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

ar too many Americans are struggling with poverty. The coronavirus pandemic has only made matters worse for low-income Americans. 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.


Every year, the price of goods and services goes up due to inflation. Sometimes, it seems impossible to get ahead.


The best way to budget money on a low income is to track your cash flow closely. Of course, this starts with the money you are receiving from work or any other source.


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 grocery bill. Some people go to the grocery store weekly, while others go less often.


The monthly grocery 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 groceries 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.


If you are spending too much on groceries, it may be time to make some changes. This may mean buying some generic brands or taking advantage of a local food pantry.


It is important not to spend money that you do not have to. Check to see if you are eligible for the government’s Supplemental Nutrition Assistance Program (SNAP).


For those that are eligible, an EBT card is loaded with some funds to purchase groceries. Some struggling families are even eligible to use their EBT card at fast-food restaurants. 


Entertainment is another form of variable expenses. This is money that some may spend at the movies or at restaurants.


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 exoebse, 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


Millions of Americans are trying to get by with poor credit scores. The average credit score in the United States is 711. While this score falls in the good category, millions fall in the fair to very poor categories.


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.


Many people are wondering how to build credit with low income. You do not need to make six figures 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 and should be avoided wherever possible. 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.


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. Sometimes all you have to do is call your credit card company and ask 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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