Pay Down Debt or Save Money – Which is Best for a Freelancer?

Guest Article by veteran B2B Web Marketing Expert, Dianna Huff.

In an article I read some months ago, the author gave advice to a freelancer on whether she should save money for an emergency fund versus paying down her debt.

The advice? "Pay down your debt first." To explain her reasoning, the author showed the math and explained why paying the debt would save the freelancer money in the long run.

I thought this terrible "and troubling" advice.

If your freelance income is like mine, it's up and down for any given month. Some months I'm flush with cash as I receive deposits for new projects and/or payments for completed projects. Other months my cash flow is very tight as I finish up projects and/or wait for new projects to come in.

Cash flow is also affected due to the unexpected: a client cancels a huge project or your child becomes seriously ill, necessitating time off from your work.

Having a significant cash cushion helps with these inevitable cash flow crunches.

 

How much cash should you have on hand?

In his book, The Total Money Makeover: A Proven Plan for Financial Fitness, Dave Ramsey advises saving $1,000 as a cash cushion and then focusing exclusively on paying your debt.

This is decent advice if you have steady income. For freelancers, the advice is not so good as $1,000 doesn't go far if you're in dry spell for a few weeks or more.

That's why I believe you should save at least three months of expenses to feel comfortable (six months of expenses is even better). But how do you build this cash cushion when your income isn't steady? After years of trial and error, here's what I've found that works for me.

1. Determine how much you need for three or six months

Before you can build your cash cushion, you need to figure out how much you need to cover for both business AND personal expenses.

2. Use baby steps to saving

I don't have a problem with saving per se. The problem I had was that each time I looked at my goal number I'd think, "I'll never get there." In other words, I became overwhelmed. It's much easier "mentally" to get into the habit of saving if you break your goal into manageable steps:

  • Save enough to cover your mortgage or rent for one month
  • Save an additional two weeks worth of expenses
  • Save another two weeks of expenses "“ now you have one month
  • Rinse, repeat. Now you have two months, etc.

Be sure to celebrate when you reach your milestone goals!

3. Keep your cushion "liquid"

Another piece of standard advice that I've thrown out the window is automatic savings. I think it's a great idea to put your savings on autopilot if you have steady income.

Because my income isn't steady, I found myself transferring money back and forth when the inevitable cash flow crunch hit.

Working with my financial planner, I developed a long-term financial plan that includes keeping three months of expenses in my regular checking account. I do make an entry in Quicken that I've "transferred" money each month to my six months savings account, but it's still sitting there in my checking account. This way, I know I'm working toward my goal but I also don't "see" a large checking account balance. And, I have a nice cushion that tides me over when needed.

Standard financial advice is great "“ if you have a standard job. As freelancers, we have our own special needs when it comes to saving money. What have been some of the strategies you've used to build your cash cushion?

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Dianna Huff, President of Huff Industrial Marketing, Inc., is also the author of Cash Flow for Freelancers, a guide for freelancers and their variable income. You can hear Dianna's interview at Ed Gandia's High Business Writing Podcast.


  • This is certainly good advice, and I used to give it myself when I was writing financial advice articles.

    But for some freelancers it can be difficult to amass three to six months worth of expenses in savings, especially those who are early in their careers and suffer more from the feast or famine cycle.

    Another option, if it fits, is to create liquidity through a low-interest, home-equity line of credit attached to a house or apartment (preferably one that is mortgage-free or close to it).

    That way the equity you've built up in a home -- for most people it's their largest investment --works as a revolving bank account.

    It's similar to the working capital that many businesses use for everyday financing.

    However, anyone using this option has to diligently pay down that line as soon as possible, and that might be a discipline that not everybody has.

  • I think using Dave Ramsey's advice as a template still works well for freelancers. Yes, Dave says to only save a $1,000 emergency fund (step 1) before starting to pay off debt, except a mortgage (step 2). But step 3 is to then save 3-6 months of savings, which is more or less what you're describing here.

    I wouldn't say the "pay off debt first" advice is way off base. Perhaps freelancers just need a little more of a savings cushion before be aggressive about paying off debt.