Last week I talked about the myths or misconceptions about those that pay off debt. Basically, people think you need to live with your parents and have a high income or else you are probably lying about paying off debt. While the first two points are nice to have financially when paying off debt, that isn’t the case for many people paying off debt. The old rule of living off less than you earn and putting the rest towards debt is paramount, but what if you have a low income? Can you pay off debt with a low income?
What Is Considered A Low Income?
A 2016 study by the Pew Research Center identified median incomes for the lower, middle and upper class. Here are the results.
The middle-class income range for a household of three was about $45,200 to $135,600 annually. Therefore, we can consider anything lower than $45K a low income.
With the middle-class having a median income of $78K, you would also expect $78K to be the average household income but it is not. According to the U.S. Census Bureau, the average household income is roughly $61K a year.
$61K is not a ton but it is much easier to get by on then $25K. It wouldn’t be tough though to find people making both amounts of income to feel squeezed and have a hard time getting ahead, let alone keeping up.
Factor debt into all of this and it makes any income more difficult. Keeping up with minimum payments and dealing with late fees only exacerbates the situation.
Then when you add in the emotional aspect of a low income it is easy to withdraw and feel ashamed. You feel less inspired and just flat out tired when thinking about the drastic changes that need to occur to get ahead.
Your income has no bearing on your value as a person, yet it is easy to feel that it is a reflection on you.
If A Low Income Is The Reason You Can’t Pay Off Debt, Then Why Do Higher Income Households Have Debt?
You would think that debt would be related to income, but it is not.
If the general thinking is that “if only I made $100K a year, then everything would be OK,” then why do people making much more still have debt?
Some of it is student loans, which most likely led to a higher income for them, but the big part of it is lifestyle inflation and lack of financial knowledge and discipline. It is very easy to make 6 figures and accrue debt each year in the form of credit cards, car loans and a mortgage for more house than you need. Plus, you pay a lot more in taxes as your income goes up but you still have more much more money left over than if you made less.
The good news though is that once they wake up and find some discipline they can make huge strides in paying off debt and saving for retirement.
That is because they had the income component already figured out. They just needed to change their focus and spending habits.
Our Debt Payoff
For full disclosure, we paid off about $107K in 33 months making $83K to $107K between the two of us.
That was a much higher income than either of us had been used to though.
Before we got married my highest income was $48K a year but started at $40K upon graduating college. That didn’t last long though once I got laid off in early 2009. I was out of work for a few months but managed to cobble together enough to stay afloat by adding to my credit card debt.
When I met Erin, she was living in a small studio making roughly $25K a year. She was working at least 20 hours a week going to school full time for an accounting degree.
Believe it or not, I was the one with the debt problem though and not her. Yes, she took out loans to cover tuition, but she did not have credit card debt and was living within her means. It was by learning from her that caused me to see things differently.
By the time we decided to tackle our debt head on we had a combined income of $83K a year. I was making $52K and she was making $31K while finishing up her last semester of school working 20-30 hours a week.
What I learned early on though was that I had made a mistake thinking that I needed more money to pay off my debt. After putting together some budgets I realized that I could have found a few hundred dollars each month to pay off my credit card and student loan debt while making $40K a year. Instead, I wasted my 20’s carrying a revolving credit card balance. I thought I needed more and made my income an excuse for why I couldn’t pay off debt. The problem was me and not my income.
Paying Off Debt Is A Mindset
The frustration that I felt about not having a higher income wasn’t about me paying off debt, it was about me wanting more stuff. If I had more money I could buy more stuff and not go into debt for it. Eventually I would have enough income that I could have everything I wanted and still have enough extra to pay off the debt I owed.
That was my mindset. Basically, I would try to out earn my stupidity except I wasn’t doing much to make more money beyond getting a raise once a year.
The day it all changed for us was when we made paying off debt our number 1 goal and mindset. Every decision we made included how it affected our debt payoff. Since our income was higher we could afford to give in to some small temptations admittedly, but we still paid off around $35K a year.
Now, that example is my experience. I am not saying that someone who makes $30K a year is of the mindset of accumulating stuff the way I was.
What I will say though, is that you can’t make $30K a year and not have a dept payoff mindset and be successful at it. You don’t casually get out of debt, especially with a low income.
It is that much more imperative that when you have a low income you become hyper vigilant about every dollar you spend. And, you must make tough choices about what you do spend your money on that others don’t.
That gets exhausting over time. Period. It is very easy to give up if you don’t see any progress, but the problem is that it only hurts you in the long run when you give up.
To break free, you must have a hardcore debt free mindset and you must not give up. What do you have to lose if you make those two things your priority?
