Trying to pay off debt while living on a fixed income can be difficult. For example, you might be a retiree who relies on Social Security and annuity payments, and therefore may not have a lot of room in your budget for extra expenses. And not having that extra room in your budget can make paying off debt even harder.
However, there are still some attainable ways to make paying off debt manageable while living on a fixed income.
Consolidate Your Debt
One way to potentially save money is to consolidate your debt into a loan with a lower interest rate. Doing so can free up some extra money you were putting toward interest.
“The first thing I would look at is to see whether you can consolidate debt to a lower interest rate. For example, many credit cards offer a promotional 0% interest for a period of time. If you qualify, it might make a lot of sense to transfer the balances from other credit cards to that card if you think you might be able to pay it off while it has the low promotional rate,” said Keith Spencer, CFP, founder of Spencer Financial Planning.
Figure Out Which Debts To Target
If you’re not consolidating your debt, then it’s important to figure out a strategy for tackling your different types of debt.
“If you have multiple debts, first you need to ensure you’re making at least the minimum monthly payment on each debt. Then, it usually makes sense to allocate any extra dollars to the debt with the highest interest rate. Once that’s paid off, then you direct that payment to the debt with the next highest interest rate, and so on until you’ve paid off all the debt,” Spencer said.
Tackling your debt this way is typically a good strategy. “Approaching your debt payments this way normally leads to the best outcome. An exception could be if you have a smaller debt, then you may want to prioritize any extra dollars toward that one, so that you can get it paid off and really feel like you’re making good progress,” he said.
Prioritize Your Spending
While you might not have a ton of wiggle room on a fixed income, you can still review your spending and see if there are ways to tweak it to put more money toward debt payments.
“I like to think about spending in terms of the broad categories of Grow, Owe, Give and Live. The idea is that you prioritize any outgoing money in that order. You first make sure you’re saving enough (Grow), then you prioritize any taxes and debt payments you have (Owe), then think about what you want to give away (Give), and then you can spend the rest however you’d like (Live),” Spencer explained.
That said, you might be at a stage in life where saving and growing money isn’t your main goal and instead you want to focus on tackling debt.
“For a retiree or someone on a fixed income, it’s important to prioritize the Owe portion. That is, make a plan to pay down your debt over a reasonable amount of time. Those payments are prioritized to ensure you stay on track. Then you can allocate to the categories of Give and Live with what remains,” Spencer said.
Review Your Tax Withholdings
Lastly, reviewing your tax withholdings can potentially help you free up room in your budget to pay off debt faster. For example, if your retirement plan administrator over-withholds some of your distributions, adjusting that can mean you have more income coming in with each distribution, rather than having to wait until tax season to see that money.
“If you typically get refunds every year, look at cutting back your withholdings throughout the year, which would give you more cash flow monthly toward debt paydowns,” said Cassandra Kirby, CFP, EA, chief operating officer and private wealth advisor at Braun-Bostich & Associates.
If you still end up getting a tax refund, you can also earmark that toward debt payoff, Kirby said.
