Inconsistent Income Series: What to Do About Debt

The past few weeks, we’ve been going over how to build a financial plan when you deal with inconsistent income. Many people have fluctuating, or what we call “lumpy” income. Whether you receive a large chunk of your income in the form of a periodic bonus, or you’re an entrepreneur or freelancer hustling to hold down steady client work, it can be challenging to stick with a consistent plan for your finances. So far, we’ve discussed how to save, and how to set financial goals - but what do you do when you’re dealing with debt and a lumpy income?

Avoiding Consumer Debt

Although avoiding consumer debt is a piece of advice that the vast majority of people would do well to follow, it’s especially important for individuals dealing with inconsistent income. It’s tempting to fall back on credit cards, auto loans, or other lines of credit to cover the gaps during months when your income dips.

Consumer debt is a slippery slope. It’s often rooted in lifestyle inflation - which can be a difficult thing to recognize in your own spending habits. When your income is inconsistent, you may feel the urge to “keep up” with your friends and colleagues when it comes to the kind of lifestyle you live. This is especially true when you’re working a job where your bonuses, or “up” months are significant.

A sense of entitlement can come hand in hand with larger-than-average bonuses that directly correlate to how hard you work, or how much you accomplish at work. This entitlement is rooted in a very logical feeling. You’ve worked hard, you’ve earned money, and you feel you deserve to spend that money in a certain way.

However, once your spending starts to outpace how much income you bring in each month, it’s tough to slow down. Eventually, when you turn to credit to bridge the gap on months where you have a dip in your income, you’ll find it’s hard to stop using credit and repay what you owe. Interest is typically high when it comes to consumer debt, which means that you’ll end up overspending on something you may or may not have needed in the first place.

If you’re already facing consumer debt, it’s wise to do a spending reality check. Take a month and write down each expenditure you and your family have during that period of time. You may be surprised to find what areas you’re overspending. From there, you’ll be able to clearly know where to cut back in order to pay down your debt. Create a plan to pay your debt of quickly and steadily, and leave a little bit of wiggle room for enjoying life in your budget. You don’t want to fall back into consumer debt because you get burnt out trying to maintain a too-strict budget.

Picking a Student Loan Repayment Plan

44.2 million Americans are living with student loan debt. Even if your debt load is small, picking a repayment plan can still be stressful. In general, there are a handful of different plans you can choose from:

Income-Driven Repayment

This plan is exactly what it sounds like - the amount you pay each month is directly connected to your income. For someone with fluctuating income, this may be an option to consider.

Standard Repayment

If you’re more interested in getting your loans knocked out in a consistent and time-sensitive fashion, the standard repayment plan may be the option that appeals to you. On this plan, you pay a consistent amount each month for 10 years after your repayment kicks in (usually 6 months after you graduate).

Extended Repayment

This plan stretches out the life of your loan, typically allowing you to pay it for up to 25 years. Although this lowers your payments, you do end up paying more in interest over the time you repay your loan.

Selecting a student loan repayment plan can have a huge impact on your financial life. Speaking with a financial planner to determine which is best for you, especially considering your up-and-down income, can be beneficial. Finding a repayment plan that helps you to get out of debt quickly while still allowing you enough room to save for your other goals, like purchasing a home, retiring, or sending your kids to college, is key.

Paying down debt with a lumpy income isn’t easy, but with a clearly defined plan, you can do it! By building a plan to avoid any future consumer debt while fitting debt repayment for any outstanding loans you currently have, you’ll be able to budget in a consistent amount of debt payment each month until you’re debt-free.