(psst* for your listening pleasure I have made an audio version which you can listen to here or by scrolling to the bottom of this post:)
Let’s just state the obvious. A side hustle can help you pay down your debt. The extra money that you earn from it can go towards interest or the principal balance of any loan or credit card bill that you may have.
Boring and obvious stuff out of the way, let’s move on to what’s really important.
The plan and the method.
You need a plan and a method for paying down your debt.
The plan revolves around the restrictions that you face + the amount of monthly money that you can put towards your debt - aka the money that actually belongs to you (you’ll see what I mean by this a little later).
And you need to be aware of any restrictions (like taxes and business expenses) in order to formulate a proper plan.
The method is about the technique used to pay down debt as well as how you keep you on track and motivated.
So as implied from the title of this post I’m going to discuss the actual “how to”.
Not fluff, but actionable steps and figures that can help you have hope about overcoming your debt.
But first a story...
The Power of Small Wins
Say you’re trying to lose weight. You go on a “diet” and exercise like crazy for a week at the gym. You start lifting weights, take a yoga class, and try to get some treadmill time in as well.
When you first start you feel you have all the energy in the world. But after day 3, heck maybe even day 2, your energy starts to wain. You begin to feel overwhelmed. Why? Because:
a.) you took on too much at once, and
b.) your focus of “lose weight” was just too broad
You’re doing everything at once and stretching yourself too thin (no pun intended) to try to see results. But instead you’re not seeing any changes so you feel a lack of motivation to keep going.
You feel overwhelmed and eventually and gradually give up.
And another new year’s resolution silently dies.
But then it’s a few months later and you decide to look at things another way. You realize what you’ve really wanted to focus on was getting into a daily yoga practice and now two things are different than they were before.
You picked a focus, and
You since learned about the power of small wins
So this time you’re going to devote one full minute each morning working on the perfect mountain pose. And that’s it. So for a week's time you work on stabilizing your mountain (now pun intended) for a minute a day.
Then the next week you add on to the minute by going from your mountain pose to a forward fold. Now your yoga practice is 2 minutes long.
Then the following week you begin to work down to some floor work with a downward dog, adding on the third minute.
And so it continues week after week, adding an additional minute and combining all of the other moves that you’ve previously mastered. And before you know it, you’re doing a daily yoga practice just like you set out to do.
The progress that you’ve seen from this pushes you to try out other small changes in your lifestyle. You give up soda (I call it pop, but said soda for you:), start eating at least one salad each week, and eventually drink 64 oz. of water a day.
And next thing you know you’re blogging about your journey and selling fitness videos through YouTube!
This, my friend, is the power of small wins.
By starting with one habit over time your momentum and efforts can snowball until they reach mammoth size and produce some pretty amazing results.
Why does this work?
Because you started with one manageable and seemingly easy habit that over (a relatively short) time lead to results. And thus a cycle begins.
The results keep you wanting more results and the habits that you cultivate keep you consistent.
So what does small wins have to do with debt?
Well that’s for the second half of our journey today - the method. But first, we’re going to start with the plan.
Thus our agenda for today:
- Part 1 - The Plan: THE 50% RULE
- Part2 - The Method: THE SNOWBALL METHOD
Now I want to take the time to state and clarify that I am NOT a financial expert. These are just my opinions, observations, and thoughts that have come from research, reading finance books and blogs, and pondering my own answers to these questions for many years.
Disclaimer now stated, let’s get to work:
Part 1 - The Plan: THE 50% RULE
Before you think you can designate ALL your side income to paying off your debt, only a portion truly goes to you.
You will always have taxes and other monetary considerations no matter what country you live in.
For example, if you live in America and you earn over $400 in additional income - that doesn’t come from an employer - you have to pay taxes on that.
So even though you’ve just made $400 you’ve really only made about $250-$280ish.
And if you’re putting in the effort to start a side hustle I’m hoping that you plan on making over $400 in a year.
But so you don’t start spending money that belongs to Uncle Sam by mistake, I propose The 50% Rule.
This means that only 50% of your side hustle earning should go towards paying down your debt.
