How to become debt–free on a low income in 2023
Debt repayment strategies
With soaring energy bills and the cost of living crisis gripping the country, there’s no wonder 25 million British adults are now in debt or worried about falling into debt. Whether you’ve got a small amount of unwanted debt or you’re struggling to keep up to date with payments, we’re here to help. `Firstly you’ll need to start by making a list of all the debts you have, ranging all the way from that £100 ASOS haul which Klarna paid for to the £3,000 bank loan you took out for your all-inclusive Ibiza blow-out.
It may seem scary to see all of these big numbers in one place, but this number will only reduce from here. We’ve created a handy free sheet for you to download and get to grips with your monthly outgoings and track your debt repayments all in one place.
Next, write down the minimum payment you must pay each month along with the due dates for each payment and put a minimum payment total at the bottom. These are the non-negotiable payments you have to make in order to prevent falling into arrears or having a negative impact on your credit rating.
Determine how much additional cash you have to put towards your debt payments on top of the minimum payments.
Creating a budget for all your outgoings will help you to work out how much you’re able to put aside each payday. You can easily do this using the money manager feature on WAC app where you can input your recurring bills and see where they fall between paydays, as well as set an allowance to help you stay on top of your spending money.
Don’t worry too much about interest rates just yet, once you have this information you’re ready to choose the best method for you. To keep your debt repayments organised in one place you can download our free snowball debt spreadsheet.
IMPORTANT! Ensure all your essential bills and debts are covered first, such as rent, utilities, and repayment plans.
Debt Snowball Method
Well done for taking the first few steps in clearing your debt. You’ve already come so far so you should be super proud of yourself. The first repayment technique we are going to look at is called the Snowball method. This takes its name from a small ball of snow that slowly gathers momentum and grows larger and larger with every movement. Keep that analogy in mind and read to find out how to tackle it:
Arrange the list you’ve already created in ascending order with the smallest debt first. If you are using our snowball debt spreadsheet you can easily see the total debt amounts in each.
Now you know the minimum payments total, work out what leftover money you can add to this. For example, my minimum payment total is £300 and I have £50 extra cash left over from my pay that I could also add to my monthly repayments. To make this super easy we added an outgoings tracker to the snowball debt spreadsheet. Add all your regular bills, outgoings and expenses into this sheet and it will calculate your disposable income.
Each month pay the minimum payments for each debt other than the smallest one. With the smallest debt, you want to try and pay as much of the whole debt off as possible using the extra cash and the budgeted minimum payment you’ve already accounted for. As we are focussing on your smallest debt, you could end up being able to pay it off in its entirety.
My smallest debt is a Klarna bill for £60, with a minimum payment of £20. I have already budgeted £20 for the minimum payment and have an additional £50 to put towards my payments each month, which totals £70. This means I can pay off the whole £60 Klarna bill and use the leftover £10 as extra cash for my next smallest debt.
Then on your next payday and do it all again. This time you’ll transfer the money Remember you’ll have the cash that you budgeted for the minimum payments of the debts you’ve now paid off to use as extra cash.
Hang on, I know what you’re thinking; ‘but the interest on these smaller payments is so low, surely I should pay off the high-interest debts first?’ Not necessarily, and hear me out on this one.
Have you ever set yourself a goal but found it too difficult and gave up? That’s exactly what we want to avoid here, by paying off the smallest debt first you get that lovely warm feeling when you achieve part of your goal! It’ll motivate you to keep going and you’ll be more likely to stick it out to the end.
Every time you pay off a debt you’ll do a little happy dance and feel like you can accomplish the world, one overpayment at a time.
Debt Avalanche Method
f you’d still prefer to reduce the amount of interest you’re paying each month then the alternative is following the Avalanche method. This follows exactly the same process, however, this time you need to reorder your payments into the order of highest interest first. Rather than gathering momentum, this method packs a punch obliterating everything in its path on the way down.
I have tried both of these methods and although in the long-term you could be saving more using the avalanche method because you are reducing interest payments, there’s a high probability you won’t see much of a difference and will give up within a few months time (like me).
Each person works differently, so have a good think about your priorities and what you’d prefer to focus on, but know that you can always switch up to the other technique if it’s not quite right for you.
Tips to prevent debt
The best way to avoid debt is to save an emergency fund and stay up to date with your bills but it’s easier said than done.
Keep a clear budget by totalling up your recurring bills and knowing exactly what is coming out of the bank. This is easy to do on the WAC app Money Manager feature.
If you’re an hourly-paid worker, make sure you are keeping track of your hours and pay. Use a free app like WAC to help you to track your hours and get a live payslip estimate so you can make sure you are getting paid correctly. If you have concerns that you have been underpaid you can find out more information on what to do by checking out our blog on what to do if you’ve been underpaid.
If you or someone you know is getting overwhelmed by debt, please link them to this blog and refer them to these useful links below for additional help.
Support for serious debt problems
UK Government guidance for paying off debts
Get support from citizens advice
Step Change Debt Charity
Money Saving Expert breakdown of Debt vs Savings