27 October, 2015
How to Aggressively Pay Down Debt When You’re Self-Employed
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 being a freelancer is a roller coaster for your bank account and financial goals.
When I became self-employed over two years ago, I thought I was in a good place financially. I had paid off all my debt and saved up nearly $8,000 in a bank account for freelancing ventures.
(I planned to save up $10,000, but had to move across the country unexpectedly to help my mother-in-law with cancer treatment.)
Little did I know, being self-employed was totally different from receiving a regular paycheck. Within a year I was over $12,000 in debt again.
How did this happen?! And what do I do now?
In the beginning stages of being my own boss, I made significant investments into my business, hired team members and took time off for family needs. I also had extremely erratic income and tons of surprise expenses. It wasn’t pretty!
If you’re facing a similar situation, or trying to make progress on your financial goals, you have to put in the time and effort to create financial stability.
Here’s how to reverse the momentum and start aggressively paying off your debts — even without a regular paycheck.
1. Stop Adding to the Debt Mountain
This step is actually one of the most overlooked pieces of advice. Many experts jump to advice about learning to budget or earning more money, but these aren’t the first steps.
If you want to make any progress paying your debt, you have to stop adding to the balances and take back control of your spending.
Cut up your credit cards (or hide them in a hard to reach place) and vow to stop using loans as extensions of your paycheck. Do whatever you have to to stop adding on more debt.
Get into the mindset of doing what it takes to stop the debt momentum and reverse the process so you can start paying down those balances. It might take a while to get into the habit of not using credit cards and loans, but be patient and don’t give up.
2. 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 or money in the bank account via a debit card. No credit cards or loans were allowed.
If something like my 60-day Challenge isn’t for you, here are other challenges you can join:
- 7-Day No Spending Challenge: Much like my 60-Day Cash Only challenge, this one forces you to pay for the essentials, like food and utility bills, and nothing else. Once you do it for a week, you can extend it for a longer period of time.
- A Spending Diet: In this challenge, you give yourself a small spending allowance (that’s reasonable) for a specific period of time and don’t buy anything outside of your basic needs.
- Year-Long Shopping Ban: You’re not allowed to buy any new clothes, books or even take-out coffee with a shopping ban. If it’s not something you need to survive, you’re not allowed to buy it.
Once you complete one of these challenges, it will be much easier to create a new budget that you’ll actually stick to. It’s like doing a cleanse before changing your eating or workout habits.
Plus, you can allocate any money you save during the spending challenges toward additional debt payments!
3. Learn to Budget With Irregular Income
Don’t be naive about your finances. Being a freelancer forces you to think of your money and budget differently from someone who receives a paycheck each week.
It’s no secret that working with clients and running your own business is volatile for your bank account and financial goals. So it’s time to change up your budget to work more successfully with irregular income.
If you want to be self-employed, you have to learn to budget with irregular income successfully.
It will likely take two to three months for your income and expenses to level out and work within your new spending limits. Stick with it. Know that at the end of this you will actually be able to spend within your means and have money left over in the bank.
4. Level Out Your Income
Along with spending less and learning to budget better, 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 these:
Get Paid Faster
Offer a discount to clients who pay you within 10 days of receiving the invoice. Give them lots of options for paying your invoice, such as credit card, PayPal or check.
Use an automated or recurring invoicing system, so you can spend less time on admin tasks.
Enforce Payment Policies
Request that clients pay 50% of the project rate upfront. Enforce deadlines and a late fee if you don’t receive payment within the allotted time. Don’t waste your time chasing down payments.
Upsell Your Services or Raise Your Rates
It’s easier to get someone who’s already said “yes” to say “yes” again.
Focus your efforts on current clients. Upsell them on your services or negotiate higher rates. What else can you offer that they need? (Maybe they don’t even realize they need it.)
Leveling out your income may also mean getting a part-time job in addition to your freelance work, or signing up to work as an independent contractor for a recurring client.
Be open to doing anything that will help create more consistent cash flow.
5. Laser-Focus Your Financial Goals
Once you learn to stick to a budget successfully and get into the mode of having 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.
As with any other goal, paying off debt 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 the financial freedom you’re looking for.
Your Turn: Are you paying off debt as a freelancer? What steps are you taking to overcome this financial challenge?
This post was originally published at Careful Cents. Carrie Smith (@carefulcents) is a financial writer and business coach who helps self-employed freelancers overcome financial mountains.
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