There are many advantages to being your own boss. Being self employed means having the freedom to work as much as you want, to do what you want, when you want—no more pretentious guards who dictate your every move or watch you like an eagle ready to pounce on any minor mistake.
But there are also downsides to being self-employed. One of which is the roller coaster cash flow that can be accompanied by irregular income.
But just because your income is not regular doesn't mean you can pay your bills whenever you want (or when you get paid). Unlike your earnings, bills are as regular as the ticking of a watch and should be paid no matter when and how much you earn.
This can make it difficult to create and stick to a budget and pay off debt while being your own boss.
Fortunately, with a little strategy, it is possible to pay off your debts as a self-employed.
Here is how:
Try not to increase your debt.
The first thing that will help you pay off your debts as a self-employed is to stop increasing the debt.
Before you do anything like budgeting, tracking expenses, etc., you need first to cut off the things that are adding to your debt.
This could mean cutting up your credit cards, freezing them in a block of ice, putting them in a safe, or putting the key somewhere else.
Removing this temptation will help you stop increasing your debt.
For those who are self-employed, debt is dangerous to your overall growth due to irregular income. You are more likely to have unforeseen expenses because not only do you have to worry about unknown personal expenses, but you may also encounter unforeseen business expenses.
If you have less debt, you will free up more cash that you can use for these expenses and other things that you want to get financing.
Learn how to budget with irregular income
Having irregular income doesn't mean you can't budget. It just means you need to think it over a bit because you don't have a fixed payment amount that you know you will receive every two weeks.
Having found that having several different budgets helps keep track of your expenses, depending on whether your business's income goes up or down from month to month.
First, create a basic budget.
Collect all your monthly bills and debts. Make two piles: the essential and the non-essential.
The essentials will be things like rent or mortgage, utilities, a budget for groceries, etc. This does not include the cable TV bill or money for entertainment.
The essential stack is what you add to calculate the baseline budget. This is the amount of income you MUST earn each month to survive. It's a good place to start that everyone who is self-employed should know at the back of their minds.
If you are intensely trying to pay off your debt, anything you earn above that amount should be put toward debt.
Calculate your average budget
Once you know the number of your essential expenses, add the non-essential expenses. This will help you determine how much you are actually spending in a normal month in which you earn more than the base amount.
Compare that to your average income for the past three months to make sure your expenses are lower than your average income.
If so, save the extra income you earn until you have comfortable savings. The number will not be the same for all self-employed workers.
This savings is what you will have to fall back on when you have a month with less income, so you can pay your bills without using your credit cards.
Once you've created your reserve, you can put on the additional income you earn above the average into your debt to help pay it off faster.
Pay your debts several times a month.
Another safety feature that you can use to pay off your debts when you have irregular income is to make multiple debt repayments per month.
For example, you only pay the minimum payment for each debt at the start of the month.
As the rest of the month goes by, hopefully, you get a better idea of how much you'll earn that month.
Suppose you don't reach your average monthly income. In that case, you can rest assured that at least your minimum payment obligations have been met without having to borrow from your savings or emergency fund to cover your bills.
During the months when you meet or exceed your income goals, you can always ask for another debt payment at the end of the month.
Apply "found" money to debt
Every once in a while, everyone gets "found" money. It is money that is not part of your normal income stream. This may be a refund for a product purchased. Or maybe you got a year-end bonus from a customer.
No matter where the extra money comes from, don't spend it. Instead, use the money you find to pay off your debts.
Treat yourself like an employee.
Since you have already created your average and base budget, you have a good idea of how much income you need to live each month.
Instead of paying yourself every month and only taking advantage of the savings pool if you're in a tough spot, treat yourself like an employee who gets paid a set amount every two weeks. This will help you feel that you have a more stable income again.
It's also similar to the idea of living on last month's income, which is a great strategy for the self-employed. So, whenever you accumulate a large surplus of income, you can pay off the debt and give yourself a bonus or an increase in salary.
Consolidate high-interest debt
If you have high-interest credit card debt, consider transferring the balances to a single card with 0% APR. Or you can apply for a personal loan at a lower interest rate to pay off your credit card balance.
Consolidating and refinancing the high-interest debt can help you save a lot of money on interest. Plus, you can pay off your debt faster. If you have a single monthly loan payment instead of multiple credit card payments, managing your finances is more convenient, which gives you more time to grow your business.
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