Debt can be difficult to manage even when you’re making a full salary. When you’re on a fixed income, such as in retirement or when receiving unemployment benefits, managing debt can feel even more challenging. After paying down a balance one day, you might have to use a credit card to pay your bills the next, keeping you in a cycle that feels like debt never goes away.
Fortunately, there are steps you could take to make it easier to pay down debt, such as using debt repayment strategies or getting a debt consolidation loan. Let’s explore some ways you can manage debt on a fixed income.
1. Create a list of debts
It’s easy to get overwhelmed when you’re dealing with debt, especially if you have multiple accounts to manage each month. The first step of any debt management strategy is to create a list so you can see exactly what you owe each month. The list should include:
- Lender or credit card company
- How much you owe
- Minimum monthly payment for each debt (you’ll adjust this later according to the debt repayment strategy you choose)
- Payment due date
Laying it all out in one place helps you organize your debt and begin planning how to pay it down.
2. Consider debt repayment strategies
Two common approaches to paying down debt are the debt avalanche method and debt snowball method. They basically work in opposite ways:1
- The debt avalanche method focuses on paying debt with the highest interest rate first. You pay at least the minimum amount due on all debts, but as much extra as you can afford toward the debt with the highest annual percentage rate (APR), which is the total annual cost of borrowing. The goal is to reduce your interest costs as quickly as you can.
- The debt snowball method focuses on paying the debt with the smallest remaining balance first. Again, you pay at least the minimum amount due on all debts, but you put as much extra as you can afford toward the debt with the lowest remaining principal balance. The goal of this method is to lower the number of outstanding debts as quickly as you can.
3. Create a budget
A budget tracks your income and expenses so you can figure out how much you must spend each month. Your budget should allocate money for “needs” like rent and groceries, “wants” like entertainment and travel, and savings goals. It’s important to include debt payments in the “needs” category to ensure you’re meeting your financial obligations.
With a budget, you can identify non-essential expenses to cut, such as subscription services or dining out, and move money around to meet your debt repayment goals. Just remember, setting a budget is only the first step. You’ll have to put in the work to stick to it, too.
4. Stop acquiring new debt
It might sound obvious that you need to stop tacking more debt onto your outstanding balances, but avoiding new debt may be more difficult than you think. If you’re using credit cards to cover expenses, you’re acquiring debt. It takes planning to avoid new debt.
Some steps you can take include:
- Start using a debit card for everyday expenses instead of a credit card.
- Cancel automatic payments connected to your credit card accounts and transfer them to your debit card.
- Delete your credit card information from online accounts and apps to reduce the temptation to shop online.
Limiting your credit card use is one of the most effective steps you can take to avoid taking on new debt.
5. Consider a side hustle
It can be hard to afford living expenses, let alone additional debt obligations, when living on a fixed income. If your regular fixed income isn’t enough to cover your living expenses and debts, you might consider earning more with a side hustle.
More than half of Americans have side hustles today.2 Some potential ways to earn extra income include driving for a ride-share company, tutoring or performing odd jobs in the neighborhood. However, if you rely on certain government benefits, such as unemployment or disability insurance, you should make sure you know what your earning limits are first, so you don’t compromise your eligibility.
6. Consolidate debt
Juggling multiple payment amounts and due dates each month can make it complicated to manage your debt. Debt consolidation doesn’t reduce what you owe, but it can simplify your payments so you don’t miss one by accident.
With a debt consolidation loan, a lender pays off your outstanding debts and provides you a new loan with a single interest rate and repayment schedule. Under the best circumstances, debt consolidation could help you lock in a lower interest rate and make it easier to budget your fixed income for a monthly payment.
It’s important to understand that lower payments and a lower interest rate don’t always mean you’re paying less overall. If you get a longer loan term, you may end up paying more interest than you would have otherwise. And if any of the loans you pay off have a prepayment penalty, you’ll owe that cost as well. You’ll need to do the math to make sure the loan works for you.
Make a plan to pay off debt on a fixed income
It can be challenging to manage debt on a fixed income, but good budgeting and planning could help you meet your financial obligations and pay down what you owe. By setting a budget, cutting expenses and taking action to consolidate debt, you may be able to manage your debt and still meet your needs, even on a fixed income.
Notice: Information provided in this article is for information purposes only and does not necessarily reflect the views of etherions.com or its employees. Please be sure to consult your financial advisor about your financial circumstances and options. This site may receive compensation from advertisers for links to third-party websites.
1 https://www.onemainfinancial.com/resources/loan-basics/debt-repayment-method
2 https://www.marketwatch.com/financial-guides/banking/side-hustles/
