How Entrepreneurs Can Pay Off Debt on an Irregular Income

cash for debtAs a business owner your hard-earned money is pulled in lots of different directions. You need new equipment, have to hire some help, or spend money for an upcoming networking event.

All of these business obligations can make it difficult to pay off debt and get ahead with your finances.

So how do you manage paying off debt when you have an irregular income?

I used to believe that it would be easier to pay off debt when I didn’t work for someone else because I would have more control over my income.

But I was mistaken in that belief and now realize that leaving a full-time job with a regular paycheck and benefits, makes it MUCH more difficult to pay off debt and reach your financial goals.

For many small businesses, using debt to leverage growth can actually backfire and end up crippling your success. Which is why I strive to run a business without debt, and help others do the same.

It’s hard enough to budget for all the financial ups-and-downs if you’re not prepared, and having debt payments only compounds the problem. Here’s how to work your way out of debt, as an entrepreneur with irregular income.

Create an Essentials-Only Spending Plan

If you don’t already have some sort of spending plan or budget, then it’s time to create one. Not tracking your spending is not an option as an entrepreneur.

It’s too easy to spend money you don’t have in order to “invest into the business”. I’ve been there, and spent way too much money on courses, books, and website redesigns.

Figure out what the exact expenses your business needs to operate properly and use that as your essentials-only spending plan. When budgeting with a variable income, you’ll need to create a bare minimum figure that covers all of your necessary expenses for any given month.

This includes things keeping the lights and water on, paying for an office space, buying food, and any necessary equipment. Hint: you need to earn more than your budget’s bottom line to cover expenses like self-employment taxes (and yes, this is a must-pay expense), and having an essentials-only budget will help you gauge this.

After figuring out how much you need to earn in order to pay your essential expenses you can use any extra funds towards debt repayment, or even saving for future business needs.

An important factor to think about in regards to irregular income, is the low income months. This is where having a regular spending plan can keep you from going into debt even further. Spend the lowest amount your business needs to stay afloat and then stash away any extra revenue for when you have a bad month.

Set a Target Income Level for Debt

As you work on your actual spending plan each month, set a target for how much you’d like to realistically pay towards your debt. If you have a deadline before a large payment is due, or fees will be assessed, then record what you need to pay.

This figure is what you’re going to aim for so you can pay more than just the minimum payments required on your debt. You want to get out of debt as quickly as possible to save some money on interest.

Now that you have a monthly debt payment target, how much will you have to earn to hit this mark? Are you making enough now to be able to pay all your bills and afford extra payments towards debt, or do you need to increase your revenue?

Keep in mind that the income you receive as a business owner is usually gross income, and will need to have taxes and health insurance taken off the top. So take these unavoidable expenses into account.

Some months it will be easy to hit your target income levels to pay all of your bills plus make debt payments, and other months it will be a struggle. When you have those phenomenal months in revenue where you make way more money than you need to meet your minimum monthly income, set aside a portion of the surplus toward debt.

As I mentioned, during good months you’ll want to put a portion of your surplus in a savings account for months where you fall short. I like to think of this as an additional emergency fund for being self-employed.

irregular income

Use the Percentage Method

Rather than setting a specific debt target, it may make more sense to use a percentage system to get out of debt with irregular income. Instead of a setting a dollar target for your monthly payment, designate what percentage of your net self-employment income you want to put toward debt.

For example; if you earn $10,000 gross in one month, approximately 25% of that income needs to be set aside for self-employment taxes. Then you can allot another 50% for overall business expenditures, and the rest towards savings, debt or retirement goals.

So no matter what your income figure is each month, you’re still making strides towards your financial goals, and you’re always putting the same amount of income (percentage-wise) toward paying off debt. Be sure to include your personal salary within this figure since you need take care of you first, so the business gets 100% of your best efforts.

Obviously, during the months when you have a higher income, you’ll be putting more money toward your debt but use this as motivation. Likewise, keep in mind that no matter how low your income is during a bad month, you still need to pay at least the minimums on your debt to avoid negative consequences like fees and damage to your credit score.

When considering what percentage of your net income should be allocated toward debt, here are a few things to consider.

  • Average your monthly income. What is the average amount you’ve earned over the last 3, 6, and 12 months? Were there any anomalies that throw the average off, like a month where you took off significant time for an illness or vacation? If so, adjust for these amounts in your calculation.
  • Use projected cash flow for the next month or two. Have you received any new, high-paying gigs? If so, consider these in your projected cash flow for the coming month. But don’t forget that not all jobs work out or, nor are they long-term.
  • Don’t forget to leave some wiggle room. Leave yourself some room between your essentials-only monthly budget and your ideal budget. Everyone needs a little discretionary money for fun things and to celebrate business wins now and then.

Pay Debt at Your Own Pace

When deciding which system to use for paying off debt as an entrepreneur, you want to push yourself into action with goals that make you work hard to reach them. But at the same time don’t lose sleep over trying to pay off debt within a certain timeframe.

As your business grows, so will your revenue. Then you can pay off debt and meet other financial goals more aggressively. Of course paying off debt as quickly as possible has its advantages — you’ll spend less money on interest and be able to put your money towards more important things.

But it has drawbacks too. If you’re feeling burned out from working too much you could get yourself into far more financial trouble than if you had set your target a little lower and kept your workload a little more manageable.

As long as you’re still making progress at paying your debt down each month, you’re headed in the right direction.

About Carrie Smith


Carrie Smith is a financial artist and founder of The Client Connection, a matchmaking service for clients and freelancers who want to avoid job boards and instead build quality businesses. In 2013 she quit her full-time accounting job and now works as a full-time business consultant and writer. Find her on Twitter (@carefulcents).

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Dennis Seymour

Hello Carrie,

Thanks for these helpful tips. Many of us are struggling how we can pay off our debts specially if we have irregular income. For me, it’s just a matter of proper planning and management. I usually do the percentage method. No matter how much I earn for a certain month, I always follow the x% for savings, v% for debts, f% for bills and so on. Whatever will be left is for my expenditure.

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