Preparing for Entrepreneurship [1]: 6 tips for getting out of debt

By Melanie K

The economy is going in the tank—it’s everywhere in the news. Part of the issue, the experts say, is the high personal debt load that North Americans have accumulated. We’re teetering on the brink of bankruptcy and foreclosure, and more are falling over the edge everyday.

I’ve read several great books on self-employment. But few of them provide specific advice on how to set yourself up financially to make the transition. Financial security is a huge obstacle to going out on your own, especially if you have dependents. Debt ties you to that job that you don’t want anymore and keeps you from doing more interesting things with your work and having more time for your family. Preparing to shift into self-employment can involve several years of getting your personal finances in order to make the move.

In 2004 I had a new beginning. On my own after a long-term relationship ended, saddled with student loans, a car loan, and other residual debts from my old life, part of my positive new start was getting out of debt for good. Unsecured debt (debt without an asset attached to it, like real estate) leaves you financially vulnerable to economic downturns, a job layoff, personal emergencies when you can’t work, and cuts out many options for you. At the time I had a regular stable job, that I was still enjoying, to accomplish it and I decided I deserve better than being a slave to all this debt.

Finances were pretty lean between then and now. It took about a year of really careful budgeting to turn things around so that I could pay down more than the minimum on debts without accumulating more of it. After that year, I had a little bit more breathing room to pay even higher amounts on my debts and have a little extra money leftover for myself. I’m not completely done yet, but I can definitely see the light at end of the tunnel - and I'm glad for that because it'll make self-employment that much easier and anxiety-free.

If you are a woman and have never read a personal finance book, I recommend Suze Orman's Women and Money. Several of the basic strategies she recommends for getting your finances in order are pretty much the same as other books - the difference is that Suze explains some of the historical and cultural differences that influence women's relationship with money.

Debt reduction is one part of several strategies (to be discussed in future posts) that I’m using to get into self-employment. Here are 6 tips for you, based on strategies I’m using to turn my finances around:

1) Stop adding to the debt. Pay with cash only, anticipate bigger expenses, and save up for them. For example, I made sure I had a few hundred dollars available every spring to take care of any proactive maintenance work that my used car needed. If I didn’t need to use all of it, it went toward the next upcoming big expense, usually property taxes, or as an extra payment on existing debt.
2) Use money management software to monitor your expenses – and I mean every penny. I used to project my expenses forward about 3 months to plan for the big ones that I knew were coming and what it would take to save for them. Quicken or Microsoft Money will do the trick.
3) Take advantage of lower interest opportunities. I’m not saying apply to every credit card offer that comes in the mail. Absolutely don’t do that. But do take advantage of offers from your existing credit card to transfer balances if they give you a long term interest savings –just pay attention to any deadlines. Otherwise find a less expensive line of credit and consolidate your high interest debts there.
4) Live lean for a while. If you are serious about this process, you must make sacrifices. Give yourself a limited amount of spending money per week and stick to it. For a period of time, I was only carrying around enough cash to cover groceries and gas for the week. This rule hasn’t changed much – I still set limits on my weekly spending budget.
5) Leave the credit cards at home. I’m really bad at keeping track of my retail spending unless I can see how many twenties are left in my wallet. Leaving the credit card out of your wallet limits impulse buying, and forces you to make choices based on what you have in cold hard cash. During this period, credit cards are for emergencies only. If you really have have a hard time resisting the shopping bug, leave the debit card at home too.
6) Set strict criteria for your purchases. If it didn’t feed me, shelter me, get me to work, replace (not add to) something essential in my wardrobe, or maintain my assets (car and house), I didn’t purchase it. For example, I lived with the ugliest vertical blinds on my windows for two years--and while I was working on my financial turnaround, functionality was good enough.