Surviving Self-Employment

In late spring of 2002, Ellen Hendrix lost her job. A video editor at the time, she had seen the “writing on the wall” in terms of business slowing down in the production division of the public relations firm where she worked. With the firm also undergoing a major reorganization, she felt her days were numbered.

Hendrix tried to prepare for the inevitable by purchasing rental property to generate another source of income. “I was thinking I would get two or three houses and build up some savings that way.” At the time she lost her job, the 43-year-old Winston Salem, North Carolina, resident had only about $700 saved—a far cry from the three to six months’ worth of living expenses most financial advisers recommend.

Although she reached her goal of acquiring a rental home for $25,000, “I was laid off literally two days after I signed the papers on the property,” Hendrix recalls. After four years of service, she received one month’s severance pay, roughly $3,000.

The $3,500 in closing costs and 10% down payment Hendrix used to acquire the single-family rental home came from a $15,000 home equity line of credit on the single-family home she already owned. She purchased that home in the fall of 2001 for $62,500. She has since used the home equity line of credit (which has a $9,000 balance at 5.25% interest) to sustain herself when she needs quick cash for quarterly taxes and other expenses. Hendrix was also helped by $8,000 in unemployment benefits for the 2003 tax year, which came in handy during a lull in freelance work.

Now self-employed, Hendrix grosses a combined income of about $35,000 a year from video editing jobs and unemployment, which closely matches her former salary. Single with no children, her expenses are relatively low—a little over $2,000 a month. She also has a fairly low debt load and very good credit. Her debt includes $2,500 in credit card balances and a $13,000 car note (at an interest rate of 5.79%) on a 2000 Toyota Rav 4 purchased this summer. The mortgage on her primary residence is about $62,500, after she refinanced in August 2003, lowering the fixed rate from 7.75% to 5.65% and shortening the term of the loan from 30 to 20 years. The mortgage on the rental property is $37,000 (after a recent refinancing) at an adjustable rate of 4% at press time. The combined equity in the homes is $42,500.

While her situation has improved from 2002, Hendrix has a major cash-flow problem. She still doesn’t have enough cash on hand in the event of an emergency. She has $5,000 in checking accounts, another $4,000 in savings, $3,500 in a Roth IRA, and $12,200 in a Rollover IRA—money from a 401(k) account with her previous employer.

In terms of the rental income, Hendrix has not made much of a profit. She still owes her mother $3,900 that was part of a renovation loan. “My mother decided to let her money ride; we made an arrangement that