Home » How to Get Out of Debt If You’re Living Paycheck to Paycheck
Written by:
Meghan AlardFinancial Literacy Specialist
When you’re barely scraping by month-to-month, getting out of debt can seem 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 closes 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.
Do you need help finding the right solution to get out of debt? Request a free, no-obligation evaluation.
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.
Get the debt-free life you deserve! Find out how we can help you today.
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FAQs
People living paycheck to paycheck are sometimes referred to as the working poor. Living paycheck to paycheck can occur at all different income levels. The working poor are often low-wage earners with limited skills but can include those with advanced degrees and skills.
Are you poor if you live paycheck to paycheck? ›
People living paycheck to paycheck are sometimes referred to as the working poor. Living paycheck to paycheck can occur at all different income levels. The working poor are often low-wage earners with limited skills but can include those with advanced degrees and skills.
How can I save money if I live paycheck to paycheck? ›
With the right strategies, you can successfully save more money even when you leave from one paycheck to the next.
- Know Your Expenses. The first step to saving money is understanding your expenses. ...
- Build a Budget. ...
- Look for Ways to Increase Your Income. ...
- Automate Your Savings. ...
- Cut Back on Non-Essential Expenses.
Living paycheck to paycheck by income
According to a recent PYMNTS report, as of November 2022, 76 percent of U.S. adults who make less than $50,000 are living paycheck to paycheck, compared to 65.9 percent of those making $50,000 to $100,000 and 47.1 percent making more than $100,000.
How do people end up living paycheck to paycheck? ›
More than half of Americans earning over $100,000 a year live paycheck to paycheck. So what's going on? Many experts point to a phenomenon called lifestyle inflation as one of the culprits. Lifestyle inflation, or lifestyle creep, is the pattern of spending a little more as a person's income increases.
What paycheck is considered rich? ›
Here's the income it takes to be a top earner in your state
You'll need to earn more than half a million annually to be considered among the highest earning residents in 11 states and Washington, D.C. "This comes down to cost of living," Murray said.
Do 80% of Americans live paycheck to paycheck? ›
A 2023 survey conducted by Payroll.org highlighted that 78% of Americans live paycheck to paycheck, a 6% increase from the previous year. In other words, more than three-quarters of Americans struggle to save or invest after paying for their monthly expenses.
What percentage of Americans are living paycheck to paycheck? ›
A majority, 65%, say they live paycheck to paycheck, according to CNBC and SurveyMonkey's recent Your Money International Financial Security Survey, which polled 498 U.S. adults. That's a slight increase from last year's results, which found that 58% of Americans considered themselves to be living paycheck to paycheck.
Do some millionaires live paycheck to paycheck? ›
There are several reasons why millionaires may live paycheck to paycheck. Some may have high-cost lifestyles, such as expensive homes, cars, and vacations. Others may have large amounts of debt, such as student loans or credit card debt. Still, others may simply be poor at managing their money.
How can I save $1000 fast? ›
11 Easy Ways to Save $1,000 in 30 Days
- Create a Budget. ...
- Automate Your Savings. ...
- Create a Savings Bingo Sheet. ...
- Negotiate Your Bills. ...
- Separate Wants From Needs. ...
- Plan Your Meals. ...
- Buy Generic Brands. ...
- Cancel Unnecessary Subscriptions.
According to the U.S. Census, only 15.3% of American households make more than $100,000 annually. A $100,000 salary can yield a monthly income of $8,333.33, a biweekly paycheck of $3,846.15, a weekly income of $1,923.08, and a daily income of $384.62 based on 260 working days per year.
How many Americans have no savings? ›
As of May 2023, more than 1 in 5 Americans have no emergency savings. Nearly one in three (30 percent) people in 2023 had some emergency savings, but not enough to cover three months of expenses. This is up from 27 percent of people in 2022. Note: Not all percentages total 100 due to rounding.
How many 25 year olds make over 100k? ›
Only 2% of 25-year-olds make over $100k per year, but this jumps to a considerable 12% by 35. That's a whopping 500% increase in the share of people making $100k or more. 21% of 66-year-olds make $100k per year or more.
Are people struggling financially? ›
Only 48% of Americans have enough emergency savings to cover at least three months' worth of expenses, as of May 2023. 22% have no emergency savings at all. Americans' debt is piling up. 36% of U.S. adults have more credit card debt than emergency savings, as of January 2023, the highest percentage since 2011.
What is high income but no savings? ›
HENRYs earn substantial wages but have few investments and meager savings. Developing better spending habits, increasing savings, diversifying investments, and taking advantage of tax credits and deductions can transform them from the "not right yet" to the "wealthy."
Why do rich people live paycheck to paycheck? ›
High-income earners are the likeliest to say they lack good saving habits. One possible explanation is that they may have less incentive to save than the average consumer as they are more confident about their job prospects and are less likely to switch jobs.
Can you be middle class and live paycheck to paycheck? ›
As the data show, a paycheck-to-paycheck lifestyle isn't exclusive to lower-income earners. A higher salary may not stretch as much for those facing a higher cost of living, especially if they rely on credit to cover the gaps. Finding ways to break the paycheck-to-paycheck cycle is vital to long-term financial health.
How much of your paycheck should you live on? ›
50% of your net income should go towards living expenses and essentials (Needs), 20% of your net income should go towards debt reduction and savings (Debt Reduction and Savings), and 30% of your net income should go towards discretionary spending (Wants).
Why shouldn't you live paycheck to paycheck? ›
Problems With Living Paycheck to Paycheck
A wide range of financial and emotional consequences depend on every paycheck for essentials. These include: No money is saved to handle emergencies. Interest costs from borrowing money to cover unexpected expenses adds to the financial burden and monthly budget.
