Even when you’ve hit lean times where work is famine instead of feast, or when juggling deadlines keeps you burning the midnight oil more times than you’d like to count, freelancing is still as fulfilling an experience as it’s made out to be.
Becoming your own boss is a chance to take charge of your career. You’ll get the perks, like working when you want, where you want, for who you want. There’ll be dry spells, too, when income is unstable and clients come few and far between.
Once you’ve got your momentum going, your success and earning potential as a self-employed contractor is pretty much limitless.
However, while working for someone else may not make you rich, making the wrong moves as a freelancer won’t do you any financial favors, either. Even when it seems like you’re doing everything right and earning money, you may be making some missteps without realizing it. Steer clear of these common mistakes that can hinder your freelance success:
Going without a freelancer’s budget
When you freelance, your old budget needs to be updated or replaced with a new one. It’s especially important in the early stages of your freelance career when your income is irregular, making it hard to predict how much you’re likely to earn.
A budget can help you determine how much money you need to be saving, and how much you’ll owe on your monthly expenses like rent, student loan repayments, car payment/insurance, groceries, and other costs.
A freelancer’s budget won’t just take into account your income and personal expenses, but your business expenses as well -- anything from office supplies and stationery, to computer software, travel costs and professional development, or marketing materials. Make sure your budget incorporates expenses that are tax deductible to save money that can be re-invested.
Newbie freelancers may need to start off on a pro bono basis or take whatever work they can find, at the smallest rates, just to start building a portfolio. Clients, however, won’t do you any favors. They’ll be more than happy to keep paying you next to nothing for as long as it suits them.
Sell yourself short, and your rates will stay the same forever. Aim too high, and you could price yourself out of work. And determining your worth based just on your work experience can still amount to a guessing game.
Honestly, it can be hard to determine your worth as a freelancer at any stage of your career. Rockstar moments are sometimes juxtaposed with other times of doubt, coupled with a poverty mindset that can limit our view of what we’re worth as a professional.
Determine how much more you’d like to earn out of necessity. Compare your existing rates against your current budget, and any financial goals you’re looking to reach or increases to cost of living. How much more would you need to be earning?
Look at what the average rates are in your field. Gauge your worth as a freelancer by researching professional groups in your industry to see what freelancers are charging. One of my go-tos is Writer’s Market, which lists what freelance writers and editors in my field are earning hourly and per project. Looking for a similar resource or publication in your vertical can help guide you on what you should be charging.
It’s OK to negotiate with clients, but hold firm to your rates. Emphasizing the value you can bring to a project, whether it’s contributing to a blog or building a website, tells a potential client that you’re worth the rates you charge.
Not getting insurance
You might think that you don’t need insurance of any kind. Health, disability, liability insurance -- it all seems irrelevant when you’re healthy and young, so why not chance it for a few years uninsured?
The truth is that neglecting key insurance policies really is the same thing as neglecting your health and well-being. Even if nothing ever happens to you, having the safety net of health insurance to pay for potentially expensive medical costs is a necessity that everyone should have.
If you’re under 26 years old and venturing into freelance, you may still be able to stay on your family’s health insurance policy -- but once you pass that age, you’ll need to get your own policy, or be hit with an annual fine from the government ($695 per person, or 2.5 percent of your income, whichever is greater).
Freelancers should consider disability insurance, since without an employer-sponsored paid time off, a disability policy covers expenses if you’re sick and unable to work. Liability insurance can help protect against legal claims brought by clients or companies over work-related projects, no matter your involvement. And renters insurance pays for damages to your personal property if you’re currently renting your home, and your freelance budget can’t afford to replace your belongings.
Avoid the mistake of venturing into the world as a freelancer without insurance by taking a look at the basic policies that suit your needs, lifestyle and financial situation.
Not having an emergency fund
Most freelancers experience dry spells and slowdowns in work. You don’t know when you’re going to get sick, so you need insurance just in case something happens. The same applies for freelance work: you can’t be sure if you’ll land 10 new clients next month, or if you’ll lose all your current clients at once.
To safeguard against this possibility, every freelancer needs an emergency fund. Your budget will need to incorporate some money saved up for personal expenses when there’s less cash flow coming in, but don’t stop there. An emergency fund should cover a full three to six months’ worth of expenses -- even more if you’re a freelancer, since your income scale may differ from that of a salaried employee.
Spending gross earnings like net pay
If you’ve spent most of a career as a staff employee, you become accustomed to being on someone else’s payroll and having your income taxes withheld each paycheck. New freelancers who aren’t accustomed to withholding and itemizing their own taxes may make the mistake of not realizing that their freelance pay is gross income, not net profit. It can feel like you’re earning more, so the money that you should be setting aside for taxes may end up getting spent.
I fell into this trap for a few months when I started out. When it came time to pay the IRS after filing my tax return, I had to dip into my savings for the money, which felt more like a huge, unwanted penalty than it did paying one’s regular taxes.
As your own employer, the right move is to apportion roughly one-third of your monthly income for taxes, just like an employer would do for you. If you’re putting it into a savings account, label it as your freelance income tax fund that can’t be touched for anything else except paying taxes. It’ll help you live within your means, so when you owe money at the end of the tax year, it’ll be right there to pay without having to scramble for the cash.
Not investing in yourself
They say to make money you need to spend money—and as a freelancer, this is true if you want to succeed in the long run. Successful people don’t close themselves off to professional development and taking the steps to advance in their careers and improve their income.
It could be buying tickets for a conference or networking event, buying books or enrolling in online training courses or a certification program to enhance your skills. It may seem cost prohibitive to some, with the assumption that a college education is all one needs to learn, so anything additional can translate into money wasted.
But personally and professionally, we can’t evolve or improve if we cut ourselves off to learning and growing. And sometimes that can cost money. One productivity coach suggests setting aside 10 percent of your income towards education. Smart freelancers will invest a portion of their earnings to bettering themselves, applying what they’ve learned to their skill set, and seeing their efforts pay off in the future.
You may even be able to deduct some of your educational expenses on your income tax return if they relate directly to your freelance professional development, effectively lowering the overall costs to attend a seminar or take a class. (Tax write-offs can also include membership costs and dues to join professional organizations or groups within your industry.)
Becoming a freelancer offers a lot of freedom, but also a lot of potential challenges that can be hard to deal with if you make financial mistakes. Making smarter, better moves with your money can get you closer to a freelance career that’s prosperous, secure and fulfilling.