Can You Pay Off Debt With A Low Income?
So, if Erin and I paying off debt making a minimum of $83K a year is too unrelatable for you let’s look at some examples of people paying off significant amounts of debt on a low income.
Kara Paid Off $25K In 3.5 Years
Kara Perez, from Bravely and the Fairer Cents podcast, paid off $25K in 3.5 years never making more than $32K a year. I personally consider that much more impressive than what Erin and I did. She was willing to make changes and sacrifices that I balked at while making more than her.
As a result, she is now debt free and has started investing.
I encourage you to read the articles I linked to telling her story. In them, she describes the various jobs she pieced together and sacrifices she made. She lived on her own, but did have roommates to keep her costs down. There is one thing though that I keep seeing as being the consistent reason she got out of debt.
As stated in her interview from Student Loan Hero, her biggest tip for people dealing with a low income while paying off debt is the following.
“Just commit to paying it off. I was focused on that and nothing else, and as a result, I paid off huge amounts very quickly.”
Melanie Paid Off $81K
Melanie Lockert, from Dear Debt, paid off $81K total over 9.5 years, but paid off $68K of that in 4.5 years once she got serious. At the beginning of her 4.5 year debt payoff she was making $20K a year.
Despite not making much, she made the commitment to becoming debt free and put 50% of her income towards debt. Her income was not an excuse, instead it was the reason to make changes.
After 1.5 years of making $20K, she then got a full-time job making $31K a year which helped quite a bit. She continued to side hustle and eventually turned that into her career. She quit her full-time job once she felt she could make more freelancing than at her full-time job. Here she describes her mindset during that time.
“My mindset shifted and I was determined to make it work. I would not fail and I would make sure that I made more than my day job, so I could pay off student loans.”
She had every reason to put off paying off debt and no one would have thought otherwise but she didn’t. In addition to the mindset she also talks about earning more.
“Many people in personal finance extol the virtues of cutting your expenses. I think that’s one important part of personal finance, but there’s only so much you can cut back on. You’ll always have some expenses. I found that earning more — even if it required more “work” — was far more fruitful for my debt payoff efforts and helped land me a new career.”
At a certain point near the end of her payoff, she was able to bring her income up to about $60K and put $30K towards debt in a year.
I am convinced that if she hadn’t committed early on to paying 50% of her income towards debt that once she hit $60K she wouldn’t have paid off $30K per year. It was the steps she took early on with a low income to make that possible.
Chris Paid Off $16,500 In 16 Months
In this Debt Free Scream from the Dave Ramsey show, Chris talks about what he did to pay off $16,500 in 16 months with a salary ranging from $24K a year to $27K.
He lived with his brother, but still paid rent, and sold what he could to find extra money. Change occurred after he realized that it wasn’t his income that was stopping him, it was his habits. Prior to paying off debt he found that when he made more money, he just spent more money so why not start paying off debt despite the income.
As a result, he changed his habits and redefined success. By realizing that every action he made it somehow affected his finances. Whether it was when he was grocery shopping or how he used his evenings, his focus was first and foremost to pay off debt.
So, what is his advice for paying off debt on a low income?
“Just start doing it.”
It Is Possible To Pay Off Debt On A Low Income
So, we know that it is possible to pay off debt on a low income but how does this relate to you?
At the end of the day, it is your life. If you want different results, you must make changes. Otherwise, you will get more of the same. If you think it is impossible, then it will be impossible if that is what you believe.
I always remember finding debt free stories frustrating. I wanted their results without changing my behavior. I made excuses for why I couldn’t change. I realized too late though that could have made changes. As a result, my new wife had to help pay off my credit card debt. I can’t take that back, but I can change how I operate going forward.
The best thing you can do, regardless of your current situation, is to commit to being debt free. Even if your current circumstances don’t allow it, this is the mindset you need to adopt going forward. It isn’t about where you start, it is about how you finish.
Through Melanie’s drive she raised her income and paid off $81K eventually within 5 years of graduating. Her bigger legacy though is her commitment to talking about debt and suicide which is a topic not a lot of us bloggers write about. That commitment to becoming debt free though, led to her new career and ability to reach others in need.
Kara has been successful with both her blog and podcast in a short amount of time. Since she is debt free she started investing despite a low income. She is also committed towards spreading financial literacy to women.
In Kara’s article about the Emotional Burden of Debt, she describes how it feels to be debt free.
“Being debt-free has vastly improved my life. I feel lighter. I’m happier. I’m saving money, and I’m beginning to build wealth. I own my life, not some lender.”
That is what I want for you regardless of your income. We can see the good that has come from Kara’s and Melanie’s commitment and I can’t wait to see what you can do.