It’s a common misconception that all debt is bad. Some forms of debt—such as student loans, mortgages, and auto loans—can help you improve your professional and personal life. But while debt can be useful, overspending while already in debt can lead to an unmanageable situation.
To find tips to ensure you aren’t adding unnecessarily to your debt or falling behind on payments, we asked Bob G. Wood—a professor of finance at the University of South Alabama’s Mitchell College of Business—to share his top debt-crushing strategies. These tips and ideas can help you gain lasting financial freedom.
Keep reading to learn how to get out of debt and stay there.
1. Avoid increasing what you owe on your credit cards
One of the first steps to getting out of debt is to stop adding to it. While credit cards are a helpful payment option (especially for unplanned expenses), continually building up a card balance that you can’t pay off every month can negatively impact your debt load and your credit score.
“A debt-averse individual pays the total balance on each credit card before the payment due date to avoid interest charges and late fees,” Wood explains. “This approach helps people avoid using the cards to buy things they cannot afford.”
2. Put some investments on hold
If you’re struggling to figure out how to pay off debt, you may want to put discretionary investments on hold until you’re debt-free. (Think: that $100 in crypto your buddy suggests you buy, or the IPO you’ve been reading about.) In some cases, paying off your debt faster will save you more money than your investments can earn. According to Wood, the exception to this rule is investing as a part of your retirement savings strategy, such as in a 401(k).
“I recommend continuing to fund retirement account investments, especially for those individuals with employer-provided accounts,” Wood says. “Many of these accounts provide a match for individual investments into the account, and that provides a 100% return on the individual’s contribution. Also, delaying retirement investment contributions can drastically reduce the future value of the account.”
3. Commit to a plan
While putting extra cash toward debt payments can help you make progress, having a steady plan is necessary to tackle debt efficiently. Wood shared the following steps consumers need to take when they’re budgeting to pay off debt:
Step 1. Differentiate between your needs and wants, and review your current expenses. “Be honest—upgrading to the latest cell phone model or adding items to an already full closet are more than likely wants rather than needs,” Wood says.
Step 2. Develop a realistic budget. Not sure how to budget to pay off debt? Be thoughtful when you create a budget to help keep your spending in check. This new budget should include a fixed monthly amount for debt repayment, beyond any monthly payments for student, auto, or home loans.
4. Choose the ‘snowball’ or the ‘avalanche’ style of debt reduction
When creating a plan to tackle your debt, you may consider the popular “debt snowball method,” which targets the smallest debt first. As soon as this first debt is satisfied, you focus on the next-lowest balance.
While seeing a debt of any size reduced to zero can be incredibly motivating, this approach may come with a cost. “Unfortunately, the strategy often results in more interest paid by the borrower,” Wood explains.
“As an alternative, the ‘debt avalanche method’ targets the highest interest debt first,” Wood explains. “By paying off the debt with the highest interest first, the borrower reduces the total amount of interest paid. Although this approach is more financially sound, it requires the borrower to focus on the long-term result and remain diligent in their payment plan.”
Note that with either of these approaches, staying current on all debt payments is important, meaning that you should pay at least the minimum amount due, while dedicating any extra contributions to the targeted debt.
5. Try to renegotiate your debt
One of the ways to pay off debt is to renegotiate it. While there are no guarantees that a lender will agree to negotiate the terms of your debt, you may have more luck if you’re a long-term customer with a history of on-time payments. In this case, a lender may be willing to waive fees, shift due dates, or even lower the interest rate. And these actions should not affect the individual’s credit rating, Wood notes.
Before committing to an arrangement, you should seek guidance from a professional about your specific situation, needs, and goals.
6. (Carefully) consider a balance transfer vs. debt consolidation loan
Transferring credit card debt to a new account has advantages, as many transfer offers may have an introductory period with an interest rate of 0%. A balance transfer can also reduce multiple payments to one, with a single payment date.
But keep an eye on your calendar so you’re aware of when the introductory period ends and the new interest rate begins.
He explains that debt consolidation is similar in concept, but these balances are typically rolled over into a personal loan for debt consolidation, a home equity loan, or a credit card with a lower interest rate (and concurrent lower payment).
7. Consider a rewards checking account
Looking to make the most of the cash you aren’t spending but still need access to? This is where a rewards checking account such as the Discover® Cashback Debit account can be handy when considering how to budget to pay off debt.
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A rewards checking account can assist consumers in managing their debt by offering perks such as cash back or interest rewards on certain transactions. Consumers can then take those earnings and put them toward debt payments as needed.
8. Make it a family affair
Borrowing money from a trusted family member can help you save a lot on interest, making it easier to get out of debt faster. Let’s say that loved ones lend you the money you need to pay off your high-interest debts in full. You can then focus on paying them back at a lower interest rate or with no interest at all—whatever you agree on.
Just ensure you and your loved ones are on the same page about what this repayment agreement will look like so you don’t strain any relationships.
9. Know when to seek professional help
There may come a point when you need to hire a professional to help with get out of debt planning. “An individual should seek debt counseling when the anxiety associated with the debt interferes with the person’s personal and professional life or when the minimum debt payments are not possible without sacrificing necessities,” Wood says.
“There are both for-profit firms and nonprofit counseling agencies available to help an individual through the process.” The Consumer Financial Protection Bureau offers advice and resources on how to select a reputable counselor.
Consider what strategies might work best for you
There are many different approaches you can implement to help you get debt-free faster. Take some time to devise a realistic plan to tackle your debt so you can pay it off for good and start making your money work for you.
When you’re paying off debt, every boost of extra cash can help. A Discover Cashback Debit Account can help you earn cash rewards on debit card purchases1 with no account fees.
Articles may contain information from third parties. The inclusion of such information does not imply an affiliation with the bank or bank sponsorship, endorsement, or verification regarding the third party or information.
1 On up to $3,000 in debit card purchases each month. See Deposit Account Agreement for details on transaction eligibility, limitations and terms.
Inside: Learn how to save money quickly, even on a tight budget. Get practical tips for how to save money fast on a low income. Simple savings ideas to implement today.
Saving money on a tight budget can feel like a high mountain to conquer, especially when you’re trying to do it fast.
Many people earn just enough to cover their essential costs, leaving little room for savings. However, with the right strategies, saving money fast on a low income doesn’t have to be a pipe dream.
This is something I started when we decided to pay off debt. Then, we choose to continue saving that money and investing it.
By understanding the flow of your money – where it’s coming from and where it’s going – you can make informed decisions that maximize your savings potential.
By prioritizing your spending and forecasting future expenses, budgeting can reduce the stress of financial uncertainty and introduce a sense of control and confidence in your money management skills. Thus, leading to you starting to save.
What is the best way to save money on a low income?
On a low income, the best way to save money is to thoroughly understand your expenses and prioritize your needs over wants.
In addition, by planning and tracking your finances meticulously, you can identify where each penny is going. Thus, allowing you to analyze your expenses. Once you have a clear picture of these, start looking for areas to trim down.
Remember, saving money is about being proactive and consistent. These small but steady steps can build up over time to help you save money fast, even on a low income.
How to Save Money on A Fast Income
1. Start with Clear Priorities
Before you can decide where to cut costs or how to allocate your funds, you need to know what’s most important to you.
What is your why for doing what you need to do? Is it building an emergency fund, saving for a down payment on a home, or maybe preparing for retirement?
Whatever your goals, outline them clearly. This is how you will save money.
2. Budgeting effectively to manage finances
To budget effectively on a low income, it all starts with a cold, hard look at your numbers.
Begin by listing all sources of income – that’s your foundation.
From each paycheck or income stream, subtract your non-negotiable expenses such as rent, utilities, transportation, and debt payments. What you have left is your discretionary income.
Then, it’s time to categorize and prioritize. Group your expenses into necessities and nice-to-haves. If your essentials consume most of your income, you’ll need to scrutinize the nice-to-haves list.
Every dollar saved from unnecessary splurges is a dollar that can be put towards your savings.
Use budgeting apps or tools to keep a real-time record of your spending. These can help you stay disciplined and provide a visual reminder of your progress.
3. Track and Slash Unnecessary Expenses
Now, you must meticulously and ruthlessly cut out the non-essentials.
