A 5-Step Plan for Paying Off Debt When You’re Self-Employed
Ed note: Paying down debt and living on a budget are personal finance fundamentals. But that doesn’t mean they are easy to accomplish. Those tasks can be particularly challenging if you aren’t employed in a traditional 9-5 job. Carrie Smith has awesome tips for all the freelancers, small business owners and self-employed and in debt folks out there.
The benefits of being self-employed are extremely appealing. They include freedom, flexibility and the potential for unlimited income. But one thing most people don’t talk about is how much of a roller coaster it can be for your bank account and financial goals. To start your self-employment adventure, you may have to make a significant investment in your business to get started. You may have erratic income. You may have surprise expenses.
What’s certain is that you have to put in the time and effort to make financial stability happen. Here’s how to reverse the momentum and start aggressively paying off your debts – even without a regular paycheck.
This step is actually one of the most overlooked pieces of advice. If you want to make any progress with your debt, you have to stop adding to the balances and take back control of your spending.
Go on a Spending Challenge
One of the most effective ways to pay off debt involves going on a short-term spending challenge. I put my business on a 60-day Cash Only challenge where I only spent money if I had the cash in the bank account. I only used a debit card. No credit cards or loans were allowed.
This challenge allowed me to evaluate what was worth spending money on and what could be cut from my budget. It basically put everything into perspective, while helping me reign in my spending.
Once you complete a challenge like this, it is much easier to create a new budget that you’ll actually stick to.
Learn to Budget With Irregular Income
It’s no secret that working with clients and running your own business is volatile for your bank account and financial goals. So if being self-employed is what you want to do, then you have to learn to budget with irregular income successfully. Download my free budget template, or use one of the other types of budgets to create a custom plan that works for your needs.
In my experience, it will likely take 2-3 months for your income and expenses to level out and work within your new spending limits.
Level Out Your Income
Another way to aggressively pay down your debt is by increasing your cash flow. Aim to level out the inconsistencies of self-employment income by applying simple cash flow strategies, like:
- Getting paid faster – Offer a discount to clients who pay you within 10 days of receiving the invoice. Use an automated or recurring invoicing system so you can spend less time on admin tasks.
- Enforcing payment policies – Request that clients pay 50% of the project up-front. Enforce deadlines and assess a late fee if you don’t receive payment within the allotted time.
- Upselling your services/raising your rates – It’s easier to get someone who’s already said “yes” to say “yes” again. Focus your efforts on current clients and upsell them on your services, or negotiate higher rates.
Leveling out your income may also mean getting a part-time job in addition to your freelance work. Be open to doing anything that will help level out your income and create more consistent cash flow.
Be Laser-Focused With Your Financial Goals
Once you learn to stick to a budget successfully and have money left over each month, it’s time to aggressively pay off your debt. Put any and all extra money towards your smallest debt balance, then continue until all your accounts are paid off.
Pause any other financial goals, retirement savings and travel plans until you either pay off all your debt or reach a significant milestone (like paying down $10,000). If you want to make real progress, you have to be laser-focused with your debt payoff efforts.
Like with any other goal, it takes patience, dedication and discipline to stay on track. Think of this as a long-term change not a short-term solution. Doing so will allow you to aggressively pay off your debt and find financial freedom.