Paying Off Debt When You’re Self-Employed

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Being self-employed can have lots of benefits. You set your own hours. You determine when you go on vacation. You’re your own boss.

But, with entrepreneurship come some financial challenges that are different than those experienced by people who work for an employer. One of them is an erratic paycheck. If you find yourself trying to pay down debt and stick to a budget, it can be kind of tricky.

Our family’s primary income for about 15 years was from a construction business. Our income was different every month.

This made budgeting extremely difficult. For years I read the books that said, allot this percentage for housing, this percentage for food, blah, blah, blah. But when the whole changes every month, so does the % and that doesn’t work well with the phone company or your landlord.

It wasn’t until I read The Total Money Makeover that I learned how to really make a workable budget.

Bryan and I tweaked the recommendations in the book until we worked out a plan that helped us get the bills paid and get out of debt, even when there wasn’t a regular, predictable income coming in every month.

Here’s what we did:

Budgeting and Paying Off Debt when You’re Self-Employed

ham and egg salad sandwich with pickles

1. Figure out your bottom line expenses.

Even though your income might not be regular, your expenses often are. You can figure out that you need basically the same amount each month for housing, utilities, transportation, food, minimum debt payments, etc. We worked out an amount that we had to have every month to meet our family’s basic needs.

2. Pay your bills as you can.

When you’re first starting out with a budget and paying down debt, you may not have a lot of capital to work with. So, pay your month’s bills as soon as you can with the income that is coming in. Do not buy extras. (It will pay off, I promise.)

3. Stockpile for next month.

Once the current bills are paid, start saving for next month. If you get a great commission check, do not pass go; do not collect $200. DO NOT go out for a steak dinner! Self-employment can be feast or famine, but it doesn’t have to be.

Instead, start saving for the next round of bills. Put that commission toward next month’s bottom line.

money in lego box

4. Any extra goes to debt.

Once we had saved a month’s budget in advance, any extra income that came in that month went toward paying off our smallest debt. When the month ended, we went back to step #3. We continued going back and forth between steps 3 and 4, until our debts were all paid.

It took 18 months. And it was really hard. But, it was worth it.

(If you’re curious or you missed the series, read more of our “get out of debt” story.)

Being self-employed can be both a blessing and a curse, but budgeting and paying down debt is not impossible with an erratic income.

How are YOU minding your money?

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  1. My husband and I had been either self-employed or commissions for 40 yrs of marriage. It was great and it was horrible. You never know, ever, what is coming in the next month. I have worked in real estate most of that time. We never got ahead, always had too much debt, just charging stuff to keep going, get a big check, pay credit down, celebrate, then the next month have to charge it up again, because no income that month. My husband passed away 3 yrs ago. I was frantic. Now it was JUST me. So if I had a bad month it was ALL bad. I had to figure out a plan. I did have a very little survivors benefits for myself and 2 teens. So I added everything up that it cost to SURVIVE on a monthly basis, no new clothes budget, no out to eat, no occasional things, minimum, minimum. Real Estate checks are big and far between. Next check, good I can pay all this months bills and next months too. Still no extras, even on debt, cheap food, beans and rice. 2 months later a really good check, now I could have 3 months reserve, still don’t spend anything other than bare minimum, not even on debt, just pay the basics. Once I got to 6 months in reserve, I started paying things down, but maintain the reserve. I was $80,000 in debt (not counting car) when my husband died. Now I am down to $10,000. I have 6 months reserve, don’t have to worry all the time, and my credit is stellar and I feel like a huge boulder is off my shoulders. We used to reward ourselves when we got a big month, now, I just stash it. Now I have money and when I want to do something big, I really think it through. “When is the next check for sure coming?, How will this effect my reserves?” Last month I decided, after MUCH thought, I could fix the tub/shower in my room, which was a death trap. I still thought on it a long time before I finally decided it was ok to do it. Now, $5,000 later it is beautiful, I am not feeling the least guilty, and I am so thankful I was able to stay on track. It was really hard the first year and a half, but then I reached a point where it started to become easier. Besides, when I am not so worried and stressed I do much better with my business.