Identify patterns and spot the recurrent, unnecessary expenses that are draining your funds.
Do you subscribe to multiple streaming platforms?
Are you forking out cash for a gym membership you barely use?
Are those daily specialty coffee drinks adding up?
It’s time to slash these expenditures.
Cutting these expenses is like giving yourself a raise.
4. Lower Housing Expenses Without Compromising Comfort
Living in smaller, more affordable housing to decrease rent or mortgage might be exactly what you need.
Opting for a smaller, more affordable space is a practical approach to significantly lower your rent or mortgage payments. When you choose to live in a compact setting, not only do you reduce the square footage costs, but often, utility and maintenance expenses decrease as well due to the reduced size of the living area.
If you are renting, try to negotiate your rent or lease terms with your landlord – they might be willing to offer a discount to keep a reliable tenant, or you may be able to agree on lower rent for a longer lease commitment.
If you’re a homeowner, explore the possibility of refinancing your mortgage to take advantage of lower interest rates. Alternatively, consider renting out a room or a portion of your living space, as the additional income can offset your mortgage or maintenance costs.
5. Save Money on Utilities with Simple Home Adjustments
Saving money on utilities might sound challenging, but you can often achieve substantial savings with a few strategic home adjustments. Let’s explore some cost-effective strategies and modifications you can make to your living space that could help reduce your bills.
Energy Efficient Appliances: Swapping out older appliances for Energy Star-rated ones leads to significant reductions in electricity use and water consumption.
Smart Thermostats: Installing a smart thermostat allows you to programmatically control your heating and cooling based on your schedule and preferences, potentially saving you a bundle on your energy bills.
LED Lighting: Switch to LED bulbs, which are more energy-efficient than traditional incandescent ones and have a longer lifespan, saving you on replacement costs as well as your electric bill.
Insulation Upgrades: Proper insulation keeps your home warm in the winter and cool in the summer, reducing the need for excessive heating or air conditioning.
Water-Saving Fixtures: Low-flow showerheads and faucet aerators reduce water usage, preserving this precious resource and lowering your water bill.
Not only do these simple home adjustments lead to savings on your utility bills, but they also contribute to a more environmentally friendly lifestyle.
6. Cooking at home instead of eating out
Cooking at home instead of dining out is an excellent way to save money, especially on a low income. When you eat at a restaurant, you’re not just paying for the food; you’re also covering the cost of service, ambiance, and the establishment’s overhead.
Plan a balance between meal prepped home-cooked meals and the occasional dinner out to keep your budget in check while still enjoying life’s little pleasures. Here are some frugal meals to get you started.
Remember, you don’t have to eliminate eating out entirely.
7. Canceling unused subscriptions and memberships
Stop draining money on services you don’t actively use. It’s surprisingly easy to forget about these auto-renewing expenses, so taking the time to audit your subscriptions can reveal opportunities for savings.
Recently, we tracked over $100 a month in my mother-in-law’s unused subscriptions and membership!
As such, it’s important to periodically evaluate your subscriptions and memberships to ensure they are still serving your interests and goals. If not, give yourself permission to cancel and save that money for something that offers tangible benefits in return.
8. Buying quality items that last longer
Investing in quality items that last longer is a strategic way to save money over time. While the initial cost may be higher, durable products can prevent the cycle of frequent replacements, ultimately contributing to long-term savings and less waste.
Remember, not every purchase necessitates the highest quality option. Examine which items you frequently use and can benefit from in the long run. For instance, driving a Toyota or buying higher quality shoes.
Once you’ve identified these, invest in quality for those and enjoy the satisfaction of a purchase that lasts.
9. Optimize Grocery Shopping
To optimize grocery shopping and manage your food budget effectively, start by thoroughly checking your current pantry supplies and making a precise shopping list to deter impulse purchases.
Utilize coupons and enroll in local store loyalty programs for exclusive discounts.
Embrace meal planning to avoid unnecessary spending.
Consider incorporating meatless meals, as this can contribute to consistent savings over time due to the typically higher cost of meat compared to vegetables and other plant-based options.
Plan meals around these cheap foods when you are broke.
By shopping smartly, you have the power to drastically lower your monthly food bill. Just remember, the key is preparation and discipline.
10. Repairing items instead of replacing them
Repairing items instead of replacing them can be a significant money-saving tactic, especially when budgets are tight. It’s often more cost-effective to fix a piece of furniture, mend a garment, or troubleshoot an appliance than it is to buy new one.
Consider the condition and value of each item before deciding to repair it. If the cost of repair approaches the price of a new item, or if it’s beyond your skill set, researching community resources or seeking professional help may be a wise choice.
11. Practicing the 30-day rule for non-essential purchases
Putting the brakes on impulsive buying can significantly boost your savings, and practicing the 30-day rule is a tried-and-true method to control those urges.
Before you make any non-essential purchase, wait 30 days.
If after a month you still feel the purchase is necessary or meaningful, then consider buying it.
Remember that the goal isn’t to deny yourself enjoyment but to ensure that each purchase is considered and valued. This conscious approach can lead to more satisfaction with the items you do choose to buy and a healthier bank balance.
12. Skip the Car Loan
Opting out of a car loan and finding alternative modes of transportation, such as cycling, walking, or using public transportation, can lead to significant financial savings.
Without a car payment, individuals can redirect the funds that would have gone towards monthly installments, insurance, and maintenance into their savings account.
This strategy can be particularly impactful for those with a goal in mind or working with a low income, as every dollar saved moves them closer to financial stability. Furthermore, the elimination of auto loan interest charges and potential debt can provide a more secure financial footing and peace of mind.
13. Using public transportation or carpooling to reduce fuel costs
Utilizing public transportation or carpooling can be significant in reducing fuel costs, particularly when you’re committed to saving money on a low income. These alternatives to solo driving not only save on fuel but also on parking fees, and wear and tear on your vehicle.
Another option is embracing car-sharing services, especially if you find that you don’t require a car on a daily basis. Services like Turo and Getaround offer the flexibility of having a car when you need one without the constant financial responsibility associated with ownership.
Remember, it’s all about what suits your lifestyle and frequency of need. By assessing how often you need a vehicle and comparing it with the total costs of ownership, car-sharing could be an excellent way to save money.
14. Selling unused or unwanted items for extra cash
Selling unused or unwanted items is a fantastic way to declutter your space and earn extra cash. You might be surprised how much money you can make by letting go of things you no longer use or need. From clothes you’ve outgrown to homeware that’s gathering dust, each item sold can inch you closer to your savings goal.
Take advantage of this opportunity; a thorough home audit could reveal a treasure trove of sellable items right under your nose. Not only does this increase your income, but it also helps you consider future purchases more carefully.
15. Taking advantage of free entertainment and community events
Leveraging free entertainment and community events is a delightfully frugal way to enjoy yourself without breaking the bank. From concerts and exhibitions to workshops and meet-ups, there’s often a wealth of activities that won’t cost you a penny.
In fact, here at Money Bliss, I have the most popular list of things to do with no money.
With a little creativity and resourcefulness, you can uncover a variety of enjoyable and inexpensive things to do.
16. Automating savings to ensure consistent contributions
Automating your savings is a hassle-free way to ensure you consistently contribute to your financial goals.
By setting up an automatic transfer from your checking account to a savings account, you’re essentially paying your future self first.
This ‘set and forget’ approach helps grow your wealth with minimal effort.
17. Negotiating bills and asking for better rates
Many service providers are open to negotiating prices if it means retaining a customer. Whether it’s your cable package, insurance, or even a credit card interest rate, it’s worth having the conversation.
Remember, the worst they can say is no. But often, companies will offer helpful options when they realize you are considering alternatives due to cost concerns.
One phone call could save you $1000 a year – just like when I decreased my cable bill!
18. Evaluating insurance policies for potential savings
When evaluating insurance policies, it’s critical to regularly assess your coverage needs and shop around for the best rates. Comparing policies from different providers annually can reveal opportunities for lowering premiums or finding more suitable coverage.
Utilize online tools and independent insurance agents to ensure a comprehensive review of available options.
Remember to inquire about bundling policies, as this can often lead to significant savings while consolidating your insurance needs effectively.
19. Meal Planning and Prep: Strategies to Reduce Food Waste
By allocating some time each week to plan your meals, you can ensure that you only buy what you need, thereby minimizing waste and cost.
