Student loans can be a huge pain in the wallet and you don’t really see any real progress against your balance when you make those minimum payments each month. Increasing your income can help you get debt-free much faster and for many millennials, freelancing is the answer.
According to the Freelancers Union, there are 53 million in the U.S., and 20-somethings make up a big chunk of that number. If you’re in your 20s and you’re ready to accelerate your student loan payoff by launching a freelance career, here’s what you need to do to keep your finances on the right track.
1. Map out your business plan
Freelancing is like any other business and you need to have a plan going in if you want to be successful. Your business plan doesn’t have to be elaborate but it does have to outline the basics around your goals and how you plan to achieve them.
For example, if you want to work as a freelance writer you need to know what kind of writing you’d like to do and who your target market is. Ask yourself if there are certain publications you’d like to work with or specific topics that you’re knowledgeable about. The more you can narrow down your niche, the easier it is to pinpoint opportunities that can lead to a gig.
You also need to decide how much time you’re willing to put into freelancing and what your income goals are. If you’re only able to put in part-time hours, don’t expect to earn full-time pay. Be realistic about how much money you stand to make and how long it could take to start bringing in the extra cash.
2. Weigh loan repayment options
Next, decide whether to continue making regular payments on your loans or put them on hold temporarily while you get your freelance career off the ground.
If you want to freelance full-time, for instance, but you think it may take six months before you start seeing a profit, making your regular loan payments could prove to be difficult. If you qualify for a deferment or forbearance based on the temporary economic hardship, take it so that you don’t risk defaulting because of missed payments. Keep in mind that interest may continue to accrue during a deferment or forbearance.
Another option is to shrink your payments, either by consolidating your loans or by switching to an income-dependent repayment plan. Consolidating allows you to combine all of your loans into one, possibly at a lower overall interest rate. The payment on one consolidation loan is normally lower than the sum of the minimum payments on multiple loans. The better your credit, the better the terms will be on any new loan you qualify for. You can check your free credit report and free credit score at Credit Sesame to get an idea of where you stand.
With income-based repayment, you can lower your payments but will inevitably pay more in interest over time since the lower payment will lengthen the time it takes you to pay off the loan.
3. Fine-tune your budget
To some, budgeting sounds complicated. A budget is really just your spending plan. You should know where your money goes, even if you don’t choose to change your spending habits. If you want to break into successful self-employment, a budget is critical for profitability. If you plan to freelance full-time, reduce expenses as much as possible now, at least until you have steady work. Watching spending is especially important if you plan to continue making your loan payments while you get things rolling.
The goal should be to get your monthly outflow as low as possible because freelance income can be extremely unpredictable, with wide fluctuations. If you have an off month for income, you don’t want to end up in the red. Figure out the minimum you need to earn to pay for basics like housing, food, transportation and your loan payments and use that number as a starting point for your monthly income goal. Once you’re earning that amount comfortably, raise your income target.
4. Build a foundation of savings
An emergency fund is one of the most fundamental finance tools any 20-something can have and it’s even more important if you’re a freelancer. You’ll inevitably have good months and bad ones, and having an extra stash of cash set aside will be a lifesaver during the lean times.
Most personal finance experts recommend having 3 to 6 months’ worth of expenses set aside in emergency funds. If you don’t have any emergency savings at all, work toward a $1,000 emergency fund to start. This money can cover a minor financial hiccup in a pinch.
From there, continue making regular savings contributions and don’t worry if you have to start small. Setting aside just $50 a week can add up to $2,600 in emergency funds over the course of a year. If you’ve deferred your loans temporarily, you can use some of the money you normally paid to your loan servicer to beef up your savings even more.
Freelancing definitely has its perks. After all, there aren’t many jobs that allow you control over your working hours, flexible days off and the ability to work on the couch in your pajamas. The key to making a freelance career work when you’ve got student loans is to be clear about your expectations and to have a strategy in place for meeting them.
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