  2. Hi Jess, what a great series and I am taking a lot of your suggestions to heart! Sometimes even though we eat well, my kids want old school kid food and so I made some Mark Bittman chicken nuggets that remind them of the restaurant fare they sometimes crave. All the best, Alex

  3. Thanks for this post! We are also self-employed – we started a construction company 6 years ago right before the bottom fell out of the real estate market. It’s been a struggle, but somehow we always seen to make it. One trap I find us falling into sometimes is the “Oh it’s a business expense…”
    Those little words justify the purchase of the meal, etc. ๐Ÿ™‚ That just doesn’t work. I’m trying hard to get my husband to agree with me on that.
    When we started our company, we figured out what we needed to survive, bare-bones, and that’s what my husband is paid. We’re still pretty new at this so have been investing every space penny back into the business. My husband figures, if we can’t afford to pay us a bare-bones salary, he needs to seek other employment options. But there have still been times when we have relied on my on-line teaching salary to pay the bills (which we try not to do).
    Anyhow, thanks for this post.

  4. Thank you so much for this post! We are self-employed and have struggled with planning the “perfect” budget that will work for us. Thanks for the tried-and-true ideas. ๐Ÿ™‚

  5. Such a good post! You are right, that it’s definitely do-able, but it takes a bit more planning and organization than when you have predictable income.

    We have a “green line” and “red line” on our budget. Everything above the red line is four-walls essential – and we pretty much know that our monthly income will cover that 90% of the time.

    The stuff b/w the red line and the green line is really important, but not life or death. Everything beyond the green line is gravy. When we have months that go past the green line, we put that money into a “variable income sinkfund” (VISF) so we can pull it out to full the between-the-red-and-green-line stuff when we don’t make enough one month. It sound complicated, but it’s not. This way, we can pretty much afford all the needs and most of the wants. Long term savings goals get funded annually out of whatever is left in the VISF.

  6. Thanks for this post! Our budget is very tight and I am always looking for new ideas. It is nice to have such wonderful resources.

  7. We are in the same boat, it’s continually feast or famine around here. In the winter my husband doesn’t make enough to cover our rent, let alone all of our other expenses. But in the summer he makes almost 4x our expenses/month. In the summer I pay rent twice a month, which usually holds us over until April when he starts to make a better wage. We use what little he does make in the winter to pay the rest of our bills (utilities, gas, food, etc.) This seems to work for us. The first year he worked at this job we ended up spending much of the money he made in the summer (cause it felt like we were rich, we had money for the first time ever!). But now we stick to a very strict budget (and don’t touch the money I make) and have found it’s not as difficult as it seems to ride the feast or famine wave, as long as you have a plan.

  8. My husband works in construction so his work expecially in this economy is very unpredictable. I agree pay bills first. I even break that down to the most important bills are paid first (mortgage, insurance and utlities) Thanks for the post.

  9. Number 3 is one of the most important, in my opinion. I’m a freelance musician and my work definitely comes in seasons. Thankfully I usually know ahead of time when to expect feast or famine as much of my orchestral playing is contracted for the entire season. Before I got married I was constantly looking four to six months ahead to make sure I had enough money coming in to cover my bills. I even went as far as writing checks for rents several months ahead of time. Had to stop that once I married as it drove my husband crazy. Ha ha. I know not every self employed person is lucky enough to have work contracted months in advance but that makes it even more important to always be thinking ahead.

    My other tip would be to over estimate expenses and under estimate income. That helped me a lot when work or students fell through.

  10. I’ve been a stay-at-home mom for 30 years. I wish we’d known about Dave Ramsey’s Biblical principles before digging ourselves such a big hole. After we stopped digging we looked for ways to honor God while trying to repay our debts. It is an ongoing thing.

    It hasn’t been easy for me to remain home when I could be out there helping to earn money. But when looking at the big picture it is obvious to us that it wouldn’t be pleasing to the Lord if I were to abandon what we knew to be His Will for me (stay home and homeschool). The end would not justify the means.