Why so little?
Allow me to explain.
I recommend setting aside AT LEAST 30% of your side hustle income for taxes. Then I recommend setting aside 10% for investing back in your business - for recurring monthly business expenses, learning new programs or software, conferences, better equipment, etc.
With the last 10% (of the 50% that shouldn’t go towards paying down your debt) I recommend paying yourself.
If you’ve ever read the book The Richest Man in Babylon^^ (affiliate link), you will understand the importance of paying yourself first. It’s one of my favorite finance books and setting aside 10% for yourself is the first rule for avoiding “a lean purse”.
That 10% that you pay yourself can go towards retirement savings or maxing out your IRA accounts, a general savings account, or even just be used for personal pleasures.
And If you see a portion of your money going towards something important to you besides just your debt, you’ll probably have a stronger desire to continue with the progress that you’re making #smallwins.
After all, I’m sure you want to set yourself up for financial success in the future, and maintaining some sort of savings is critical to do that.
If your taxes are higher than 30% I would say take away from the 10% that you set aside for business expenses before taking from the 10% that you put aside for yourself. But that is completely up to you.
And again and for the record I am not a finance expert. This is just how I plan to allot my money and I thought sharing might perhaps be beneficial for you as well.
Now onto Part 2:
Part 2 - The Method: THE SNOWBALL METHOD
There are several methods that people use to pay down their debt. The most common are The Avalanche Method and The Snowball Method.
The Avalanche Method is about paying off debt with the higher interest rates first in order to save you money in the long run.
But, since we’re all about using the power of small wins, we’re going to focus solely on The Snowball Method. So let’s get started.
The Snowball Method is for those of us with multiple debts - say a car payment, credit card bills, and 2 or 3 student loans. This technique will work for anyone with 2 or more loans and will help you pay them down faster and with more ease.
First let’s get some background. The Snowball Method was made very popular by the personal finance guru Dave Ramsey, in his financial peace program. It’s all about “snowballing” the effect of small wins.
I’ve never taken his program, but I did read his book, Financial Peace^^, a few years ago and I think this technique is great for those who need to feel like they're making progress in order to stick with something (aka people like me). Again, it uses the power of small wins to build momentum.
THE SNOWBALL METHOD
With this method you focus on paying off one debt at a time in it’s entirety while you're still making the minimum payments on the other debts that you have.
Then, once you pay off that first debt completely, you apply the money that was going towards that debt to the next one, and then once that second debt is paid off, you apply the previous payments of the two prior debts to the third one, and so forth and so forth.
That was wordy right? Let’s see an example.
You have four debts that you need to get rid of totaling $31,000:
Credit Card $1,000
Student Loan A $5,000
Car Loan $10,000
Student Loan B $15,000
Let’s say that from your side hustle, after applying The 50% Rule, you can set aside an extra $500 a month towards settling your debt.
To make things easy (easy for me that, is math wise), let’s say you haven’t been paying your minimum payments on this one debt. But now, from the $500 that your side hustle has given you monthly, you are able to tackle the $1000 Credit Card debt and pay it off completely in 2 months! How’s that for a quick win!
Now 1 down, 3 to go:
Student Loan A for $5,000
Car Loan for $10,000
Student Loan B for $15,000
Now you take that same $500 that was going towards towards your credit card bill and apply it on top of your monthly Student Loan A payment. So let’s say you were previously paying $100 a month towards Student Loan A. Now you’ll be paying $600 a month to reduce the balance even further. Thus snowballing your efforts.
So now it takes you a little less than a year (about 8-9 months) to pay off that debt completely. And now that a $6,000 weight has been lifted off your shoulders, you keep the momentum going and turn your efforts towards your Car Loan.
Let’s say you were making the minimum $250 payment towards your Car Loan while you were paying off those last two debts. But, because of a high interest rate (and because I’m saving us both the math headache) the balance that you owe hasn’t shifted much in the last 8 months. So we’re going to say the price is still $10,000.
But now let’s apply that $850 snowballed payment towards your Car Loan.
