When you’re an entrepreneur with personal credit card balances, you need to find the sweet spot between aggressively paying down your debt and investing in your business. Add in the complications of budgeting an irregular income and accounting for business expenses, and you’ve got quite the financial juggling act.
Chris Morris stayed “as focused as possible on the end goal, which is to destroy all our debt” while growing his accounting and freelance writing businesses.
Morris and two other entrepreneurs are managing to balance their business’ needs and their personal financial priorities. Here’s how:
Set realistic expectations
If your primary motivator for starting a business is to pay off your personal debt, first determine how much you need to make each month. You can make adjustments if your original projections are unrealistic, but start by doing the math, so that the endpoint is in sight. This is what Morris, owner of Chris Morris CPA, did to stay motivated.
After realizing his family had amassed $30,000 in credit card debt and over $180,000 in student loans, Morris decided to start a side business specifically to pay off debt. He ended up starting two — a freelance writing business and a small CPA firm — in addition to his full-time job as an accountant.
Morris has decreased his family’s credit card debt from $30,000 to $7,000 in 18 months by redirecting around 65% of his business income toward their card balances. He says he balances debt payoff and reinvesting in his accounting business by only spending when “I need to spend [on the business] in order to function, or I am fairly certain the investment will yield results, either in the form of more customers or significantly more exposure.”
Add up all of your debts, from the $20 you owe your best friend to the thousands you owe for your college degree, then divide the sum by the number of months you think you need to be debt-free. Be realistic; it’s unlikely that you can clear a six-figure debt in a year. This simple math will give you a target income that your business needs to make to hit your goal. If that figure is too high, stretch out your payoff date or find more clients.
» MORE: How to pay off debt
Don’t go into more debt for your business
Adding to your debt load to grow your business will result in more stress and interest owed. When you’re using your business to pay down debt, it’s best to stop charging.
Lauren Greutman, co-owner of the personal-finance website Mark & Lauren Greutman, did this when she was starting her business. Greutman and her husband, Mark, accumulated $40,000 in credit card debt by overspending on their American dream. When they realized they were deep in debt, with an underwater mortgage and a monthly budget deficit, they took action.
To earn more money to tackle the debt, Greutman decided to start a website. She ran a small couponing seminar to raise the cash necessary to set it up and waited until it was generating a few thousand dollars a month before paying for a redesign. The strategy seemed to work, because the family was able to pay off their credit card debt in two-and-a-half years. Her advice to fellow entrepreneurs: “Make sure that you are paying off your debt first before reinvesting in your business.”
Use your skills to make enough cash to start your business, if you can do so without overhead. Whether that means freelancing, doing odd jobs or marketing and selling your unwanted stuff online, aim to raise the cash required to officially set up your business without tapping into your current cash stash.
If that’s not possible, use your existing income or savings to start your business. It’s unwise to start a business with debt when your intention for the business’s revenue is to pay it off. Accept that you may not have the best of everything to start, and upgrade when it makes financial sense.
Make rules, then stick to them
There isn’t one right way to pay off debt while running a business. However, skipping from one good plan to another is a surefire way to avoid making much progress.
Instead, Sarah Greesonbach of Up & Comers says you should “pick a system [for paying off debt] and stick with it. Then make your habits conform to those rules so that you aren’t overthinking or messing things up all the time.”
Greesonbach is using this approach as she builds her digital marketing consultancy. She used her business revenues to pay off her car, and now she’s moving on to tax and credit card debts. Greesonbach aims to put a certain amount toward her debt each month and keeps her business and personal accounts separate. She invests in her business as needed but puts the majority of her earnings directly toward her debt and living expenses.
Create a debt payoff plan and decide what rules will govern your business income before you start making it. Then, stick to that plan for at least six months, unless you absolutely must change. At that point, you can reassess your goals. Avoid making constant adjustments that will have little effect on your profit or loss while eating up your time and energy.
The bottom line
To pay off your debt while running a business, you should set realistic expectations, avoid going into more debt and stick to a system. Make sure that your debt load is continuously going down and redirect extra income to your debt repayment to save on interest and beat your target payoff date.
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