Learning to meal plan starts with looking at a calendar and a local sales flyer to find the low cost deals.
By creating a weekly plan and incorporating budget-friendly recipes, you can not only eat healthier but also avoid the costlier option of dining out.
20. Forgo single use items
By choosing reusable items over single-use ones, you cut down on waste and habitual spending on disposables. This is also known as frugal green.
For instance, investing in a reusable water bottle, rather than buying single use water bottles.
By integrating sustainable products into your life, you also promote a culture of conservation and mindfulness, inspiring others to make eco-friendly choices.
21. Shopping for groceries with a list to avoid impulse buys
This is key! Especially when shopping with kids or a significant other!
Shopping for groceries with a list is a golden rule to avoid impulse buys, which can quickly derail your budget. By planning your purchases beforehand, you stick to the essentials and resist the temptation of sale items that aren’t on your list or don’t fit your meal plan.
Bonus Tip: Remember to always shop on a full stomach – hitting the grocery store hungry is a surefire way to end up with impulse purchases that aren’t on your list!
22. Buying generic brands instead of name brands
Opting for generic brands rather than name brands is a straightforward and effective way to save money on everything from groceries to over-the-counter medications. These products are often of similar quality and effectiveness but come at a significantly lower cost.
By making the switch to generics, especially for regularly used items, the aggregate savings can be substantial over time.
23. Making bulk purchases for commonly used items to save on cost-per-unit
When you buy in larger quantities, the cost per unit typically decreases, leading to savings that add up over time. Bulk buying works best for non-perishable goods or products you use consistently.
Make a point of buying non-perishable items or products with a long shelf life in bulk to avoid waste and ensure that you truly save money with each bulk purchase.
Just make sure you are going to use it!
24. Cutting costs on personal care by DIY methods
DIY methods for personal care are not just a trend – they’re a practical and often healthier alternative to store-bought products. By creating your own beauty and personal care items, you can significantly trim costs and take control of what goes on and into your body.
Even if you’re not the crafty type, consider starting small with something like a DIY sugar scrub or homemade toothpaste. This is something I did over ten years ago. You might discover a new hobby that enhances both your well-being and your budget.
25. Regular maintenance of vehicles and appliances to prevent costly repairs
Keeping on top of maintenance schedules helps prevent major breakdowns that can lead to expensive repairs down the line.
By making regular maintenance a non-negotiable part of your routine, you protect your investments and save yourself from future financial headaches.
I keep a list in my digital to do list, so I never lose track.
26. Shopping at thrift stores, garage sales, or second-hand websites
Shopping at thrift stores, garage sales, or second-hand websites is an excellent way to acquire items at a fraction of the retail cost. Not only are you being financially savvy, but you’re also participating in the circular economy, reducing waste, and often supporting charitable causes.
Shopping second-hand first is not just about saving money—it’s a lifestyle choice. With patience and persistence, it’s amazing what quality items you can find without impacting your wallet heavily.
27. Learning basic sewing to repair clothes
Mastering the basics of sewing to mend your clothes is a skill that pays off in multiple ways. You save money by extending the life of your garments, reducing waste, and developing a practical capability that can come in handy in various situations.
Honestly, sewing a piece of clothes is a very simple thing. Something that must be learned by the younger generations.
Consider setting aside some time to learn sewing basics via online tutorials, community classes, or even from a friend or family member—it’s a practical step toward financial savings and sustainable living.
28. Utilizing coupons and discounts for shopping
Using coupons and discounts strategically can lead to significant savings on your shopping bills. With a little planning and some savvy shopping techniques, you can ensure you never pay full price for essentials and other purchases.
Remember to only use coupons for items you were already planning to purchase; otherwise, you’re not saving money, you’re just spending less on something extra.
29. Consolidating debt to reduce interest rates
Debt consolidation can be a strategic financial move to lower your overall interest rates and simplify your monthly payments. By combining your debts into one loan with a lower interest rate, you can streamline your bills and potentially save significant amounts of money over time.
Make sure to shop around for the best debt consolidation options and read the fine print. The goal is to find a consolidation plan that truly puts you on a faster track to being debt-free without any hidden costs.
30. Tackle High-Interest Debts First to Free Up More Cash
Addressing high-interest debts is paramount in optimizing your financial strategy. Such debts, often from credit cards or payday loans, can spiral out of control if not managed promptly due to their compound interest rates, which can quickly exceed the original amounts borrowed.
This is known as the debt avalanche.
By zeroing in on high-cost debts, you ensure your income is spent more effectively and not wasted on steep interest fees, accelerating your path to financial freedom.
31. Choose the Right High-Yield Savings Account for Your Emergency Fund
Selecting the right high-yield savings account for your emergency fund is an essential move for growing your savings. High-yield accounts offer interest rates significantly higher than standard accounts, ensuring your emergency fund doesn’t stagnate and keeps pace with inflation as much as possible.
This is one of the bank accounts you need.
32. Implement The Envelope System
The Envelope System is a budgeting method that involves physically dividing your cash into envelopes for different spending categories.
Utilizing the cash envelope system promotes disciplined spending by providing a tangible limit on various expense categories, ensuring you stay within your pre-determined budget and facilitating more intentional money management.
This method also offers immediate visual feedback on spending patterns, which can lead to better financial habits and incremental savings as any leftover cash from each envelope can be added directly to a savings fund, making the act of saving more rewarding and motivating.
33. Using cash -back envelopes to track spending
The use of cash-back envelopes takes the traditional envelope budgeting system a step further by rewarding yourself with savings.
Whenever you spend less than the allocated amount in a budget category, you place the cash difference into a “cash-back” envelope, which can be used for saving or investing.
Adopting the cash-back envelope strategy can provide a rewarding twist to budgeting, making it a fun challenge to spend less and save more.
Boost Your Income: Creative Side Hustles and Opportunities
Boosting your income can provide substantial financial relief, particularly when you’ve maximized your ability to cut costs and still find your expenses stretching your budget thin.
Generating extra income, be it through a side hustle or achieving a raise enhances your ability to save and invest.
With additional streams of revenue, you gain more financial flexibility to achieve goals like paying off debt faster, saving for a significant purchase, or building an emergency fund.
Finding a side hustle or part-time job for additional income
Exploring a side hustle or part-time job is a proven way to supplement your income. In today’s gig economy, there are numerous opportunities for flexible work that can be customized to fit your skills and schedule.
A side hustle can not only pad your wallet but also provide an outlet for creativity and passion, possibly even offering a new career trajectory down the line.
Explore Gig Work and Passive Income Streams
Exploring gig work and passive income streams can accelerate your savings efforts, especially when your regular income isn’t enough to reach your financial goals. These alternative income ideas often provide the flexibility to work on your terms and build up earnings over time.
These revenue channels provide a proactive approach to increasing your disposable income. Researching and choosing the best options for your skills and financial situation can help you build a sound extra income strategy.
Take Advantage of Bank Bonuses and Credit Card Bonuses
Banks often offer attractive incentives to new customers, and high-interest savings accounts can grow your deposits at a faster rate than traditional accounts. The same is true for credit card issuers offering big bonuses.
Taking time to research the best offers and account terms can net you a nice bonus and put your money to work earning more money.
Learn How to Invest Your Money
Learning how to invest your money is paramount to building wealth over time. While it can seem intimidating at first, understanding the basics of investing can enable you to take advantage of compounding interest and market growth to increase your savings exponentially.
Start small, stay disciplined, and continually educate yourself as you grow your investment portfolio. Over time, your investments can become a significant source of wealth and financial security.
Learn how to invest in stocks for beginners.
FAQs: Navigating the Path to Low-Income Savings Success
Saving money when your income barely covers your fixed expenses requires a strategic approach. Begin by scrutinizing your budget to cut any non-essential costs.
Look for ways to reduce your fixed monthly expenses, like negotiating bills or refinancing loans.
Every small change can contribute to your savings, so focus on making incremental adjustments that together can enhance your financial situation.
Even when funds are tight, saving money is possible by making small but impactful changes.
Prioritize reviewing your expenses and identifying areas to cut back, such as non-essential subscriptions or eating out.
Round up loose change or small amounts from your daily transactions into savings.
