the Smarter Finances website.

5. Have an Emergency Fund!

Emergency Fund

Emergency Fund

Whatever is left after your necessary expenses are deducted from your income, gets saved towards a 1000 Emergency Fund (EF). At the beginning on this journey, you only need 1000 as an Emergency Fund, and the plan is to get that 1k as quickly as possible.

How can you make money as quickly as possible?
  • Go through your clothes, unused items and sell what you no longer need or use
  • Work extra hours
  • Online surveys
  • Get a 2nd job
To realise the importance of an Emergency Fund, imagine what would happen without it. What will happen when your washing machine breaks down, or your car fails the MOT? What happens if someone drives into the back of you and damages your car?
If you don’t have an Emergency Fund, you’ll end up getting further into debt to cover those types of emergencies and get further into debt.

6. Sinking Funds.

Funds

Funds

Now that you have your 1000 Emergency Fund, and written your budget, you should know exactly how much money you have left at the end of every month. At this point, when you are feeling motivated to start paying off our debt, it’s really tempting to throw every penny at debt. But it is important to have sinking funds.

What are Sinking Funds?

They are basically just a pot of money (either a physical pot, or online) where you save for expected expenses. For example, you know Christmas is on the 25th December every year, it shouldn’t come as a shock!
So instead of panicking in October or November, plan ahead. Decide on how much you will spend on Christmas and divide it by how many months until Christmas arrives. So, in January you’d divide by 12 and in June you’d divide by 6. Then bank that amount every month to pay for it.
The thing here is to set REALISTIC amounts for Christmas. Pre ‘Debt Free Planning’ you may have spent a huge amount every year on Christmas, but your budget will tell you what you can afford now!
This is the same for all big expenses. Plan ahead and you won’t ‘Sink’.
Some examples of Sinking Funds are:
  • Christmas/Birthdays
  • Car Expenses (MOT, Tax, Insurance, repairs)
  • School Expenses (Uniforms trips, bus pass)
  • Pet expenses (annual vaccination boosters, emergency vet visits)
Again, depending on your personal circumstances, these may be different from mine and you may have less or more of them.

7. Paying off your debt: Snowball vs Avalanche.

Finance

Finance

Now, things get exciting! You get to put every single penny towards debt and get started with becoming Debt Free!

But which method should you choose? I do not think there is any ‘should’ in that question, I believe its YOUR decision, not up to me to tell you.

There are 2 methods

The Debt Snowball and The Debt Avalanche.
Put simply, The Debt Snowball ignores interest rates on your debts and tackles each debt in order from lowest to highest balance. There is some good Psychology in using this method, as you gain traction quickly and get those ‘quick wins’.
The Debt Avalanche is the opposite. You list your debts in order from the highest interest rate to the lowest interest rate, and you pay them off in this order. This method has maths on its side!
Whichever method you decide to use, it’s entirely up to you. Don’t feel like you can’t change your mind either! If you start by using The Debt Snowball but find it doesn’t work for you, it’s perfectly fine to switch to using The Debt Avalanche. Whatever keep you motivated and keeps you on your Debt Free Journey is the best thing.
I personally used The Debt Snowball, as it meant that I paid off some of my smaller debts quickly. This helped keep me motivated, but some of you may be more ‘maths people’ and prefer The Avalanche.

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