High Debt and Volatile Income: Challenges of Self-Employment

DH = Dear Husband
                “The stories we hear about business owners and entrepreneurship are the ones that mythologize individuals who started with little, risked it all, and are now leaders of thriving corporations” (Porter, p. 101). In her book Broke: How Debt Bankrupts the Middle Class, Katherine Porter includes the work of Robert Lawless in Chapter 6: “Striking Out on Their Own: The Self-Employed in Bankruptcy”.

Founders of Google: A narrative of epic success

Lawless provides an example of this mythologized story of self-employment success in the experience of Sergey Brin and Larry Page, the founders of Google. “As so many of these tales go, the story emphasizes modest beginnings in a shared campus laboratory before moves to garages, apartments, and eventually a small office space. Early startup financing was nonexistent. Instead . . . Brin and Page had to put their own credit on the line. As Page described it, ‘we had to use all of our credit cards and our friends’ credit cards and our parents’ credit cards.’ Google, of course, has become one of the world’s most successful corporations, and Brin and Page are among the wealthiest individuals on the planet” (Porter, p. 101).

DH’s home business: A humbler self-employment story

                “The typical startup occurs in ordinary, everyday industries and often begins because the owner is unemployed . . .” (Porter, p. 102). A careful man prone to worry, DH was not someone who naturally gravitated to self-employment. In fact, after he had become a casualty of the hi-tech bust at the turn of the millennium, he was specifically advised, in a series of workshops designed to assist the masses of newly unemployed, that his personality type was least suited to self-employment. It took what I have called our “wilderness years” – six years of uncertain direction and extremely low income – for DH to invest in a small, home-based business.

Debt-to-income ratio and the ability to pay off debt

                “Starting a small business can lead to job creation for some people but to overwhelming debt for others . . .” (Porter, p. 102). Already feeling financially choked, we took on a huge business debt in 2009.  It was a sink-or-swim move, but after six years of going nowhere, we were ready for it. “The acid test for the ability to service debts,” Lawless states, “is the ratio of debt to income” (Porter, p. 111). Included in Lawless’ chapter is a table showing, among other things, the debt-to-income ratio of Americans who filed for bankruptcy in 2007.
                To find out your debt-to-income ratio, take the total of all of your debts (including your mortgage) and divide it by your household’s take-home pay. The average debt-to-income ratio in Canada these days is a record breaking 1.65 – meaning that for each take-home dollar, $1.65 is owed. According to Lawless’ table, the average debt-to-income ratio of American filers for bankruptcy in 2007 was 3.22. And among those who were self-employed, it was 4.85 (Porter, p. 110). The numbers seemed extreme to me.
                I knew that when DH and I started our jouney out of debt in June 2012, our debt-to-income ratio was over 2.5 – way over the Canadian average – but nowhere close to the numbers in Lawless’ table. But we weren’t at our worst when we took on the challenge to become debt-free. I did some digging with DH’s help. What was our debt-to-income ratio before we took on the business debt? And what was it afterwards? Going through old income tax files and bank statements, I found out that in 2008, the year before DH took out the business loan, our debt-to-income ratio had been 3.15. Ugh! The business debt reached its peak early in 2010, and for that year, our debt-to-income ratio was 3.5. Yikes! We were in SUCH a precarious position! (Why didn’t we just sell the house? I’ll save that for later.)

Slices 9 & 10 out of the business debt

                After paying off two smaller debts in our first six months of debt-reduction, DH and I started in on Debt #3 – the business debt – in December of 2012. It sat at $80,800 at that time. I remember predicting that it would take eighteen months to pay it off. Not so. “For most self-employed people . . . income can be highly volatile” (Porter, 115). There have been months when we couldn’t pay anything off the business debt due to slow business. There have been months when we couldn’t pay anything off because we had to save for out-of-the-ordinary expenses. Over the nineteen months since we took on Debt #3, we have cut 10 slices out of it, ranging from $1,000 to $10,000.
                This past May, it was looking like we could either put $1,000 against the debt or else finally get the ugly blotches on our two water-damaged ceilings fixed up. We had already decided to live with the blotches when DH had one incredible day of business at the end of month, and we ended up putting $3,250 against Debt #3. June was very slow overall, but remarkably, DH had a single even-more-incredible business day to make it a solid month, and allow us to put $2,500 against the business debt. So now, Debt #3 is less than half of its original size. At $39,500 it’s still big, but we’re making headway.
We earn a lower income now than we did when DH was at the height of his salaried hi-tech days. As Lawless points out, “the reality of small-business ownership varies dramatically from the epic narratives told about entrepreneurial success stories” (Porter, p. 102). Self-employment typically comes with high business debt, a volatile income, and the ever-present risk of failure. We have lived with all of the above since DH started his business five years ago. But we’re staying the course, and we’re so much better with the money we do earn than we ever were before. And last night, I calculated our current debt-to-income ratio. We’re down to 1.5. Below the Canadian average. Far, far removed from the dismal state of our worst years. “Epic narrative of success?” No. But it’s one of encouragement. And it’s giving me hope.

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