Seek free entertainment options and consider generating additional income through side hustles or selling items you no longer need.
Each penny saved is a step towards your financial cushion.
Setting Realistic Savings Goals and Celebrating Milestones
Setting realistic savings goals is a key to financial success, particularly when managing a low income.
Determine what you can feasibly save without overstretching your budget. Whether it’s $5 or $50 per week, every bit helps.
Celebrating your achievements, no matter how small, can inspire continued discipline and dedication towards your financial objectives.
Being realistic and flexible with your budget will help you manage your finances more efficiently, ensuring that you set aside money for future growth, even when funds are tight.
This is a great step towards habits of financially stable people!
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More importantly, did I answer the questions you have about this topic? Let me know in the comments if I can help in some other way!
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The number of people living paycheck to paycheck is rising, and not just among low-income workers. One-third of Americans with an annual income of $150,000 or more are struggling to pay their bills and have no money left over for savings. Reasons for this include high housing costs, a lack of financial literacy, and lifestyle creep.
So how do high earners end up living paycheck to paycheck, and what can you do to break the cycle?
What Does Living Paycheck to Paycheck Mean?
Most people expect to earn a “living wage.” The term refers to an income sufficient to afford life’s necessities, including housing, food, healthcare, and child care. That level of income should also allow you to save for an emergency, retirement and other goals to some degree.
When a person lives paycheck to paycheck, they can barely pay basic bills and have nothing left over to save for a rainy day. In the event of a pricey emergency — like a big medical bill or major car repairs — low-income families are financially wiped out.
High earners have more wiggle room. They have the ability to downsize their home or car and find other ways to cut back on expenses.
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Understanding the Paycheck-to-Paycheck Situation
According to a 2023 survey conducted by Payroll.org, 72% of Americans are living paycheck to paycheck, with Baby Boomers the hardest hit. When you are living paycheck to paycheck, as noted above, you have no ability to save. If you go into debt, you may not be able to afford to pay down the debt in a meaningful way.
According to research from MIT, the average living wage for a family of four (two working adults with two children) in the U.S. in 2022 was $25.02 per hour before taxes, or $104,077.70 per year. Compare that to the federal minimum wage of $7.25. Even in Washington, D.C., which has the highest minimum wage at $17, families make well below what is considered an adequate income.
But even households bringing in $200,000 or more say they feel the crunch. According to a Forbes study, 39% of those earning at least $200K described themselves as running out of money and not having anything left over after covering expenses. While they have the freedom to downsize their lifestyle, many people may not realize the precariousness of their financial situation until they’re locked into a mortgage and car payments they cannot afford.
Why Do Some Americans Live Paycheck to Paycheck?
The reasons why Americans live paycheck to paycheck vary. For lower-income workers, you can point to a higher cost of living and wages that have not kept up with inflation. For those with higher incomes, the issue is more about a lack of financial literacy and living beyond one’s means.
Rising Cost of Living
According to the Federal Reserve, 40% of adults spent more in 2022 than they did in 2021. They spent more because monthly expenses, such as rent, mortgage payments, food, and utilities had all increased.
Low Income
Low incomes are another reason some people live paycheck to paycheck. This is particularly the case for people who earn minimum wage or live in areas with a high cost of living.
Poor Budgeting
Another reason some people are living paycheck to paycheck is that they lack basic financial knowledge and budgeting skills. It’s easy to overspend and accumulate credit card debt, but difficult to pay down the principal and interest. 💡 Quick Tip: When you have questions about what you can and can’t afford, a free budget app can show you the answer. With no guilt trip or hourly fee.
Lifestyle Creep
Also known as lifestyle inflation, lifestyle creep happens when discretionary expenses increase as disposable income increases. In plain English: You get a raise and treat yourself to a new ’fit. And a fancy haircut. And a weekend at a charming B&B in the countryside.
Whether you can afford it is debatable. On one hand, you may be paying your credit card bill in full each month. On the other, you’re not saving or investing that money.
Factors Driving Financial Insecurity for Six-Figure Earners
Because of inflation, it is increasingly hard to buy a home, car, and other nice-to-haves. However, people may still expect and try to afford these things once they earn a certain amount. And if they have a taste for luxury items, they may struggle to maintain that standard of living and pay their bills.
It’s common for people to buy things on credit and then find that they cannot make the payments. Soon, they find themselves mired in high-interest debt.
How to Stop Living Paycheck to Paycheck
You can stop living paycheck to paycheck by living below your means rather than beyond your means. That requires earning more than you spend and saving the difference. The obvious steps to take are to increase your income and to live more frugally.
Once you have downsized your lifestyle, you can find relief quicker than you might think. And some changes may only be temporary. For example, you might have to work a part-time job for a short time until your debt is paid off.
Tips for Those Living Paycheck to Paycheck
Here are some changes you can make to get on the path to living below your means.
1. Create a Budget
You have to know where your money is going before you can cut back. By tracking your expenses, you can see what you are spending where. There are lots of ways to automate your finances and make it much easier to stay on top of things.
Then, create a budget where you subtract your non-negotiable expenses, or needs, from your net income. Non-negotiables are your housing costs, utilities, food, and transportation. Hopefully, you have some money left over to allocate to savings. If not, it’s time to look at how you can make your life more affordable.
Here are a few budget strategies to try:
• Line-item budget
• 50/30/20 method
• Envelope method
2. Cut Back on Nonessentials
Budgeting will help you find expenses that you can eliminate or reduce. For example, look closely at things that might seem insignificant. You are not necessarily bad with money just because you lose track of subscription services that you have forgotten about.
Be aware that a large cold brew on your way to work every morning can add up, and eating out or spending $30 on takeout each week adds up to over $1,500 annually. More consequential changes are downsizing your home, accepting a roommate temporarily, or finding a part-time gig to supplement your income.
3. Pay Off Your Debt
Debt is expensive. High-interest credit card debt and buy-now-pay-later (BNPL) schemes can eat up your income as you struggle to pay the minimum while the interest mounts up. Consider using a personal loan to consolidate debt and reduce the interest you’re paying.
4. Save for Emergencies
If you are living paycheck to paycheck, just one unexpected expense can cause you to spiral into debt. It’s important to have enough cash on hand. Once you have paid off your debt, start an emergency fund so that you don’t have to rely on credit if you experience an unexpected financial emergency. A rule of thumb is to have three to six months’ worth of expenses saved up. 💡 Quick Tip: Income, expenses, and life circumstances can change. Consider reviewing your budget a few times a year and making any adjustments if needed.
5. Hold Off on Big Purchases
While you are trying to reduce expenses and pay off debt, hold off on buying big ticket items. For example, forgo an expensive vacation for a year and start saving toward next year instead. As much as you might like new furniture or a new car, try to economize for a while until you are in a better place financially.
6. Ask for a Raise
Asking for a raise is not an easy thing to do when money is tight. However, it could be well worth it. According to Payscale.com, 70% of survey respondents who asked for a raise got one. You are in a particularly strong position if your skills are in demand and your employer values you.
The Takeaway
Many Americans are living paycheck to paycheck, even high earners. The reasons why are linked to inflation, lifestyle expectations, and the ease with which people fall into debt. The remedy is to live below your means, and that often means making sacrifices.
If debt is a concern, temporary steps such as downsizing while you pay off your debt or finding additional sources of income are options. Identify where your money goes and stick to a budget to reduce unnecessary spending. Also, getting rid of high-interest debt and cutting back on eating out and other nonessentials can free up a significant amount of cash each month.
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FAQ
Does living paycheck to paycheck mean you’re poor?
Living paycheck to paycheck does not necessarily mean that you are poor, but it does mean that you are living beyond your means. Even high earners can find themselves in a position where they are living paycheck to paycheck, often due to mounting debt and lifestyle creep.
Lifestyle creep is when people spend more whenever their income increases. According to a Forbes study, 39% of those earning $200,000 or more described themselves as running out of money and not having enough leftover to save after covering expenses.
Is living paycheck to paycheck stressful?
Yes. When you live paycheck to paycheck, you may constantly worry how you will afford to pay for an emergency. It’s important to have an emergency fund, so that you do not have to use a loan or high-interest credit card to pay for something unexpected.
How many americans are living paycheck to paycheck?
