Building a Better Future: How to Budget Money, Pay Off Debt, Build Credit, and Break the Low-Income Cycle

As far too many Americans know from experience, poverty is the result of a complex series of social factors creating a cycle from which it is very difficult to escape. In fact, 2020 brought the sharpest increase in the poverty rate in half a century.

The good news is that there are ways to break the poverty cycle. Before the pandemic, the poverty rate was on the decline. Many Americans discovered ways to increase income and reduce expenses. 

Read on to learn how to budget money on a low income. Explore how to pay off debt and build good credit.

How to Budget Money on Low Income

The question of how to budget money on a low income is difficult for many. There are so many expenses in today’s society, from housing to health care, not to mention the systemic barriers to economic opportunity so common in communities with high poverty rates.

Every year, the price of goods and services goes up due to inflation. Sometimes, it seems impossible to get ahead, but every journey, no matter how long, starts out the same way: with hope and a few first steps.

First, you will need to understand exactly how money is (or isn’t) flowing through your life. The best way to budget money on a low income is to track your cash flow closely. This starts with a clear view of your income, or the money you are receiving from work or any other source. How much money is coming in per month? Write it down and list it out.

With this information, you can start to plan. The goal is to ensure that the cash you bring in covers your expenses. A part of breaking the poverty cycle is to avoid emptying the bank account each month.

Next, list all of your fixed and variable expenses each month. Below, we break down some examples of fixed and variable expenses.

Fixed Expenses

The first thing to breakdown is your fixed costs each month. Certain expenses rarely change. These are referred to as fixed expenses.

This typically includes any cost that is financed with a fixed interest rate. Also included are rentals, leases, and membership fees.

The most prominent fixed expense is housing. Your monthly rent or mortgage payment falls in this category.

Those that own or lease a vehicle have another significant fixed expense in the form of a monthly payment. Another big-ticket item is health insurance for those who have it.

While medical appointments and prescriptions vary, carrying a health insurance plan is likely a fixed cost. Each month, you pay a fixed premium to maintain medical insurance.

Student loans are another example of a fixed expense. This cost, in particular, is plaguing young Americans. Total student loan debt now exceeds $1.6 trillion.

Other fixed expenses include your utilities. While your natural gas or electricity usage varies each month, many people opt for a budget plan. These plans allow the utility companies to spread the cost equally out over the year.

There are a few less significant fixed expenses, such as streaming services or gym memberships. However, they all add up when you are preparing a monthly budget.

It’s always a good idea to to reduce fixed expenses however possible. In some cases, public and private assistance programs may be able to help. For example, Goodwill and the Salvation Army have car donation programs. The federal government provides subsidies on rent through the Housing and Urban Development (HUD) agency.

Variable Expenses

Variable expenses are a lot harder to pin down than fixed ones. These costs change each month and need to be closely tracked.

The most impactful example for many is the monthly food bill, which includes groceries and restaurants. Some people go to the grocery store weekly, while others go less often. Some people may eat out often for a variety of reasons such as inability to cook or lack of access to kitchen facilities.

The monthly food bill adds up over the course of the month. The cost varies depending on the items that you need and what products are on sale.

The best way to budget for food is to see how much you spend each month. Then, decide on what monthly expense is reasonable. Set a financial goal for each month and try to stick to it.

You may be able to reduce your food expenditure by eating out less often, cutting back on prepared foods, or finding other low-cost or no-cost ways to cover your nutritional needs.

In some cases, a food bank can be a very helpful resource. If you are eligible for the government’s Supplemental Nutrition Assistance Program (SNAP), those benefits can be a huge asset to your monthly budget.

Entertainment is another form of variable expenses. This is money that may get spent on streaming services, at the movies, or at restaurants. Take a look at those expenses and see if there are cuts you can make or lower-cost alternatives that you can substitute for a while.

Transportation expenses outside of an auto payment are typically variable. The amount of gas you require depends on how often you are driving.

Some are paying to take public transportation. While it may not be much each month, it all adds up.

List every expense, no matter how small. Some budget apps, such as YNAB or Mint, can be very helpful for tracking and planning your finances regardless of your income.

Once you have your fixed and variable expenses, compare them to your income and figure out the difference between how much you’re spending and how much you’re bringing in. Knowing the facts of your own situation, even if they are difficult, is the first step to taking charge of your financial future.

