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How to Become Debt-Free on a Fixed Income

We hear it a lot. People say, “Well, if I made that much money, then I would be debt-free already.” And it’s true—having a larger income means you have more money to help you get out of debt. But that doesn’t mean you can’t become debt-free on a fixed income. People do it every single day, and so can you! It’ll just take some work to get there. But don’t worry, you’ve got this. Here’s everything you need to know about getting out of debt while on a fixed income.

What Is a Fixed Income? 

When we talk about fixed income, it means someone’s income is set in stone, so they usually can’t count on things like bonuses, raises or promotions. You probably know a few retired folks who live off of social security checks—yep, they’re on a fixed income.

But you know what’s funny? Most of the time, fixed income is just a fancy way of saying lower income. If you had a fixed income at $100,000 a month, you’d be okay. The issue isn’t the fact that it’s fixed. So, the real question here is, what can we do to get your income up?

What Can I Do to Make More Money?

If you’re trying to get your income up, the best thing to do is—work. If you’re trying to live on $1,100 a month from Social Security and trying to pay off $50,000 in debt—math says it’s not going to happen anytime soon. You need a bigger shovel to dig your way out of that debt. (Psst . . . the shovel is your income.) The bigger your shovel (income) the quicker you can get out of debt.

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There aren’t any magic beans to make it happen faster—but the good news is, it’s all up to you. You’re in control and have the power to change things! That means you’ve got to do whatever you can to make extra cash or free up more money in the budget. You can sell stuff, start a side business, and even look at your lifestyle for ways you can cut back and spend less.

How Can I Become Debt-Free on a Fixed Income? 

Hear us on this—you can absolutely become debt-free, even on a fixed income. Don’t buy into the lie that you have no choice but to rely on debt as your life raft in the rocky waters of life. Nope! You can become debt-free. Will it be easy? No, it sure won’t. But anything that’s worth doing is hardly ever easy. Here’s what you need to know to knock out debt while on a fixed income.

1. Make a budget. 

Whether you make $200,000 or $20,000, you need a budget in your life. The best way to do this is to create a zero-based budget. Our budgeting app EveryDollar makes this really easy. All you have to do is list your monthly income and your monthly expenses, and then make sure you’re budgeting down to zero each month. That’s zero as in making sure you’re giving a job to every dollar you bring in—not zero as in zero dollars in your bank account. Then, make sure you’re tracking all your transactions in the budgeting app throughout the month.

2. Save up an emergency fund.

We call this Baby Step 1—meaning it comes first before you even start paying off your debt. Go ahead and save up a cool $1,000 as fast as you can. We know, on a fixed income, it’s going to take a little bit longer, and that’s a-okay. Just be sure you make saving that $1,000 emergency fund a priority. This is the buffer you’ll have between yourself and the twists and turns of life while you’re paying off debt.

3. Figure out how much debt you have. 

Do you know how many people don’t even know how much debt they have? Too many. Don’t be that person. It’s time for you to look the truth in the eye and see exactly how much debt you’ve got to your name. Once you know what you’re dealing with, you can start chipping away at it. Try our debt calculator tool to help you figure out how much you owe and how fast you can pay it off.

4. Use the debt snowball to pay off your debt. 

Congrats, you made it to Baby Step 2! When you tackle your debt using the snowball method, you pay off the smallest debt first. Then once that one is out of the way, you take what you were paying on it and toss that money at the next largest debt. Rinse and repeat that process until you’ve knocked debt out of your life for good.

What Is the Best Way to Pay Off Debt? 

Easy—the debt snowball method.

All right, so we just gave you a quick flyby of the debt snowball. But let’s dive in some more. What exactly is the debt snowball? It’s the simplest way to pay off your debt, get the quick wins you need to stay the course, and change your behavior along the way.

It looks a little something like this:

Step 1: List your debts from smallest to largest (don’t worry about the interest rate).

Step 2: Make minimum payments on all your debts except the smallest one.

Step 3: Pay as much as possible on your smallest debt to get it out of your life.

Step 4: Repeat until each debt is paid in full. Dunzo!

Now, we figure you’re probably wondering, Shouldn’t I pay off the debt with the highest interest rate first? And the answer is—nope. If you look at this whole debt thing as just a numbers game, then yeah, it’s easy to see why someone would want to pay off debt that way. But the truth is, there’s way more than math here—this is a behavior and mindset thing.

If you hustle to pay off that giant $10,000 credit card bill (with 22% interest), it’s going to take a while. And the longer it takes, the more likely you are to get fed up with not seeing progress. See, that’s the great thing about the debt snowball. You get to see those quick wins right away and feel like you’re gaining traction—even if the first wins you see are just paying off those measly doctor bills at $175 a pop. Every time you scratch a debt off your list, you’re going to feel capable and empowered. Like you can take on anything. Because you can!

Why Should I Become Debt-Free?

No one actually wants to be in debt, right? People find themselves there as a last resort after a bucket of bad decisions and tough breaks. And then, they just get used to making the payments. They start believing debt is just a part of life and they can’t see a way out. So, why bother becoming debt-free? Because then you can live free. You won’t have to pay for things you bought in the past, and you can quit robbing from your future. You can put the money you’re making—even on a fixed income—to work on your goals!

Ready to get debt out of your life for good? All you need is a few small steps to equal some big wins. Ramsey+ will help walk you through your debt-free journey—no matter how long it takes. Small income or not, it’s the only tool you need to give debt the boot and celebrate your milestone victories along the way.

Ramsey Solutions

About the author

Ramsey Solutions

Ramsey Solutions has been committed to helping people regain control of their money, build wealth, grow their leadership skills, and enhance their lives through personal development since 1992. Millions of people have used our financial advice through 22 books (including 12 national bestsellers) published by Ramsey Press, as well as two syndicated radio shows and 10 podcasts, which have over 17 million weekly listeners.

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