Close to 80% of Americans are living paycheck to paycheck and are struggling to meet their monthly bills, according to a 2023 survey by Payroll.org. That’s an increase of 6% from the previous year.
Photo credit: iStock/Jacob Wackerhausen
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Managing debt can be a daunting task, but with the right strategies, you can make it easier to pay off and keep your finances in check.
Whether you’re trying to pay off credit card debt, student loans, or other types of debt, there are several strategies you can use to make the process easier.
Benefits of Effective Debt Management
Managing debt effectively is important for several reasons. First, carrying high levels of debt can be a financial burden and may prevent you from achieving their financial goals.
It can also have a negative impact on credit scores. This can make it more difficult and expensive to borrow money in the future.
Finally, failing to manage debt effectively can lead to financial distress and potentially even bankruptcy. By taking steps to pay off debt and reduce the amount of debt that is owed, you can improve their financial stability and well-being.
What is debt management?
Debt management is the practice of organizing and paying off debts through financial planning and budgeting. The goal is to lower and eventually eliminate debt. You can create your own debt management plan or hire a credit counselor to make one for you.
The advantage of doing it yourself is that it’s free, but it takes time and effort. Credit counseling can take stress off your shoulders, but is an added expense. There are many methods for debt management that you can implement on your own.
Assessing Your Debt
Gathering Debt Information
To effectively manage your debt, you first need to identify all debts and gather relevant information about each one. This includes the creditor, balance, and interest rate for each debt.
If you don’t already have a list of all your debts, you can review most of them on your credit reports. Regularly reviewing your credit report is an important financial habit to get into. You can request a free credit report from each of the three consumer credit bureaus at least once per year.
It can be helpful to create a spreadsheet or use a budgeting tool to keep track of all your debts, including the creditor, balance, and interest rate for each one.
Calculating Total Debt
Once all debts have been listed, it is helpful to calculate the total amount of unsecured debt that is owed. This can give you a better understanding of your overall financial situation and the work that needs to be done to pay off your debts.
Identifying High-Interest Debts
After calculating total debt, you should identify which debts have the highest interest rates. These debts may be a higher priority to pay off, as the interest will continue to accrue and potentially increase the total amount owed.
By focusing on paying off high-interest debts first, you can save money in the long run and make progress in paying off their debts more quickly.
Develop a Plan to Pay Off Debt
Developing a plan to pay off debt is crucial for financial stability and well-being. By identifying a strategy for paying off debts and sticking to it, you can make progress in reducing their debt and improving their financial situation.
Reduce Interest Rates
You may be able to reduce the interest rates on your debts by negotiating with creditors or transferring balances to a credit card with a lower interest rate. It is worth considering these options as they can save money on interest and make it easier to pay off debts.
Create a Budget
Creating a budget can help you identify areas where you can cut expenses and redirect those funds towards paying off debt. This may involve reducing discretionary spending, such as dining out or entertainment. You should also find ways to reduce fixed expenses, such as by shopping around for the best rates on utilities or insurance.
Humans are creatures of habit, and even when we’re in debt, the last thing we want to do is change our lifestyle. But any good debt management plan has to at least consider where your expenses could potentially be reduced. The more you can cut back on other expenses, the quicker you can get yourself out of debt.
It doesn’t have to be a long term change. Even reducing expenses for a few months can help.
Here are some examples of expenses you may be able to reduce:
Minimize entertainment subscriptions, or see if you can save by switching plans.
Minimize dining out and take your lunch to work.
Cancel your gym membership and work out at home.
Knowing your own finances in detail will help you find ways to reduce your expenses. Even if you work with a credit counseling organization, nobody is better placed to figure out how to reduce your costs than you are.
Consolidate Your Debts
One option for paying off debt is to consolidate multiple debts into one loan with a lower interest rate. This can make it easier to manage multiple debts and potentially save money on interest.
Debt consolidation options include taking out a personal loan or using a home equity loan or line of credit. Another option is transferring balances to a credit card with a lower interest rate.
Be sure to carefully review the terms and fees associated with consolidation options and ensure that they are a suitable fit for your financial situation.
Set Goals and Track Progress
To stay on track with paying off debt, it can be helpful to set specific goals and track progress towards achieving them. This may involve setting a target for the amount of debt to pay off each month or quarter.
It could also involve setting a goal for the total amount of debt to pay off by a certain date. Tracking progress can help you stay motivated and see the progress that they are making in reducing their debt.
More Tips on Managing Your Debt
Here are some additional tips for managing your debt that can help you effectively pay off what you owe and improve your financial situation:
Pay More Than the Minimum Payment
Making more than the minimum credit card payment can help you pay off your debts more quickly and save money on interest. Credit card companies typically set a minimum payment that is calculated as a percentage of the balance owed.
Making the minimum payment may be sufficient to avoid late fees and negative marks on your credit history. However, it may not make a significant dent in the overall balance. By paying more than the minimum each month, you can reduce the total amount of interest that you pay over time and make progress in paying off your debts.
Avoid Taking on New Debt
While you’re working on paying off your existing debt, try to avoid taking on new debt. This will make it easier to focus on paying off what you already owe.
Consider Setting up Automatic Payments
There are several benefits to setting up automatic payments for your bills:
Convenience: Automatic payments take the hassle out of remembering to pay your bills on time. You can set them up once and forget about it, knowing that your bills will be paid automatically each month.
Avoid late fees: If you forget to pay a bill, you may be charged a late fee. By setting up automatic payments, you can avoid these fees and save money.
Improve credit score: Paying your bills on time is a key factor in determining your credit score. By setting up automatic payments, you can ensure that your bills are paid on time and improve your credit score.
Simplify budgeting: When you know exactly when your bills will be paid each month, it can be easier to budget and manage your money.
Contact a Reputable Credit Counseling Agency
If your debt has gotten out of control, contact the National Foundation for Credit Counseling (NFCC) for detailed, personalized financial counseling and education. They can help you explore different ways to pay down debt.
A credit counselor can provide advice and assistance with developing a personalized plan for paying off debt and improving financial health. Credit counselors can also help you negotiate with creditors and create a debt management plan.
Seeking professional help can be especially beneficial if you are experiencing financial distress or are at risk of falling behind on monthly payments.
Bottom Line
In modern America, completely avoiding debt is difficult and potentially harmful. However, incurring debt without managing it effectively can be even worse. Follow the tips above, and you’re sure to get a solid handle on debt and use it skillfully.
Frequently Asked Questions
Should I pay off my debt with the highest interest rate first?
It can be a good idea to pay off your debts with the highest interest rates first, as these debts will cost you more in the long run. This is known as the “debt avalanche” method. Alternatively, you can also consider the “debt snowball” method, where you focus on paying off your smallest debts first to build momentum.
See also: Debt Snowball vs. Debt Avalanche
How can I create a budget to help me pay off my debt?
To create a budget, start by listing all of your income sources and all of your expenses, including your debt payments. Then, try to find ways to cut back on your expenses and redirect that money towards paying off your debt. You can also consider increasing your income by taking on a part-time job or negotiating for a raise at work.
What is debt consolidation?
Debt consolidation is the process of rolling multiple debts into a single new loan product with one monthly payment. This brings your payment schedule into a more manageable place.
Ideally, consolidated loans will come with lower interest rates and more manageable payment terms. Personal loans and 0% interest balance-transfer credit cards are among some of the most common debt consolidation options.
What is debt settlement?
Debt settlement is the process of negotiating with a creditor to reduce the level of your outstanding balance. This is one of the last resorts for those who have trouble paying their debts in full.
The process involves working with a debt settlement company to negotiate with creditors on your behalf. Generally speaking, creditors will only entertain debt settlement for debt that isn’t current.
It’s important to note that debt settlement requires you to stop making payments, which will harm your credit score. Debt settlement companies will also take their cut on top of any fees charged for successfully negotiating.
If you choose to take this route, make sure you find a reputable debt relief company to work with.
How can I rebuild my credit after paying off my debt?
After paying off your debt, you can rebuild your credit by making all of your payments on time. You should also try to keep your credit utilization low and diversify your credit mix. Other options include applying for a secured credit card or becoming an authorized user on someone else’s credit card to help establish a positive credit history.