From there, you can decide what steps to take next to bring your budget closer to balance. For most people, it’s a combination of cutting expenses and finding additional income.The goal is to bring in more money than is going out, and to use any income surplus — even a small one — to save, pay off debt, or otherwise build your future.

Remember, knowledge is power. You don’t need to be rich in order to take charge of your money. You just need a plan.

Building Good Credit

The average credit score in the United States is 711. This score falls in the good category, but the scores of millions of Americans fall in the fair to very poor categories. This number can feel like a judgement sometimes, especially if an individual’s credit score is low due to factors outside their control.

The reality, unfortunately, is that fair or not this number is very important. Poor credit scores make everything more difficult from a financial perspective. Most impactful is that low credit scores result in high-interest rates.

This means it costs more money to finance a home, car, or take out a personal loan. It also makes it more expensive to carry credit card debt. A difference of a fraction of a percentage point in an interest rate can add up to hundreds or thousands of dollars over time. This is money that could be going into your pocket or paying for other things.

You do not need to make a lot of money to have a good credit score, but you do need to show a history of responsible credit management. For most people, that means establishing some form of credit, using it wisely, and repaying it as promised.

The most effective step to building good credit is making on-time payments. Another factor is avoiding derogatory marks on your credit report, which are what happen when you mismanage credit. Collections, tax liens, and bankruptcies all bring down your credit score. Though it’s possible to re-establish good credit after one of these events, it’s not ideal and it takes a long time.

Another major factor is your credit utilization rate. This is a ratio of your outstanding balances to your total credit limit. It’s important to have credit, but it’s also important to have more credit than you actually use.

The number of hard inquiries on your credit affects your score. When you apply for a credit card or loan, the lender runs your credit history. Too many of these inquiries drops your score, so it’s important to be aware of how many credit applications you make and choose those applications wisely.

Lastly, the number of accounts and age of your credit history factor in. Lenders do not want to see borrowers who open an account and quickly close it. Instead, building a long history with a lender is going to establish you as a creditworthy borrower.

However, it can be hard to get started building or repairing your credit history. If you have bad credit or no credit, you can apply for a secured or unsecured credit card. On a secured credit card, you are required to put down a security deposit. 

The intent here is to use credit to build credit. Making on-time payments and more than the minimum required help rebuild your score. 

Lastly, you should monitor your credit report and credit score, both to understand what they say and to keep an eye out for credit fraud, identity theft, and other irregularities. There are a number of free online applications such as Credit Karma, and many credit cards provide credit score monitoring services. Every US citizen is also entitled to a free copy of their credit report each year from each of the three main credit bureaus.

Of course, the biggest tip for building good credit is to be careful about how much you borrow and under what terms, and not to borrow at all unless it makes good long-term financial sense. If the debt doesn’t add value to your future, and even if it does, think twice.

Remember, the person you’re really borrowing from is yourself.

How to Pay Off Debt Fast With Low Income

Now that we are done preparing a monthly budget and building good credit, it is time to pay off debt. You may be wondering how to pay off debt fast with low income.

Let’s start by circling back to the monthly budget. Once you are able to reduce costs, increase income, and create a surplus, you can divert this cash to paying off debt or to saving money.

One of the most effective strategies to paying off debt is paying more than the minimum.

If you make just the minimum payment each month, the financing expenses grow exponentially over time. Paying the minimum on a credit card may burden you with debt for decades, but paying more than the minimum decreases principal and interest expenses faster.

Also, seek out a lower interest rate on your credit cards if you have them. Sometimes all you have to do is call your credit card company and ask for a lower rate. In turn, you can pay off debt faster as you divert the cash to paying down the principal.

Two strategies for paying down debt are called debt avalanche and debt snowball. The debt avalanche method pays the minimum on all open accounts. Then, any additional income left over is directed towards the accounts with the highest interest rate. This method allows for the greatest reduction in interest expenses over the long run.

The other method, debt snowball, diverts additional income towards accounts with the lowest balance. The intent is to close accounts quicker and redirect your monthly payments to other outstanding balances.

A Recap: Budget Money, Build Credit, Pay Off Debt

There are so many ways to reduce your expenses and build a better future. As you can see, taking charge of your financial life means a lot of hard work and tough choices, but the good news is that the investment you make in yourself will pay off big dividends in the future.

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