How to Stay Out of Debt With a Low Income

Staying out of debt is important, but even much more so when you have a low income. It takes a bit more work to stay debt free when you don’t make much, but it can be done. Here are some common sense ways to stay out of debt when you have a low income.

How to stay out of debt with a low income

You don’t make a lot of money and you’ve worked hard to get out of debt. Now that you have the taste of what it’s like to not have a monthly interest payment for maybe the first time ever as an adult, the last thing you want to do is go back into debt. But, what’s the best way to stay out of debt with a low income?

These tips can help you make a financial game plan to make you build wealth while staying out of the poorhouse.

While you won’t become an “instant millionaire” you can still pay your bills, go on vacation, and save for the future—three activities that probably caused you to lose sleep when you were still in debt.

Keep Your Discretionary Spending to a Minimum

If you’re like most people with a small income, one of the only ways to find extra money each month is to reduce your monthly spending to the bone. That might mean not going out to eat, having a “staycation” instead of a vacation this summer, and canceling your monthly subscriptions.

The only problem is that for most us is that we can only suppress our wants for so long. When you’re debt-free and no longer sending your disposable income to make extra debt payments, the money in your pocket suddenly feels warmer than it did a month ago.

While you shouldn’t go back to your old spending habits and “keeping up with the Joneses,” it’s expected to have some lifestyle inflation. As with every aspect of life, remember the mantra, “Everything in moderation.”

It’s okay to increase some of your monthly subscription spending again, but don’t overpay.

Some of the ways you can save money on the finer things in life include:

  • Streaming cable tv online for only $20 a month
  • Get cashback on your monthly online purchases with Ebates
  • Buy generic products and medicine prescriptions when possible

While you should never pay more than absolutely necessary, the three recommendations above are the easiest ways to get the same products you use now for less.

Invest At Least 10% of Your Income

When you tackle your high-interest credit card debt, one of the next places you’ll cut is your monthly investments.

At a minimum, you should invest at least 10% of your income. But, to get a more accurate number, you should use a retirement calculator to see if you can afford to retire. It only takes a minute to plug in your current financial vitals and your retirement goals to see if you’re on track. If you need to invest more, the calculator will recommend how much you need to invest to retire on time.

Hopefully, your employer offers matching 401k contributions and you’ve been maximizing that opportunity to make “free money.” Most employers offering matching contributions match a percentage of the first 6% of your monthly salary. If you make $3,000 a month before taxes, they will might contribute $180 per month; think of it as an instant $2,160 annual raise.

Retirement Account vs. Non-Retirement Account Contributions

After maximizing your 401k match, you should split your remaining monthly investments into a tax-advantaged retirement account and taxable brokerage account.

Splitting your investments between the two ensures you invest for retirement, but you still have immediate penalty-free access to investments in your taxable non-retirement brokerage account.

When to Invest in a Taxable Brokerage Account

You will still want to keep your emergency fund savings and additional cash savings in an interest-bearing bank account and invest money you don’t plan on spending within the next two years in a taxable brokerage account. You invest the money you need a few years from now so it can appreciate faster than your bank deposits and you don’t have to pay the 10% early withdrawal penalty the 401k and IRA accounts charge.

Because the stock market is unpredictable, remember only to invest money in your taxable account that you don’t plan on withdrawing at least one year from now. Historically, the overall market yields a profit long-term, but you can lose money in the short-term.

For example, you can invest $1,000 today and if the market declines 10% a month from now, your investment is only worth $900 and can potentially take a year to regain the losses and begin appreciating. Volatility is why investors near retirement invest in fixed income assets so they don’t have to delay retirement because of an unexpected market correction.

The money sitting in your bank account only earns slightly more than 1% interest at best. If your investments earn 6% annually on average, you’re making six times the profit compared to keeping it at your bank.

The secret to becoming a millionaire is earning more passive income than the month before. It’s challenging to do this when the money in your savings account is only earning a few pennies each month. This is why it’s so important to invest your extra income.

When to Invest in a Retirement Account

Any money you don’t plan on spending until you retire needs to be put into your tax-advantaged retirement account. If you have a decent 401k plan with solid investment options and minimal fees, it can be easier to make all your additional retirement contributions there.

If not, invest any additional monthly contributions in either a Traditional IRA or Roth IRA. Open a Traditional IRA when you want to lower your taxable income now but pay taxes on your contributions in retirement, otherwise contribute your post-tax income to a Roth IRA so your contributions grow 100% tax-free.