Our goal here at Credible Operations, Inc., NMLS Number 1681276, referred to as “Credible” below, is to give you the tools and confidence you need to improve your finances. Although we do promote products from our partner lenders who compensate us for our services, all opinions are our own.
Home equity loan
Home equity line of credit (HELOC)
Interest rate
Fixed
Variable
Monthly payment amount
Fixed
Variable
Closing costs and fees
Yes
Yes, might be lower than other loan types
Repayment period
Typically 5-30 years
Typically 10-20 years
FAQ
What is a rate lock?
Interest rates on mortgages fluctuate all the time, but a rate lock allows you to lock in your current rate for a set amount of time. This ensures you get the rate you want as you complete the homebuying process.
What are mortgage points?
Mortgage points are a type of prepaid interest that you can pay upfront — often as part of your closing costs — for a lower overall interest rate. This can lower your APR and monthly payments.
What are closing costs?
Closing costs are the fees you, as the buyer, need to pay before getting a loan. Common fees include attorney fees, home appraisal fees, origination fees, and application fees.
If you’re trying to find the right mortgage rate, consider using Credible. You can use Credible’s free online tool to easily compare multiple lenders and see prequalified rates in just a few minutes.
Today’s average mortgage rates on Apr. 19, 2024, compared with one week ago. We use rate data collected by Bankrate as reported by lenders across the US.
Current mortgage interest rates
If you’re in the market for a home, here are today’s mortgage rates compared to last week’s.
Product
Rate
Last week
Change
30-year fixed
7.13%
7.02%
+0.11
15-year fixed
6.64%
6.44%
+0.20
10-year fixed
6.51%
6.37%
+0.14
5/1 ARM
6.79%
6.60%
+0.19
30-year jumbo mortgage rate
7.40%
7.20%
+0.20
30-year mortgage refinance rate
7.11%
6.97%
+0.13
Average rates offered by lenders nationwide as of April 16, 2024. We use rates collected by Bankrate to track daily mortgage rate trends.
Mortgage rates change every day. Experts recommend shopping around to make sure you’re getting the lowest rate. By entering your information below, you can get a custom quote from one of CNET’s partner lenders.
About these rates: Like CNET, Bankrate is owned by Red Ventures. This tool features partner rates from lenders that you can use when comparing multiple mortgage rates.
Mortgage interest rate trends
Over the last few years, high inflation and the Federal Reserve’s aggressive interest rate hikes pushed up mortgage rates from their record lows around the pandemic. Since last summer, the Fed has consistently kept the federal funds rate at 5.25% to 5.5%. Though the central bank doesn’t directly set the rates for mortgages, a high federal funds rate makes borrowing more expensive, including for home loans.
Mortgage rates change daily, but average rates have been moving between 6.5% and 7.5% since late last fall. Today’s homebuyers have less room in their budget to afford the cost of a home due to elevated mortgage rates and steep home prices. Limited housing inventory and low wage growth are also contributing to the affordability crisis and keeping mortgage demand down.
What to expect from mortgage rates in 2024
Mortgage forecasters base their projections on different data, but most housing market experts predict rates will move toward 6% by the end of 2024. Ultimately, a more affordable mortgage market will depend on how quickly the Fed begins cutting interest rates. Most economists predict that the Fed will start lowering interest rates later this summer.
Since mortgage rates fluctuate for many reasons — supply, demand, inflation, monetary policy and jobs data — homebuyers won’t see lower rates overnight, and it’s unlikely they’ll find rates in the 2% range again.
“We are expecting mortgage rates to fall to around 6.5% by the end of this year, but there’s still a lot of volatility I think we might see,” said Daryl Fairweather, chief economist at Redfin.
Every month brings a new set of inflation and labor data that can change how investors and the market respond and what direction mortgage rates go, said Odeta Kushi, deputy chief economist at First American Financial Corporation. “Ongoing inflation deceleration, a slowing economy and even geopolitical uncertainty can contribute to lower mortgage rates. On the other hand, data that signals upside risk to inflation may result in higher rates,” Kushi said.
Here’s a look at where some major housing authorities expect average mortgage rates to land.
How to select a mortgage term and type
When picking a mortgage, consider the loan term, or payment schedule. The most common mortgage terms are 15 and 30 years, although 10-, 20- and 40-year mortgages also exist. You’ll also need to choose between a fixed-rate mortgage, where the interest rate is set for the duration of the loan, and an adjustable-rate mortgage. With an adjustable-rate mortgage, the interest rate is only fixed for a certain amount of time (commonly five, seven or 10 years), after which the rate adjusts annually based on the market’s current interest rate. Fixed-rate mortgages offer more stability and are a better option if you plan to live in a home in the long term, but adjustable-rate mortgages may offer lower interest rates upfront.
30-year fixed-rate mortgages
The average interest rate for a standard 30-year fixed mortgage is 7.13%, which is a growth of 11 basis points compared to one week ago. (A basis point is equivalent to 0.01%.) A 30-year fixed mortgage is the most common loan term. It will often have a higher interest rate than a 15-year mortgage, but you’ll have a lower monthly payment.
15-year fixed-rate mortgages
The average rate for a 15-year, fixed mortgage is 6.64%, which is an increase of 20 basis points from the same time last week. Though you’ll have a bigger monthly payment than a 30-year fixed mortgage, a 15-year loan usually comes with a lower interest rate, allowing you to pay less interest in the long run and pay off your mortgage sooner.
5/1 adjustable-rate mortgages
A 5/1 adjustable-rate mortgage has an average rate of 6.79%, an uptick of 19 basis points from seven days ago. You’ll typically get a lower introductory interest rate with a 5/1 ARM in the first five years of the mortgage. But you could pay more after that period, depending on how the rate adjusts annually. If you plan to sell or refinance your house within five years, an ARM could be a good option.
What factors affect mortgage rates?
While it’s important to monitor mortgage rates if you’re shopping for a home, remember that no one has a crystal ball. It’s impossible to time the mortgage market, and rates will always have some level of volatility because so many factors are at play.
“Mortgage rates tend to follow long-date Treasury yields, a function of current inflation and economic growth as well as expectations about future economic conditions,” says Orphe Divounguy, senior macroeconomist at Zillow Home Loans.
Here are the factors that influence the average rates on home loans.
Federal Reserve monetary policy: The nation’s central bank doesn’t set interest rates, but when it adjusts the federal funds rate, mortgages tend to go in the same direction.
Inflation: Mortgage rates tend to increase during high inflation. Lenders usually set higher interest rates on loans to compensate for the loss of purchasing power.
The bond market: Mortgage lenders often use long-term bond yields, like the 10-Year Treasury, as a benchmark to set interest rates on home loans. When yields rise, mortgage rates typically increase.
Geopolitical events: World events, such as elections, pandemics or economic crises, can also affect home loan rates, particularly when global financial markets face uncertainty.
Other economic factors: The bond market, employment data, investor confidence and housing market trends, such as supply and demand, can also affect the direction of mortgage rates.
Calculate your monthly mortgage payment
Getting a mortgage should always depend on your financial situation and long-term goals. The most important thing is to make a budget and try to stay within your means. CNET’s mortgage calculator below can help homebuyers prepare for monthly mortgage payments.
Tips for finding the best mortgage rates
Though mortgage rates and home prices are high, the housing market won’t be unaffordable forever. It’s always a good time to save for a down payment and improve your credit score to help you secure a competitive mortgage rate when the time is right.
Save for a bigger down payment: Though a 20% down payment isn’t required, a larger upfront payment means taking out a smaller mortgage, which will help you save in interest.
Boost your credit score: You can qualify for a conventional mortgage with a 620 credit score, but a higher score of at least 740 will get you better rates.
Pay off debt: Experts recommend a debt-to-income ratio of 36% or less to help you qualify for the best rates. Not carrying other debt will put you in a better position to handle your monthly payments.
Research loans and assistance: Government-sponsored loans have more flexible borrowing requirements than conventional loans. Some government-sponsored or private programs can also help with your down payment and closing costs.
Shop around for lenders: Researching and comparing multiple loan offers from different lenders can help you secure the lowest mortgage rate for your situation.
Our goal here at Credible Operations, Inc., NMLS Number 1681276, referred to as “Credible” below, is to give you the tools and confidence you need to improve your finances. Although we do promote products from our partner lenders who compensate us for our services, all opinions are our own.
