How to Get Out of Debt If You're Living Paycheck to Paycheck
When it feels like you’re barely scraping by month-to-month, getting out of debt can feel 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 freezes 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.
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.