Keep All Your Investments At One Brokerage

You don’t have a choice where your employer hosts their 401k plan, but you can control where you keep your personal investments. It’s almost always easier to keep your IRA and taxable brokerage accounts at the same brokerage.

If you prefer fully-automated investing, Betterment offers both account types and their complimentary portfolio rebalancing and tax harvesting tools optimize your return.

DIY investors should choose an online broker with low trade fees. It’s not hard to find a brokerage that only charges $4.95 per trade, but they usually offer many commission-free ETFs too so you get instant portfolio diversification with every single trade.

Say No to Instant Gratification for Large Purchases

Another money habit that separates the rich from the poor is delaying instant gratification. Too many people think being in debt is a fact of life. Guess what? It’s not!

You will need to make your own household rule for this suggestion, but you might say that you have to discuss with your spouse or wait at least 24 hours before you spend more than $100 on any unnecessary expense.

Whether you want to buy a stereo surround system for $300 that you can pay for with cash or a new $20,000 car that requires a car loan, these one-off purchases can quickly put you back into debt.

By waiting at least one day to say yes or no, you can decide if you actually need to make the purchase or if it can wait. In many cases, you’ll find yourself passing on the offer until your current product finally bites the dust.

Save for Large Purchases Instead

Saying “No” doesn’t mean you shouldn’t plan ever to make a large purchase again. For example, the car you’re driving now might only have a few good years left before it’s no longer cost-effective to keep owning the vehicle. Buying a replacement vehicle is a known expense and by making it a goal to have enough money set aside in three years to replace your car, you can pay for the entire car with cash for the first time ever!

With a little foresight, you can avoid going into debt in the future because you save your money for the future instead of spending it on today’s whims. If you always give into instant gratification, it gets a lot harder to accomplish your future savings goals.

Besides cars, some of the other large expenses you should plan for include vacations, home repairs and remodeling, and your child’s college education.

Use Cash Instead of Credit

Another financial pitfall for many households is using credit cards irresponsibly. Credit cards also increase the odds that you’ll spend more than with cash or debit even if you pay your balance in full each month.

On the flipside, responsible credit card use means you build your credit score without borrowing money and you can get rewards points that help you travel for free or get cash back each month.

What if you can combine the benefits of credit cards with cash to earn rewards while still being encouraged to live within your means?

With a free program like Debx, your credit card acts like a debit card. Each day, Debx withdraws the cash from your checking account to cover your daily purchases–so you never carry a card balance–while you earn rewards points and improve your credit score.

Make a New Budget

Why save this step for last?

Because you need to figure out how you want to spend all that extra money first.

Making your first debt-free budget can be challenging because you have fewer bills that need to be paid. It can be really easy to go on a spending spree and still be living paycheck to paycheck even though you’re debt-free.

By walking through the steps above you realize that putting your money in a bank account, retirement account, and increasing your discretionary spending a little bit will give you a clearer idea of how much money you will realistically spend now that you’re not forced to make a minimum monthly payment.

Once you have an idea how much you want to save, spend, and give to charity, you can see if you can still live within your means with your current income.

If not, you will need to trim your immediate and future spending so you can still accomplish your savings goals. For example, you might decide to save for a $10,000 car instead of a $15,000 car to have an extra $50 to put invest in your retirement account.

Just like you should keep all your cash at one bank and investments at one brokerage, you should also use Personal Capital to track your monthly spending for free. You can also use Personal Capital to track your investments and savings goals progress to see if you need to increase your monthly contributions.


Your first paycheck after you become debt-free can feel a lot like winning the lottery. Instead of squandering your windfall and becoming the next reality tv star for all the wrong reasons, following the steps above will help you maximize your small income so you can still retire on-time and live a life where you don’t worry about money anymore!

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  1. Kristopher lee says:

    Great article. I love the idea of saving just for a car over three years. I’m the type that thinks cars last forever with good maintenance. I bought my last car in 2004 and drove it until the power steering went out in 2017. The repair was more than what the car was worth, so I decided to just get another car.
    Having dedicated money saved up just for a car would have help me avoid a huge car loan. I’ll be taking this advice from now on,

    1. We only pay cash for our vehicles too. After making interest payments and then selling them for a sharply lower price, we decided car loans were unnecessary and cash was the way to go.

      That’s also impressive to keep your car for 13 years!