Home equity loan
Home equity line of credit (HELOC)
Interest rate
Fixed
Variable
Monthly payment amount
Fixed
Variable
Closing costs and fees
Yes
Yes, might be lower than other loan types
Repayment period
Typically 5-30 years
Typically 10-20 years
FAQ
What is a rate lock?
Interest rates on mortgages fluctuate all the time, but a rate lock allows you to lock in your current rate for a set amount of time. This ensures you get the rate you want as you complete the homebuying process.
What are mortgage points?
Mortgage points are a type of prepaid interest that you can pay upfront — often as part of your closing costs — for a lower overall interest rate. This can lower your APR and monthly payments.
What are closing costs?
Closing costs are the fees you, as the buyer, need to pay before getting a loan. Common fees include attorney fees, home appraisal fees, origination fees, and application fees.
If you’re trying to find the right mortgage rate, consider using Credible. You can use Credible’s free online tool to easily compare multiple lenders and see prequalified rates in just a few minutes.
Today’s average mortgage rates on Apr. 15, 2024, compared with one week ago. We use rate data collected by Bankrate as reported by lenders across the US.
Today’s mortgage rates
If you’re in the market for a home, here are today’s mortgage rates compared to last week’s.
Loan term
Today’s Rate
Last week
Change
30-year mortgage rate
7.01%
6.95%
+0.07
15-year fixed rate
6.46%
6.34%
+0.12
10-year fixed
6.31%
6.20%
+0.11
5/1 ARM
6.33%
6.45%
-0.12
30-year jumbo mortgage rate
7.15%
7.04%
+0.11
30-year mortgage refinance rate
7.03%
6.98%
+0.05
Average rates offered by lenders nationwide as of April 11, 2024. We use rates collected by Bankrate to track daily mortgage rate trends.
Mortgage rates change every day. Experts recommend shopping around to make sure you’re getting the lowest rate. By entering your information below, you can get a custom quote from one of CNET’s partner lenders.
About these rates: Like CNET, Bankrate is owned by Red Ventures. This tool features partner rates from lenders that you can use when comparing multiple mortgage rates.
Mortgage interest rate trends
Over the last few years, high inflation and the Federal Reserve’s aggressive interest rate hikes pushed up mortgage rates from their record lows around the pandemic. Since last summer, the Fed has consistently kept the federal funds rate at 5.25% to 5.5%. Though the central bank doesn’t directly set the rates for mortgages, a high federal funds rate makes borrowing more expensive, including for home loans.
Mortgage rates change daily, but average rates have been moving between 6.5% and 7.5% since late last fall. Today’s homebuyers have less room in their budget to afford the cost of a home due to elevated mortgage rates and steep home prices. Limited housing inventory and low wage growth are also contributing to the affordability crisis and keeping mortgage demand down.
What to expect from mortgage rates in 2024
Mortgage forecasters base their projections on different data, but most housing market experts predict rates will move toward 6% by the end of 2024. Ultimately, a more affordable mortgage market will depend on how quickly the Fed begins cutting interest rates. Most economists predict that the Fed will start lowering interest rates later this summer.
Since mortgage rates fluctuate for many reasons — supply, demand, inflation, monetary policy and jobs data — homebuyers won’t see lower rates overnight, and it’s unlikely they’ll find rates in the 2% range again.
“We are expecting mortgage rates to fall to around 6.5% by the end of this year, but there’s still a lot of volatility I think we might see,” said Daryl Fairweather, chief economist at Redfin.
Every month brings a new set of inflation and labor data that can change how investors and the market respond and what direction mortgage rates go, said Odeta Kushi, deputy chief economist at First American Financial Corporation. “Ongoing inflation deceleration, a slowing economy and even geopolitical uncertainty can contribute to lower mortgage rates. On the other hand, data that signals upside risk to inflation may result in higher rates,” Kushi said.
Here’s a look at where some major housing authorities expect average mortgage rates to land.
Picking a mortgage term and type
When picking a mortgage, consider the loan term, or payment schedule. The most common mortgage terms are 15 and 30 years, although 10-, 20- and 40-year mortgages also exist. You’ll also need to choose between a fixed-rate mortgage, where the interest rate is set for the duration of the loan, and an adjustable-rate mortgage. With an adjustable-rate mortgage, the interest rate is only fixed for a certain amount of time (commonly five, seven or 10 years), after which the rate adjusts annually based on the market’s current interest rate. Fixed-rate mortgages offer more stability and are a better option if you plan to live in a home in the long term, but adjustable-rate mortgages may offer lower interest rates upfront.
30-year fixed-rate mortgages
The average 30-year fixed mortgage interest rate is 7.01%, which is an increase of 7 basis points from seven days ago. (A basis point is equivalent to 0.01%.) A 30-year fixed mortgage is the most common loan term. It will often have a higher interest rate than a 15-year mortgage, but you’ll have a lower monthly payment.
15-year fixed-rate mortgages
The average rate for a 15-year, fixed mortgage is 6.46%, which is an increase of 12 basis points from the same time last week. Though you’ll have a bigger monthly payment than a 30-year fixed mortgage, a 15-year loan usually comes with a lower interest rate, allowing you to pay less interest in the long run and pay off your mortgage sooner.
5/1 adjustable-rate mortgages
A 5/1 adjustable-rate mortgage has an average rate of 6.33%, a decrease of 12 basis points from the same time last week. You’ll typically get a lower introductory interest rate with a 5/1 ARM in the first five years of the mortgage. But you could pay more after that period, depending on how the rate adjusts annually. If you plan to sell or refinance your house within five years, an ARM could be a good option.
What affects mortgage rates?
While it’s important to monitor mortgage rates if you’re shopping for a home, remember that no one has a crystal ball. It’s impossible to time the mortgage market, and rates will always have some level of volatility because so many factors are at play.
“Mortgage rates tend to follow long-date Treasury yields, a function of current inflation and economic growth as well as expectations about future economic conditions,” says Orphe Divounguy, senior macroeconomist at Zillow Home Loans.
Here are the factors that influence the average rates on home loans.
Federal Reserve monetary policy: The nation’s central bank doesn’t set interest rates, but when it adjusts the federal funds rate, mortgages tend to go in the same direction.
Inflation: Mortgage rates tend to increase during high inflation. Lenders usually set higher interest rates on loans to compensate for the loss of purchasing power.
The bond market: Mortgage lenders often use long-term bond yields, like the 10-Year Treasury, as a benchmark to set interest rates on home loans. When yields rise, mortgage rates typically increase.
Geopolitical events: World events, such as elections, pandemics or economic crises, can also affect home loan rates, particularly when global financial markets face uncertainty.
Other economic factors: The bond market, employment data, investor confidence and housing market trends, such as supply and demand, can also affect the direction of mortgage rates.
Calculate your monthly mortgage payment
Getting a mortgage should always depend on your financial situation and long-term goals. The most important thing is to make a budget and try to stay within your means. CNET’s mortgage calculator below can help homebuyers prepare for monthly mortgage payments.
Expert tips for the best mortgage rates
Though mortgage rates and home prices are high, the housing market won’t be unaffordable forever. It’s always a good time to save for a down payment and improve your credit score to help you secure a competitive mortgage rate when the time is right.
Save for a bigger down payment: Though a 20% down payment isn’t required, a larger upfront payment means taking out a smaller mortgage, which will help you save in interest.
Boost your credit score: You can qualify for a conventional mortgage with a 620 credit score, but a higher score of at least 740 will get you better rates.
Pay off debt: Experts recommend a debt-to-income ratio of 36% or less to help you qualify for the best rates. Not carrying other debt will put you in a better position to handle your monthly payments.
Research loans and assistance: Government-sponsored loans have more flexible borrowing requirements than conventional loans. Some government-sponsored or private programs can also help with your down payment and closing costs.
Shop around for lenders: Researching and comparing multiple loan offers from different lenders can help you secure the lowest mortgage rate for your situation.
Refinancing a rental property can allow you to change the mortgage term, rate or both or take out equity for financial needs.
To refinance your rental property, be sure you’re up on lender requirements, know your equity and are ready to shop around to find the best rate.
