We asked Shannon McLay, financial advisor and founder of the Financial Gym to let us know how freelancers can get debt down and under control.
By: Shannon McLay
Managing debt is like managing a weight loss journey where debt is the fat that you want to lose. You first have to identify what you want to lose and then create the plan for losing it. Most of our clients’ success in debt repayment journeys is adjusting their mindset and focusing on achieving the goal.
What is the best strategy for paying down debt?
If you’re planning to pay down debt, you need to list all of your debts in one place like an excel spreadsheet or a Google sheet doc and list the amounts as well as the interest rates and potential due dates. Identify the most psychologically annoying debts and then prioritize which will get paid off first. If you don’t have room in your monthly income to tackle your debt payments, then you should think about earning more income through negotiating higher rates for your jobs or taking on a side hustle to pay off your debts sooner.
What first steps can I take to handle my (credit card) debt?
If you have credit card debt, especially with high-interest rates, you’ll want to find the most efficient and less costly solution to pay it down. The first thing to do is check your credit score. A site like credit karma will let you do that for free. If your score is 700 or more, then you have a number of repayment solutions like 0% balance transfer cards which let you consolidate all your high-interest credit cards onto one card and pay it off over a period of time, like 12 months with no APR. When you remove the credit card interest, it helps you pay your balances down faster.
You could also get a personal loan where you can move your high-interest credit balances to these to help you pay them off faster rather than just paying interest.
If your score is below 700, then you will need to work on how you can set aside more money from your take home pay to pay down the cards. This will hopefully improve your credit score until it hits 700 and more options become available to you.
How does debt affect my credit score?
Different debts affect your credit score in various ways. For the most part, multiple forms of debt like a mortgage, credit card, student loans and/or auto loans actually help your credit score. As long as you pay your debts on time, and minimum payments count, then this will help your credit score. If you have high balances (close to or up to the limit) on your credit cards, this will negatively impact your credit score. You should plan to have no more than 35% of your credit limit used on your credit card at any given point. So if you have a $1,000 limit, you shouldn’t have spent more than $350 of your available credit.
Should I borrow from my SEP IRA retirement account to pay off debt?
If you have a SEP IRA, you cannot borrow from it to pay off debt without being penalized. You have to fully withdraw your funds and if you are younger than 59 ½, you will have to pay a 10% penalty and taxes on the amount withdrawn. Between the penalty and taxes, it might not make sense to take this step to pay off your debt. Rather than pay taxes and penalties, a potential solution is just to suspend your retirement contributions for a period of time and use those funds to pay off the debt. Once you’ve paid off the debt, you can resume the retirement contributions.
Which debt should I pay off first? (credit card, school loans, car loan, medical debt)
We subscribe to the debt avalanche approach, where you pay off your highest interest rate debts first, which are typically credit cards. If you have medical debt, make sure there aren’t any erroneous or egregious charges, as 80% of medical bills are inaccurate. Then, work with the provider to go on a payment plan. Unlike credit cards or student loans, medical bills typically don’t have interest rates associated with them as hospitals or doctors’ offices can’t charge interest like banks can.
Are any debts tax-deductible as a freelancer?
Interest paid on student loan debts is a tax deductible option for anyone. As far as any other debts, you would have to consult with your specific accountant regarding your situation. Most times, it’s only the interest rate that can be expensed as a deductible but not the actual debt payment.