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24 Mar 2012

The Author

Clint and Katy Davis are PerkStreet Customer Columnists and founders of Davis Coaching. As financial coaches, their passion is helping people become and stay debt free! Their personalized coaching is designed to help you get your financial life where you want it to be. Like personal trainers for your finances, they can help you develop a specific plan to achieve your goals, and provide the expertise and accountability to get you there. If you’re ready to take control of your financial life, visit Davis Coaching online, check out the Davis Coaching blog, and connect with Clint and Katy on Twitter and Facebook.
Ask the Coach: Should I Build an Emergency Fund Before Debt Payoff?
6 Comments
Ask The Coach Start Emergency Fund While Tackling Debt

Editor’s Note: As part of a special project on The PerkStreet Blog, we’re offering free question and answer columns on Saturdays with Customer Columnists Clint and Katy Davis of Davis Coaching. If you have a question you’d like to submit to get advice from these financial coaches, email it to editors@perkstreet.com.

Question 1: Should I Build an Emergency Fund Before Debt Payoff?

Dear Clint and Katy,
I know you recommend becoming debt free before saving a full 3-6 month emergency fund. However, I’m wondering if I should save up 3-6 months of expenses before I begin the debt snowball. I am self-employed and work on a contract basis. My latest job will be ending in a couple of months and I will have to find another contract. What do you think I should do?

- Wade, NJ

Dear Wade,

Essentially, you’re going to be “un-employed” very soon.  Fortunately, you know it’s coming and you can prepare yourself.

For now, I recommend paying only the minimum payments on your debt and focus on saving a full 3-6 months of your living expenses before working your debt snowball. But you need to go into overdrive and save money for your emergency fund as fast as possible. Sell stuff, tighten your budget, and put every spare dime into your emergency savings. Do everything you possibly can to install that safety net before your current contract ends.

You also need to be working your butt off to line up your next contract. Contact people in your network, get in touch with previous customers – whatever it takes to make sure your name is at the top of everyone’s list when an opportunity arises.

Once you land a new job, because you work on a contract basis and your income is somewhat unstable, leave your 3-6 month emergency fund in place. Then you can begin to work the debt snowball and get debt free! Keep looking ahead and taking action – you’ll be just fine!

- Clint

Question 2: Can We Stop Debt Payments to Buy a Car?

Dear Clint and Katy,

We’re working hard and are scheduled to be debt free (other than our home mortgage) in about a year. Our problem is that our car is very old and is falling apart. Do you think we’ll be OK if we pause our debt snowball for a month or two, and save that money for a “new” car – used, and inexpensive – that’s in a little better shape?

- Shirley, WA

Dear Shirley,

Congratulations on the great progress you’re making toward becoming debt free. Since you’re on the home-stretch, I would try to hang on to the car a little longer. But if it’s really falling apart and is more a matter of safety, your plan might be a good one. You need to be real with yourself though, and make sure you’re not just itching for a newer set of wheels.

When we were on our journey out of debt, Clint drove a 10-year old Jeep with over 300,000 miles of experience. It was in rough shape. In fact, it caught fire twice, he replaced the starter twice, he replaced the alternator, had to re-wire the A/C – you get the point. Sometimes the sacrifice is worth goal.

You guys have done an amazing job of paying down your debt. If you take a couple of months off to save for a better car, you’ll still be debt free at about the same time. A couple of extra months isn’t going to de-rail your plan or your progress.

Isn’t it an incredible feeling to actually sit down, think through your options and make a plan rather than just wandering around and acting on impulse? You guys are level-headed, you’ve done a good job of thinking through this situation and you’ve come up with a very reasonable plan! Thank you for the question, and good luck!

- Katy

Have a tricky question Clint and Katy can answer about your finances?
Email it to Editors@PerkStreet.com

Clint and Katy Davis are PerkStreet Customer Columnists and founders of Davis Coaching. As financial coaches, their passion is helping people become and stay debt free! Their personalized coaching is designed to help you get your financial life where you want it to be. Like personal trainers for your finances, they can help you develop a specific plan to achieve your goals, and provide the expertise and accountability to get you there. If you’re ready to take control of your financial life, visit Davis Coaching online, check out the Davis Coaching blog, and connect with Clint and Katy on Twitter and Facebook.

6 Comments
  • http://www.facebook.com/SuziWoodsGravenstuk Suzi Woods-Gravenstuk

    I can really relate to Wade of NJ as I also primarily work contract to contract, or more long term as an Independent Contractor. Sometimes I long for a j.o.b. with an employer AND benefits, but being an IC has kept cash flow coming in.

    My current contract is exceptional for income/cash flow. I visualized paying off my Honda, but that would have required every penny from the contract. MY husband, the other income earner brought me to my senses, though unhappily.
    Sooo, I came up with a happy compromise–as many suggest, keep making minimal payments, BUT my local credit union lets us allocate savings much like Dave Ramsey’s envelope system. I created an “envelope” for the honda, credit card pay off, income tax and so on.

    I ended up respecting him AND making myself happy be feeling as if we are making true progress.

  • http://hard-money-lenders.net/ Hard Money Lenders

    I really think that those who are self employed will have a huge advantage over others who are working for some one.  They are essentially entrepreneurs who have the ability to adapt to changing conditions in the economy.  Great advice on whether to save or pay off debt first.

  • Jan8022

    as a self-employed person also, i would recommend beefing up your savings.  while it’s very tempting to tackle the debt as quickly as possible, with erratic income, you’re always going to need that cushion.  i found that when i was eliminating debt i wasn’t a good saver even when i could have been; i was concentrating more on NOT spending, a worthy endeavor, and one that has to be part of the equation, but you’ve got to learn to treat savings as a priority especially when an IC.  Savings should be like a bill you pay every month.  

  • http://www.daviscoachingsolutions.com/ Clint & Katy Davis

    That’s great Suzi. You do need to be intenst and focused on paying off your debt as fast as possible, but as a contractor, you do need to balance that with retained earnings and saving for future expenses. It’d be a little simpler if you worked a 9-5 J.O.B., but obviously we are self-employed and are huge fans of that lifestyle. As with everything, you have to use your head, take wise advice and counsel, and plan ahead. It sounds like you and your husband are doing a great job of that! Keep it up, and thanks for sharing!  -Katy

  • http://www.daviscoachingsolutions.com/ Clint & Katy Davis

    In general, even as a self-employed person, we recommend saving your $1,000 starter emergency fund and then ferociously tackling your debt. But keep in mind, there is a difference between your business’s income and your personal income from the business. All business need to retain a percentage of their earnings to sustain the business when times are slower. Personally, you do need to take into consideration your particular business, market, etc…and make a wise decision as to when/how much to save prior to or during your debt snowball plan.

    We do teach a specific order of doing things in your finances, but there always has to be a degree of personalization, using wisdom and making decisions that you feel good about.  But, if it was always simple, and black and white, we wouldn’t be in the business we’re in!  Thanks for sharing! – Clint

  • http://www.daviscoachingsolutions.com/ Clint & Katy Davis

    Thanks for your comment. We love being self-employed and come from a liong line of entrepreneurs. It’s definitely not for everyone and that’s completely fine. Wherever you work and whatever you do, what counts is that you’re making wise decisions, you’re working toward your goals and you’re creating the life you really want!  Thanks again!  – Clint

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