Refinancing isn’t just for a primary residency. Owners of secondary residences or other real estate can save money if they can find the right deal. Knowing when to refinance your rental property comes down to factors like your current mortgage interest rate and remaining term years.
7 reasons to refinance a rental property
Whether you need to make your property expenses more manageable or access cash, refinancing your rentals has clear benefits. Some common reasons to consider a rental refinance include:
Lower your interest rate
Who wouldn’t like to pay less interest on their loan each month? If you see rates dropping and have many years left on your mortgage, refinancing can save you thousands of dollars over the long term.
Lower monthly mortgage payments
You can lower your payment by lowering your interest rate or extending the terms of your mortgage or both. This could increase your monthly take-home earnings from the rental property.
Alter the mortgage term
Refinancing allows you to change the length of your mortgage term. By selecting a 15-year mortgage instead of a 30-year one, you’ll save money on interest over the long run.
Eliminate mortgage insurance
If you have a conventional loan and made less than a 20 percent down payment when you bought the property, you’re probably paying private mortgage insurance. Assuming you now have enough equity, you can eliminate this monthly fee by refinancing. Also assuming you have enough equity, you can refinance an FHA loan to a conventional one to get rid of FHA mortgage insurance premiums.
Get cash for home improvements
If you want to make home improvements, add an addition or expand amenities on the rental property to up the rent or lease, a cash-out refinance may be a good way to pay for it.
Consolidate debt
If there is equity in the home, you can use the cash from a refinance to pay down credit cards or other debt with higher interest rates.
Tap into your home equity
By using the equity in a rental home, you could purchase more rentals or upgrade the ones you own. You could also finance other investments or improve your own home.
How to refinance a rental or investment property
If you’ve decided it’s the right move for you, here’s a breakdown of how to refinance a rental property:
Step 1: Check your equity
Knowing how much equity you need to have in the home before you begin the application process could spare you a rejection. (Equity is your ownership stake — the percentage of the home you own outright.) For most conventional and FHA loans, lenders ask that you have at least 20 percent equity in the property. They may want you to have at least 25 percent equity for a rental refinance.
Step 2: Know the requirements
Lenders generally tend to be less lenient with refinancing requirements on investment properties. Some requirements might include:
DTI ratio: For a primary residence, lenders may allow you to have a debt-to-income ratio of up to 50 percent if you have savings and good credit. Because lenders may see an investment property as a riskier loan, you may be capped at about 43 percent.
LTV ratio: The loan-to-value ratio represents how much equity you have in your home. It measures your current loan balance against the current property value. As mentioned above, you may need as much as 25 percent equity in a rental property to refinance it, meaning an LTV ratio no greater than 75 percent.
Limited number of properties: If you’ve got a large portfolio of rental properties, you may not be able to refinance at your local retail bank or get as good of a loan. Instead, you might do better with an investment property-oriented outfit that offers asset-based lending. “At the bank, not only are you going to have the same property requirements, but you’ll also have personal income requirements,” says Jason Haye, VP national sales manager at Velocity Commercial Capital, which specializes in loans for multi-family and small commercial properties. “We’ll look at the property alone.”
Appraisal: Your lender will want proof that your property is worth what you say. You can get a broker price opinion in some cases, but the lender will probably insist on an actual appraiser (it’ll arrange it, but you pay for it).
Tenants: Having tenants is crucial to a rental refinance. “It’s supposed to be an income-based property, and if it’s vacant, it’s generating zero. That’s not good,” says Haye. “It seems basic, but make sure you have a renter in there.”
Step 3: Compare refinance rates and lenders
As with all loans and financial products, it’s a good idea to shop around and talk to a few refinance lenders before you move ahead. By comparing terms, you can determine which offer works best in your situation.
Many lenders who offer lower interest rates have higher origination fees, and vice versa. Be sure to ask about origination fees and other closing costs before you apply and measure that against your interest rate. Getting pre-approved by at least three lenders gives you an idea about your range of choices.
Lenders generally consider rental properties riskier investments than primary residences. As a result, your new rental mortgage rate will probably be higher than what you could get on your main home, says Tom Schneider, VP of product management at Pathway Homes. He explains, “They’re not as great as you might be able to get for your personal property, but there’s not a huge delta.”
The average rental mortgage rate at traditional lenders is usually about 50 basis points higher than that for a primary mortgage, says Schneider. Specialized lenders may charge even higher rates — at least a full percentage point higher — because they cater to a niche market, but they often work fast.
Step 4: Gather your documentation
Refinancing typically requires submitting a lot of documents. Streamlined refinancing is the only exception. Your lender will want to see not only your personal finances and obligations but also reports relating to your rental property’s income. Prepare your documents in advance, including:
Proof of income: You’ll likely need to provide copies of recent paystubs to confirm your employment and income.
Tax returns: The lender will also likely ask for copies of tax returns to verify employment history and income.
Personal details needed for credit check: This includes your consent, full name, address, social security number and date of birth.
Explanatory letters: If you have any gaps in income or a negative mark on your credit history that needs explaining, you might need to provide the lender with a letter.
Homeowners insurance policy: You must show the lender you have enough insurance coverage to protect the home and property it is lending a mortgage to.
Recorded deed: This document shows you have a legal claim to the property.
If your property has been rented in the past, many lenders will allow you to apply 75 percent of the current agreement as part of your income. In other words, if your tenant pays $10,000 annually, you can add $7,500 to your income.
Step 5: Submit your refinance application
If you have your documents ready, you can often submit your application quickly. You may even be able to complete the application online. Most major lenders will need to evaluate and then underwrite your loan in-house, which can take between 30 and 60 days.
Step 6: Close on your new loan
You will need to sign the final documents when the loan is approved.
Should you refinance your rental property?
Before heading to your local lender for a refinance on your rental, take time to consider the benefits and drawbacks of doing so:
Benefits of refinancing a rental property
Cash for updates. A refinance can provide funds for updating or renovating the property, which could justify raising rent on your asset.
It provides an opportunity for new terms. You could change your 30-year mortgage to a 15-year mortgage with a refinance.
You can pay off debt. Using a cash-out refinance could allow you to pay off or down accumulated debts.
Drawbacks of refinancing a rental property
You’ll have to pay some money upfront. Like any other mortgage, you’ll have to cover closing costs and lender fees. Plus, if you need a property survey or appraisal, you might have to pay for those, too.
It may not be as affordable as you think. Be sure to factor in all the costs of refinancing a loan, including a change in interest rates, and make sure it’ll save you money.
You might initially lose equity. If you have been building equity and take a chunk out of it to refinance, your rental property will temporarily lose value as an asset. It will take time to build back up the equity you used.
FAQ about refinancing a rental property
Yes, you can refinance a rental property if you have tenants. In fact, it may be easier to refinance a property with tenants than a property that is sitting empty.
Yes. You can use rental income to help qualify for a refinance as long as you can prove that it’s a stable source of income.
If your mortgage lender doesn’t handle rental property refinancing, it may make sense to consult with a mortgage broker or specialized lender who does to see what options you have. A mortgage broker can shop your information around to various lenders and find you the best deals.
Our goal here at Credible Operations, Inc., NMLS Number 1681276, referred to as “Credible” below, is to give you the tools and confidence you need to improve your finances. Although we do promote products from our partner lenders who compensate us for our services, all opinions are our own.
Home equity loan
Home equity line of credit (HELOC)
Interest rate
Fixed
Variable
Monthly payment amount
Fixed
Variable
Closing costs and fees
Yes
Yes, might be lower than other loan types
Repayment period
Typically 5-30 years
Typically 10-20 years
FAQ
What is a rate lock?
Interest rates on mortgages fluctuate all the time, but a rate lock allows you to lock in your current rate for a set amount of time. This ensures you get the rate you want as you complete the homebuying process.
What are mortgage points?
Mortgage points are a type of prepaid interest that you can pay upfront — often as part of your closing costs — for a lower overall interest rate. This can lower your APR and monthly payments.
What are closing costs?
Closing costs are the fees you, as the buyer, need to pay before getting a loan. Common fees include attorney fees, home appraisal fees, origination fees, and application fees.
If you’re trying to find the right mortgage rate, consider using Credible. You can use Credible’s free online tool to easily compare multiple lenders and see prequalified rates in just a few minutes.