    (This was my first visit to your blog. I was sent here by my daughter, another homeschooling mom. Keep up the good work!)

  11. I use coupons regularly. Our Acme just closed their doors….sniff, sniff leaving us with only one grocery store in our area now.

    I was able to save hundreds of dollars on items that I need/use or wanted but wouldn’t spend the money for.

    With the Acme Card Sales, 30% off and coupons I was able to get 10 Raid Yellow Jacket Traps that sell for $8.94 for .70 a piece (we are seasonal campers) I also snagged items such as laundry detergent. All he detergent was $6.99 then 50% off with $2 coupon I paid $1.50 for each. Another great deal I got was Mucinex, sells for $8.99, 50% off w/$2 coupon I paid $2.50 ea. I could go on and on my stockpile is enormous and the high that I got from all that saving will never be able to be matched again!

    Thanks for hosting I am already a follower!

  12. My husband is self-employed with erratic payments at times. Sometimes it would seem we’re poor, the next month rich. Then, he opened a separate business account for all of his money to go into. He let this account accumulate a little, then started to pay himself the SAME AMOUNT every week. We’ve been doing this for a year now and I can’t believe we never thought of it sooner.

  13. My husband has always been self-employed, and this is exactly what we do.

    Unfotunately we have had more famine than feast, and so our situation is tighter than ever.

    We pay bills first. IF there is more, we buy food, IF possible, and other items, IF possible. But if not–and there has been much of the not in the last 4 years–we don’t buy food (and definitely nothing else, including clothing!)

    It is strange when people ask me what I budget for our family of 8 for food. The “budget” allows $0. Once the bills are paid, then we consider food and other items. There is no “blow” money, as Dave Ramsey says.

    We are also careful to watch our gas usage, and our utility usage.

    It is extremely bare bones around here, but we feel blessed with a roof over our heads and a warm home, and running water. So many in the world do not have those things. We have food, and we have clothing–and we have each other.

  14. Thanks for the post. We have regular income, but I hope to build my business, and it is nice to see someone else’s plan for what to do with the money.

  15. Thanks Jessica for this timely post! almost 6 yrs ago my husband got the job that he currently has, but at the time I was so hoping he would jump on the self-employment train that I was raised with (and are still encouraged by my Dad to do). Than came complacency with hubby’s job, and the fat, dumb and happy phase – where I didn’t want him to go down that road – cause it always didn’t feel right. Now for the last year hubby has not been happy at all at his job, but it’s a not happy with all bosses and wanting to have his own business change in him. He’s finally ready to take the plunge, and while I wasn’t a year ago (and even a few weeks ago) I know he’s miserable working for someone else. Changing jobs would only be another 5 yr temporary fix for him. And a few weeks ago we finally hit on something that fits him to a T and I’m encouraged by the idea of heading to self-employment again. But I do worry about trying to get out of debt and staying there, and this post was encouraging and helpful to know just how to aim for those things. Thanks so much! (I’m going to copy and print out the article so I can go back any time I need to for a reminder!)

  16. Great suggestions! We implemented some of those same strategies when we began our debtjourney, and were doing it on one income.

    My apologies–My link should have said One BOTTLE~Many Uses! My fingers were moving faster than my mind. My bad! ๐Ÿ™‚

  17. My husband is not self-employed, but his job is a base plus commission structure, so I know exactly what you mean! We have had a budget for a couple of years, but have been somewhat frustrated by our up-and-down income – mainly when it comes to saving, setting goals, and planning for bigger purchases. Figuring out our bottom line expenses was something that we did in December, and that has helped us a lot. Now we have a better picture of how much is “extra” each month. We know that when we have extra, we need to save for months that are more lean so that we can meet those bottom line expenses. It’s more complicated with an income like this, but we really are very aware of how God provides!

  18. Great recommendations! We have some regular pay and some irregular pay and it is really important for us to plan and budget to stay out of debt.