Debt is sneaky. Making a plan about how to break up with high-interest debt and then following through is never a walk in the park. In 2021, the average American had a whopping $94,320 in consumer debt. This includes debt from mortgages, auto loans and leases, and personal loans.
Whether you signed away your next two decades of income at 18 to pay your college tuition or got sucked into the credit card debt vortex, getting out of these mountains of debt can sometimes feel impossible.
Freelancing is an unexpected but efficient way to work towards paying off debt. While working a traditional 9–5 job is a reliable way to earn money, freelancing offers a number of perks that you can either pair with a traditional job or take advantage of separately as an independent contractor.
Here are a few ways freelancing can help you pay off debt and regain the financial freedom you need.
Flexibility is a privilege many people don’t have when working. It allows you to pick up and put down work when you see fit––provided you still meet your clients’ expectations and deadlines. This means that you can naturally pair freelancing with a full-time job to earn extra income without overextending yourself.
In fact, a flexible work schedule may end up making you a better freelancer, which will ultimately allow you to increase your earnings. Research shows that employees with flexible schedules are happier, more productive, less stressed, and have a better work–life balance.
However, establishing some structure for yourself while you enjoy this flexibility is essential to staying motivated and on-task. We recommend first determining how many hours you need to freelance per week to meet your financial needs and then finding the best way to work these hours into your schedule.
Set Your Rates, Then Raise Them
As a freelancer, you have the power to tell clients how much to pay you––instead of the other way around. Of course, this doesn’t mean that every client will agree to your rates, but deciding how much your time is worth is an empowering step that can get you on the right track toward living debt free.
Have a look at how much you need to charge to begin shaving off debt. Make sure your rate includes taxes so you aren’t caught off guard during tax season. (Trust us, when the IRS hands you a bill for a huge chunk of your earnings, the last thing you want to be is ill-prepared.)
Figuring out how much to charge can be intimidating, but remember that clients are willing to pay big bucks for great work, so don’t undersell yourself!
Raising your rates is also an important step to increasing your earnings. The worst a client can do is say “no,” so don’t be afraid to ask for more, especially if you know you deserve it! There are only so many hours in the day, and if you find yourself consistently working overtime, it may be time to bump up your rates.
Take Advantage of Tax Benefits
As a freelancer, you can take advantage of tax perks to help pay off debt. Look at your freelancing as a business with one (very hard working) employee––you! As a business, you have expenses that take away from your total profits. These costs can be deducted as business expenses, which will lower your taxable income.
Opening a limited liability company (LLC) is a great way to enjoy these tax perks. The steps involved in starting an LLC vary from state to state, but the process is usually simple and affordable. You can even submit your application online!
Your freelance expenses––like a new computer or standing desk––can then be written off, ultimately reducing the amount you owe on taxes. You may also qualify for a rent deduction by working from your apartment, among other tax tips for renters you shouldn’t miss. Of course, you should still be mindful of your spending habits.
IMPORTANT: We strongly discourage you from writing off personal expenses as business expenses as this is considered tax fraud and can get you into serious trouble.
Raise Your Credit Score and Refinance Your Debt
A key part of getting out of debt is working the credit system. Achieving a high credit score can help you regain control of your debt and eventually pay it off. Making regular on-time payments toward all your bills is obviously the first step to increasing your credit score. However, the key to building credit is to make one or two extra payments a year (or even more if you can).
This may sound overwhelming, but freelancing can give you the financial edge you need to avoid the traps that often keep people from paying off their debt. The power you have to choose your own workload as a freelancer will give you the opportunity to gradually save up enough money to pay off more debt by the end of the year than you anticipated.
For example, if you work a normal 9–5 job but dedicate an extra hour after every workday to freelancing at $30/hour, you can increase your monthly earnings by around $600!
Once you’ve raised your credit score, consider refinancing your debt. Refinancing involves reapplying for your loan under better terms. This is especially useful when dealing with student loans, which many of us took out as 18-year-olds without ever even having paid for groceries or utilities before. Make sure to take into consideration the type of loan you have, your income, and even your credit score when you decide whether you should refinance your student loans. Note that if you decide to refinance your home, you should learn how to calculate a mortgage payoff to save money.
If successful, refinancing can lower your interest rates and reduce the total amount you end up paying on your loan.
Tip: If you have multiple debts, consider consolidating them into a single debt. There are many different kinds of loans you can use to consolidate your debt, including debt consolidation mortgages and loans, home equity loans, and personal loans. Whichever type you decide to take out, just make sure it has a lower interest rate than your original debts.
Expand Your Skills and Services
We love freelancing because it opens the door to new skills and services you can provide clients. This may increase the variety of projects you can take on and the rates you can charge for them.
Look at every freelance client or project as an opportunity to gain new experience and branch out into different fields. For example, if you are a freelance writer, try to find smaller writing opportunities in more lucrative fields, such as technology or finance. This will eventually improve your prospects for taking on bigger and better paying projects.
A broader range of skills translates to more opportunities to advertise your services as a multi-faceted and adaptable business, rather than as a one-and-done independent freelancer. Are you a web designer? See if you can pick up some photo editing skills, too! Do you specialize in photography? Learning how to record short videos too will help you reel in more customers!
The world is truly your oyster as a freelancer, and at the end of the day, you are the only one standing in your way from doing more––and making more money!
Freelancing isn’t for everyone. It takes time, and there’s a lot of rejection along the way. But if you stick with it and respect your own time, it can be a fantastic way to pay off debt.
As long as you don’t undersell your value to clients, stay consistent with the quality and quantity of work you produce, take advantage of tax perks, work on building your credit score, and expand the services you provide, you should soon find yourself paying off the debt you’ve acquired. Once you’re debt-free, make sure to stay out of debt, which is the final step to the 5-step approach to paying off debt.
Lastly, remember that there’s no shame in seeking help if needed. While you’re building your freelance career to help clear your debt, consider receiving assistance from a financial expert simultaneously. For instance, calling the federal student loan relief helpline 888-856-2668 to learn your options for payment reductions. Or consider the private student loan relief helpline if your loans are from a credit union or bank. And remember, credit counseling can further enhance your financial literacy.