Wednesday, February 15, 2017

How our low-one-income family pays off $10,000 a year in debt



There are many days where I feel like we are not making progress fast enough toward our hefty student loans and car loan, but I realized recently that when you crunch the numbers, we are putting 28% of our take-home income toward debt each month. Even with the hefty interest we have to pay (it used to total over $3,000 a year - ouch!) we have still managed to lower our overall debt by $10,000 in one year. It may not be as exciting as the stories where people pay off triple this amount in the same time, but we will take what we can get.

You can read more about our current budget here, but as of this post, we only have about $3,500 a month in take-home pay to work with. Out of this, we tithe $422, so our working budget is really about $3,100. With four children, our family is classified as "low-income" according to the Federal guidelines of having an annual income of less than 200% of the Federal poverty level. It's tempting at times to throw up our hands and say it's too hard, but we believe that it is possible to make a significant dent in our debt each year even with a limited budget.

Here are 10 tips which have helped us knock off our debt:

1. Keep your expenses as low as possible (without killing yourself). You can see how we budget our paychecks here.

2. Take advantage of low income tax advantages and use as much of that tax return to put toward your debt.

3. Budget for expenses you know will happen so that you will not be caught off guard. We allocate the two extra paychecks my husband gets a year for other expenses such as home repairs/improvement, children's activities, clothing, and more.

4. Keep a list of wants vs. needs. I like to call it the "Ma Ingalls" approach, but essentially, it seemed that Laura Ingalls Wilder's family often did not buy something until they had the money for it, and then would stock up on as much as they could afford of that item. This was for financial as well as practical purposes - seasonally, certain things were more available at certain times of the year. Instead of the steady stream of consumerism we have today where there are sales every other day, it is important to look at what you or your family need and when the sale and funds line up, to purchase those items.

5. Consider becoming a one-car family. Our decision to do so has helped us to save on car insurance and gas as well as reducing our risk of auto repairs.

6. Track your progress. I created a spreadsheet  which lays out where we will be each month if we pay a certain amount toward debt each month. In the months where it feels like we will never get there, I always look at this chart to remind myself of where we will be if we just keep plugging along.

7. This goes without saying, but eating out, having cable, and paying for smartphones are three things we choose to mostly forgo while we are on this debt-repayment journey. It would cost about $100 for our six-person family to eat out a couple times a month, about that much for cable, and that much for smartphones too - saying no to these three categories saves us $300 a month!

8. Be intentional about how you spend gift money. I try to save up my gift money to purchase tools that will allow me to sew, do renovations and build furniture that would otherwise be out of our reach.

9. When you pay off student loans, if possible pay off the highest interest group first. We qualify for Income-Based Repayment for our federal student loans, and while we make a small monthly minimum payment that is evenly applied across all loan categories, we put the rest toward the loan group with the highest interest.

10. Make a list of things you can do to improve your home that don't cost little to no money. Cleaning, organizing, and making small affordable improvements to your home can help you have a much higher sense of well-being.

How have you found success in taking on debt with limited funds? I'd love to hear in the comments!

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