Debt Management PERSONAL FINANCE

Here’s a Strategy to Pay Debt Even With Low Salary

October 12, 2016
Getting out of debt is one of the best financial move you can do in your life. It promotes financial peace and security, more money to spend without guilt and improves your ability to save and invest. One thing I will be forever thankful for to my parents is how they never ever let us go in debt. We never experienced going to the neighbor asking for money or things or food. They manage to resolve all financial issues before we even knew they existed.
 
But I know not everyone is in the same situation as I am. I don’t even have idea until when will I stay debt-free. And so debt is an important matter for me too. Today I decided to post a strategy that will let you pay debt even on low income. I hope this post will help you manage debt before 2016 ends.


Here’s a Strategy to Pay Debt Even With Low Salary 

Paying debt on a low income can be a real challenge. You need enough resources to sustain both your needs and your bills. As much as you want to save and pay your creditors, you feel like there isn’t enough money coming that will enable you. Thus, people often end up with more debt instead.

The very first thing you need to do is to treat debt-payment as a goal

If you see it as a task or obligation you will easily feel discouraged to pay. When you allow your debts as a goal you want to accomplish at a give time (deadline) you’ll certainly arrive with a debt-payment plan in no time. 

Evaluate all your good debts and bad debts and write them all down. Good Debts are those with low-interest and debt you accumulate reasonably. Examples are your house mortgage, car loan and debt due to emergency situation. Bad Debts come with high interest rates that can be fatal to your budget. These includes credit card debts and personal loan to pay for luxurious items. READ: Day 1: Gaano Kalaki Ang Utang Mo

Once you have written all your “utang” and the amount of each you can now create your debt-payment goal. 

Simply feel in the blanks:

My goal is to pay an amount of _________________ to ____________ by _________ .

Example: My goal is to pay an amount of 30,000pesos to my Personal Loan with Kumpare Jose by end of 2016. 

Other variations are as follows:

My goal is to pay __________ every __________ to ______________.

Example: My goal is to pay 2,500pesos every month to my debt-payment fund.

My goal is to finish paying my ____________ before ________________. 

Example: My goal is to pay my student loan before 2017 ends.

Once you make your debt a goal rather than a task you’ll see it as a big project with small and manageable next actions. I will assure you that this mind set is way better and will help you pay even on a low income. 

Next is to know your Debt-to-Income Ratio

Not everyone knows this method in assessing debt you can have and you can pay based on your salary. The Debt-to-Income Ratio will strategically place your money to reply your current debt. Professional lenders use this equation to evaluate whether a debtor can really has the ability to pay the debt on his/her current income.

The formula is very simple:

Total Debt (Good or Bad) / Total Net Income Month) 
= Debt-to-Income Ration

    • Total Debt is the amount of your good and bad debt that you need to pay.
    • Total Net Income is your take home pay on a monthly basis.
    • Differentiate the Debt from the Bill. We are talking about debt here and not the monthly bills like electricity, rent etc.
Example:

Juan’s take home pay is 13,000pesos. His total monthly debt (credit card, housing loan, salary loan) is 4,000pesos.

Total Debt (Good or Bad)  divided by Total Net Income (Month) equals Debt-to-Income Ration

12,000 / 4,000 = 0.33 or 33%

The Meaning

A low debt-to-income ratio shows a good balance between debt and income. Financial advisers suggests a good 10-20% as Debt-to-Income Ratio.

A higher debt-to-income on the other hand suggests that a person has too much debt for his income. Thiscan cause financial loop hole in the long run.

Looking at Juan’s Debt-to-Income Ratio as an example means that 33% of Juan’s salary just goes to pay off debt. This percent is alarming because it it is almost 50% of what Juan is getting on a monthly basis.

So what should Juan do?


1. Create a Budget


Add debt on the amount you need to pay. If you remember the 50-20-30 Rule of Budgeting you can use this and alter the 30% for Lifestyle Fund to your Debt-Payment Fund. With 12,000 income Juan can use 6,000 (50%) for essential expenses, 4,200 (35%) for debt-payment and 1,800 (15%) for savings fund.


2. Pay the Most Expensive Debt First

According to Dave Ramesey’s Money Makeover a great strategy to get out of debt fast is to pay the most expensive debt first. Arrange your debt from highest to lowest interest rate (or even amount) and alongside write down the maximum amount you can pay monthly. 

 
3. Don’t Get into More Debt

Pay first your current debt before accumulating a new debt. This maybe a hard one but just please, refrain yourself from getting into more debt.


4. Find out means to decrease your expenses

There may be items and habits you do that cause you to spend more than your means. Kyle’s guest post will teach you how to really live below your means. 


5. Increase you income

If your goal is to really pay your debt then you might need to look for extra income.

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Final Notes from SavingsPinay

Your debt will not adjust to you ever. It doesn’t work that way. You need to adjust yourself to your debt in order to pay. You have the ability to be debt-free even on low salary as long you incorporate good financial habits with discipline. Soon you’ll realize that you don’t actually need that much money to get rid of your debt but just more will to commit to the goal. Read 20 More Ways to Pay Your Debt.

Go over the this discussion on SavingsPinay FB Community to find accountability partners on your goal to be finally debt-free.

Have you commit yourself to a debt-payment plan yet?

Clariza Glino

Izza of SavingsPinay promotes financial literacy for the young and young at heart by providing insights and tips on budgeting, saving, investing and online entrepreneurship. Aside from this blog she also writes at www.izzaglino.com, a beauty and lifestyle blog for frugal Pinays and manages, www.izzagevents.com, a wedding and event business since 2011. For inquiries, topic suggestions or future collaborations email her at izza@savingspinay.ph