I mentioned in last week’s sporadic post that we’re modifying the Dave Ramsey Financial Peace program to pay down debt while I freelance.
If you aren’t familiar with Uncle Dave, he advises a particular (faith-based) program built on baby steps. It’s a great program if you feel like your money is out of hand or you just never grew up with good money lessons.
He’s a controversial figure, but he always points towards the results: he’s helped millions of families get out of debt, build wealth, and feel peaceful about money!
Baby Steps: Too Small A Savings?
One of Dave’s controversial tips is Baby Step One: do whatever it takes to build up $1000, then move to Baby Step Two and pay off your non-mortgage debt before building a full 3-6 month emergency fund (Baby Step Three).
However, even working off of our bare-bones budget as we have since I was laid off, JHubbs and I have an unbalanced budget that leaves $1800 unpaid each month (if I were to bring in no income).
This has not been a problem to make as a freelancer, but it has been a cash flow problem to make sure I have it at the right time each month, given payment delays, lost checks, and payment terms like Net 30.
Now that we’re finally caught up and on the right track, I can talk about it, haha! But the main problem is that $1000 is not enough to cover the emergency we’d have if I were unable to make the $1800 plus taxes in a given month.
Therefore, in addition to the Baby Step One savings fund, I need $1800 cash reserve for my monthly “Paycheck.”
Our Solution: Savings and Payment Cycles
Now, in a freelancing household in which one paycehck doesn’t cover all of the month’s expenses, $1000 savings is a scary situation (though still much nicer than no savings at all!).
So to make sure we aren’t in crisis mode each month (that is, pay off debt, then use the $1000 savings to pay for monthly expenses, then save up that $1,000 again with no safety net), we’ve modified Baby Step 2 with the following model:
- $1,000 Cash Savings [DONE for November]
- $1800 Paycheck Savings [DONE for November]
- Tax payment [DONE for November]
- Pay down debt [DONE for November]
- $1800 Paycheck savings [TO-DO for month of December]
- Tax payment [TO-DO for month of December]
- Pay down debt [TO-DO for month of December]
- Rinse and repeat until debt is gone, then build 3-6 months savings
In this model, we pay off as much debt as we can until the first of the month (when we spend the $1800 buffer in our budget). Then we stop debt payment and build up that $1800, make a tax payment, and then get back to debt “Duck Hunt.”
This means that in lean months we won’t make it very far in debt payment. But in excess months, we have a clear plan of how to proceed.
The Future: Staying Flexible
We’ve only applied this method for the past two months or so (when I had a lot of checks come in), but so far I feel so much less stressed about debt, taxes, and savings, and we’re making progress on our debt! We just paid off an MRI bill that we’ve been paying since October of last year… and it feels ah-mah-zing!
I can’t say this won’t change (after all, two months and three months would be better than one month buffer at a time, and in December I will be making extraordinary tax payments to make sure I’m not in trouble come April 2015), but for now it strikes a good balance between comfortable and motivating.