As some of you may know, I became Debt Free in February 2018. During all of that time, I only earned just above National Minimum Wage as a single parent.
Many people told me that I was crazy for even attempting it, that I’d never manage it as a single parent.
All I can say is that I’m glad I never listened to them!
It may have taken me longer than some couples, but the end result was the same, Debt Freedom!
These are the steps I took to become Debt Free while on a Low Income.
1. You have to know your numbers.
This is by far the scariest part, and the reason that many people don’t even start their Debt Free Journeys. It can be really scary to see exactly what you owe to people written down. The reality of that number can be enough to pretend you didn’t see it, and run on the opposite direction, choosing never to look at your debts again.
I promise you, if you have the desire to face this, you won’t be seeing that number for long.
2. Know your Income and Expenditure.
Have you ever thought ‘I don’t know where my money disappears to every month’? This exercise will show you exactly where your money goes!
Next, go through the previous months bank statements. Write down all of your income for the month. This may include things like:
Rent from Lodgers/Older Children
Now assign different categories for everything you’ve spent. Examples could be
Now split all of your expenses into either ‘Necessary’ or ‘Not Necessary’.
So items like Utilities would go into the ‘Necessary’ section, and those cups of coffee you buy in town would go into the ‘Unnecessary’ section.
3. Start Cutting Things Out!
So, from your ‘Not Necessary’ list, you now know what you need to cut out, or cut down on.
Some ideas to help might be
-Invest in a good coffee flask and make all of your ‘on the go’ coffee from home
-Stop buying.streaming films, get Netflix instead
-Reduce/Stop your Sky or Cable subscriptions
-Sort through what clothes you already have, so you don’t buy anymore
-Have a skincare and Makeup audit. Don’t buy any until you’ve used up what you already have
-Think of free things you can do with your children instead of taking them on expensive days out
-Invite your friends over to your house in the evenings instead of going to a bar or pub. If everyone brings a bottle, it works out much cheaper
Whatever it is that you currently waste money on, you can find a way around it, you just need to get creative sometimes!
4. Write Your Budget.
This part is quite simple, and there are plenty of Budget Templates available on Google to help you with this step.
Essentially you write down all of your Income and Expenses, then see what you have leftover.
One of the best Budget Planners I have seen is this one from The Money Advice Service https://www.moneyadviceservice.org.uk/en/tools/budget-planner and i have a blog post about it here http://themoneyfreak.co.uk/2018/06/24/how-to-write-a-budget/
5. Have an Emergency Fund!
Whatever is left after your necessary expenses are deducted from your income, gets saved towards a £1000 Emergency Fund (EF). At the beginning on this journey, you only need £1000 as an Emergency Fund, and the plan is to get that £1k as quickly as possible.
How can you make money as quickly as possible?
-Go through your clothes, your children’s clothes and sell what you no longer need or use
-Work extra hours
-Get a 2nd Job
To realise the importance of an Emergency Fund, imagine what would happen without it. What will happen when your washing machine breaks down, or your car fails the MOT? What happens if someone drives into the back of you and damages your car?
If you don’t have an Emergency Fund, you’ll end up getting further into debt to cover those types of emergencies, and get further into debt.
6. Sinking Funds.
Now that you have your £1000 Emergency Fund, and written your budget, you should know exactly how much money you have left at the end of every month. At this point, when you are feeling motivated to start paying off our debt, it’s really tempting to throw every penny at debt. But it’s really important to have Sinking Funds.
What are Sinking Funds? They are basically just a pot of money ( either a physical pot, or online) where you save for expected expenses. For example, you know Christmas is on the 25th December every year, it shouldn’t come as a shock!
So instead of panicking in October or November, plan ahead. Decide on how much you’ll spend on Christmas and divide it by how many months until Christmas arrives. So in January you’d divide by 12 and in June you’d divide by 6. Then bank that amount every month to pay for it.
The thing here is to set REALISTIC amounts for Christmas. Pre ‘Debt Free Planning’ you may have spent a huge amount every year on Christmas, but your budget will tell you what you can afford now!
This is the same for all big expenses. Plan ahead and you wont ‘Sink’.
Some examples of Sinking Funds are:
-Car Expenses (MOT, Tax, Insurance, repairs)
-School Expenses (Uniforms trips, bus pass)
-Pet expenses (annual vaccination boosters, emergency vet visits)
Again, depending on your personal circumstances, these may be different from mine and you may have less or more of them.
7. Paying off your debt: Snowball vs Avalanche.
Now, things get exciting! You get to put every single penny towards debt and get started with becoming Debt Free!
But which method should you choose? I don’t think there is any ‘should’ in that question, I believe its YOUR decision, not up to me to tell you.
There are 2 methods
The Debt Snowball and The Debt Avalanche.
Put simply, The Debt Snowball ignores interest rates on your debts and tackles each debt in order from lowest to highest balance. There is some good Psychology in using this method, as you gain traction quickly and get those ‘quick wins’.
The Debt Avalanche is the opposite. You list your debts in order from the highest interest rate to the lowest interest rate, and you pay them off in this order. This method has maths on its side!
Whichever method you decide to use, it’s entirely up to you. Don’t feel like you can’t change your mind either! If you start by using The Debt Snowball but find it doesn’t work for you, it’s perfectly fine to switch to using The Debt Avalanche. Whatever keep you motivated and keeps you on your Debt Free Journey is the best thing.
I personally used The Debt Snowball, as it meant that I paid off some of my smaller debts really quickly. This helped keep me motivated, but some of you may be more ‘maths people’ and prefer The Avalanche.
Here is a better explanation of both methods:
But after writing your budget, what happens if you don’t have any money leftover? Well, the issue is either that your income is too low, or your expenditure is too high. Or it may be both!
In this case you either need to try working more hours (if you work outside the home already) or if you are a stay at home Mum, then you’ll need to find work outside the home that fits around your husbands working pattern.
If you are a Single Mum like I am, you’ll need to work outside the home if you don’t already, or work more hours. I understand this isn’t always possible, but these are just guidelines.
If you need childcare and are worried about the cost, please look at https://www.entitledto.co.uk/ to work out how much better off you will be in work. Despite many misconceptions, I have NEVER been worse off working than when I was on benefits.