As a freelancer, you have to treat money a lot differently than if you were employed by a huge corporation or even a small business. Your paychecks aren’t guaranteed. No one is withholding income taxes on your behalf. You have to be much more conscious of how you’re spending the money you make and avoid costly financial mistakes than can put a halt to your freelance writing career.
1. Living without a budget. Everyone who receives money should have a budget. Budgets are especially necessary for freelancers because our incomes aren’t as predictable. You need a budget to help you figure out how much money you need to make to cover expenses and to help make the most of the income you receive.
2. Failing to track expenses. The same way you use a budget for your personal expenses, you should also have one for your business expenses. Decide ahead of time how much money you’re going to spend on business items. Keep track of what you’re spending because many of those business expenses are tax deductible, reducing the amount of income tax you owe.
3. Not having a tax plan. As a self-employed worker, you’re responsible for sending your income tax to the IRS on a quarterly basis. You must calculate how much you owe and deduct it from your income, preferably on a monthly basis to make it easier. If you don’t pay your income taxes or you don’t send enough, you face a tax penalty when you file next April.
4. Living without an emergency fund. An emergency fund is a savings account that is only accessed to cover unexpected expenses, like a major car repair or medical bill. The emergency fund keeps you from having to use more expensive options for covering those expenses like using a credit card or taking out a payday loan. I suggest that freelance writers and other self-employed workers have a larger emergency fund (6-12 months of living expenses) because our income is less predictable.
5. Not adjusting your lifestyle. If your income goes down when you transition from a full-time job to full-time freelance writing, your lifestyle needs to change, too. Otherwise, you’ll find yourself struggling to make ends meet. Cut out cable television, eating out, and other nice-to-haves until your freelance writing income is high enough to accommodate those expenses.
6. Failing to save for retirement. As much as we love freelance writing, no one wants to do it forever. One day, you’ll want to (or might have to) give your fingers a rest. When that time comes, you’ll need income to live on. There are retirement plans for self-employed workers and every freelance writer should open one and start contributing sooner rather than later.
7. Spending everything you make. Spending all your money is a dangerous habit that can lead to financial disaster. Part of your income should be saved and invested for the future. If you’re spending every penny of your freelance writing income on bills, then look for ways to cut back on expenses or figure out how you can make more money. Then, put the extra money toward your emergency fund and retirement savings.
8. Leaving your rates the same. The cost of living increases, so should your rates. If you leave your rates the same while the cost of everything else goes up, you’ll find it increasingly harder to survive on your freelance writing income. You’ll probably wonder why you suddenly can’t make it anymore. Get in the habit of reviewing your rates annually and comparing to your budget to decide if you need to start giving higher quotes. You’ll also need to reevaluate your writing rates as your life changes, e.g. you have a child, get married, buy a house, etc.
9. Relying on just one or two clients. This is extremely risky because if your primary client leaves, so does most of your income. On the other hand, if one of several clients leaves, it doesn’t leave you with as great an income gap. You can recover quicker from a lost client who makes up 10% of your income than one who makes up 50% of your income.
10. Failing to send or follow up on invoices. An invoice is nothing complex. It’s just a bill that lets your clients know how much they’re supposed to pay you and by when. They’re great for tracking your income and figuring out who’s paid you and who hasn’t. If a client hasn’t paid you by their due date, don’t wait around. Instead, follow up until you get them to pay. You may be able to deduct unpaid invoices on your income taxes, so keep proof of nonpayment.
For freelancers, money management goes beyond making sure you have enough money to pay the bills. No matter how much (or how little) money you’re making, work hard to avoid these money mistakes to keep financial problems at bay.
So…be honest, how many of these mistakes are you making?