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
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.
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.
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.
Awesome job! I rejoice with you. Sounds like you’re doing super!
This post is so helpful to is as we are in the same boat. Thanks so much, as always, Jessica!
Thank you so much for hosting.
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
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. 🙂 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.