$250 (regular car payment) + $600 (from previously settled debts) =$850
You’ve now paid off your $10,000 car loan in about 12 months with $850 payments. So in less than 2 years just by adding $500 of your income towards your debt you’ve paid of $16,000!
Okay let’s keep this going and pay off that last loan. You’ve been paying Student Loan B’s minimum monthly payment of $200 for for the past two years. So your monthly snowballed total is this:
$200 (Student Loan B min. monthly payment) + $850 (from previously settled debts) = $1050!
Now let’s add $1050 to Student Loan B. This is a private student loan so because of interest the balance hasn’t shifted much since you started down this snow ’baller’ path (sorry, I had to).
You just paid off this debt in about 14 months!
And maybe you’ve paid it off even faster if you’ve been making more money from your side hustle (after following the 50% rule of course).
So let’s recap:
Credit Card $1,000 paid off in 2 months (from an additional $500 a month provided by your side hustle income)
Student Loan A $5,000 paid off in about 8 months (from an additional $500 a month once Credit Card debt was paid off + $100 min. monthly payment totaling $600/month)
Car Loan $10,000 paid off in about 12 months (from an additional $600 from Student Loan A being paid off + the $250 min. monthly payment totaling $850/month)
Student Loan B paid off in about 14 months (from an additional $850 from the Car Loan being paid off + the $200 min. monthly payment totaling $1050/month).
You’ve just paid of 31,000 of debt in 3 years just by adding $500 to your monthly budget!
And it can be done faster if you add more money towards your snowballing efforts!
For me personally, other than a debt that holds some emotional significance that I plan to pay off first (a student loan that family members cosigned for me), this is the method that I plan to use to tackle my debt.
What do you think? Will it work for you?
A few considerations when planning your income...
I do want to note that I am aware that side hustle income is not usually consistent. I know that income can fluctuate up and down, and that some months (depending on your side hustle type or the level you are at) you may not make any additional income at all.
Also you may only be making a few hundred dollars a month, so using The 50% Rule, you can only apply $100 a month towards your snowballing efforts.
That being said, there are two things that I want to state.
The benefits of adding money to your side hustle (after following The 50% Rule) can aid you even when income isn’t consistent.
Let’s say you’re a freelance designer and one month you get enough client work that totals $2000. Using The 50% Rule you apply $1000 towards the specific debt that you’re working on that month. Then the following month you get no new clients. But it’s okay because you know that when you do get work again it will all even out. You’ll still have extra funds going towards your debt when you can, and those higher income months will get you through the lesser income months.
The second thing I want to state is this: If you map out your own “get out of debt soon plan”, if could light a fire in you that makes your work harder on your side hustle so that you will generate more income more consistently.
Remember this: Whatever works for you in your situation is what is ideal for you. #doyouboo
BEFORE YOU GO...
To summarize, in order to use your side hustle to get you out of debt you need to first make a plan. My plan is The 50% Rule, but you can develop one that works for you.
You also need a method because your method becomes the habit. Your method produces the small wins. And like I said before the results keep you wanting more results but the habits that you cultivate keep you consistent.
Your Action Task For The Day:
Now I want you to create your own “get out of debt free plan”. It can be simple like my example or it can be detailed down to it’s core. Regardless of your level of detail the purpose is to MOTIVATE YOU TO TAKE ACTION!
So whether that means stepping up your side hustle game, setting aside the extra funds you earn towards paying down your debt, or doing the research needed for actually starting a side hustle - today is the day to start.
Once you see the numbers for yourself in relation to your personal situation it will inspire you to make a change. One of my favorite quotes is this:
So take action today.
And if you need help getting started with your side hustle, make sure to download The Side Hustle Starter Tools Checklist. It also has a comparison chart for both free and paid for options for the tools that are needed to start a business online - so make sure to start there.
And until the next time I compare your debt to the winter seasons of your life (#deep)...
*On my quest to earn more & spend less I try to maximize passive income. In this post some links may be amazon affiliate links which means I may receive monetary compensation - at no cost to you - if you make a purchase through my link. Don't worry, all thoughts and experiences on my site are of course my own. Thank you for your support:)