Thursday, December 6, 2007

Balancing Saving and Debt Reduction, as a freelancer

I'm a freelance technical writer, and I have been for close to two years now. As any freelancer can tell you, sometimes there's plenty of work, sometimes there's a little, and sometimes: you don't work for two months.

I've recently not been working (since the beginning of November, I've worked about eight hours). However, since I plan for this, it doesn't really hit me hard financially. A few of my friends gasp and have asked me "How can you afford this?" The answer is simple: because I planned for it.

As I've mentioned, I'm in the midst of paying down my credit card and student loan debt. Every source I've been able to access generally recommends keeping between $500-1000 in a cash emergency fund. However, the assumption is that the saver has a regular 40-hr week job. It's only when people are debt-free that they are encouraged to save 3-6 months in a cash emergency fund.

As a freelancer, only having $1000 in an emergency fund just doesn't cut it. Personally, that wouldn't get me through a month of "unemployment." Currently, that would mean I would be living on my credit cards, which we all know is undesirable.

Knowing that my work flow comes and goes, I generally have about 3-4 months basic living expenses in a cash account. When I'm not working, I don't make the higher/extra payments. I also (very consciously) do less, so that I'm not out spending money in my newfound free time, and I also cook at home a lot more. So, while I've not been working recently, I've been able to fund my basic life without a problem and without worrying financially. One of my clients recently contacted me about a new project, so I know I'll be working again probably within the next week or so - yay! If the two-month mark hit, and no work was on the horizon, I would definitely start to aggressively find new work (whether freelance or through an agency).

So, the lesson is this: if your work is guaranteed, then it's probably fine for you to have a smaller emergency fund [until your debt is paid down]. Just look back over the past few years and think of all the "emergency" money you needed -- for some people they may only need $500/year, others may need $2000/yr. My recommendatin is to double what you've needed in the past, and then stick it in a high-yield savings account.

However, if you're self-employed, you have to plan for the downtimes, otherwise your debt is going to rise.

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