Working full time as a freelancer sounds like the dream, right?
You get to pick and choose your clients and work from the comforts of your home. You create your own schedule, and get paid for doing what you love.
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However, this also comes with the struggles of being responsible for your own finances
Without an employer-sponsor salary, managing your own finances can be hard. Especially if you’re a full-time freelancer and don’t get a steady paycheck – you often get stuck with having to manage your own finances.
If you’re a freelancer or you’re planning to become one in the near future, it’s essential you know how to handle your finances and have a solid plan for immediate and long-term funds. There are a lot of questions you need to ask yourself when looking at your spendings.
Luckily for you, in this guide, we’ll be looking at some of the most common finance related mistakes freelancers make and how to avoid them.
Here are a few key mistakes you can’t afford to make when working from home.
1. Not budgeting properly
Even if you’re a sole proprietor as a freelancer, you need to be on top of your budget.
But budgeting your expenses for the month when you’re not living on a steady paycheck can be tough. The reason you need a budget in the first place is to better track the amount of money you have, what you need to spend, and what you need to achieve your goals.
In other words, you need to be keeping an eye on your cash flows – where they come from, where they go and how to make sure they’re positive.
So, if you’re not sure where to start, you can apply the 50/20/30 budgeting rule for your monthly earnings.
This rule simply states that you should split your earnings as follows:
- 50% on needs.
- 30% on wants.
- 20% on savings.
Needs include the essentials like your rent, groceries, utilities, and so on. Wants are things that make you happier but aren’t necessary for your survival. Finally, savings include retirement plans, emergency funds, and any investments you make.
2. Not separating your personal and business finances
Speaking of budgeting, if you want to keep track of your spendings better – be sure to get separate personal and business accounts.
Separating your accounts help keep track of your overall finances and allows you to organize your life better as well.
Doing so can help you track what exactly your business expenses are, where and how you can cut back on them and how to get your life on track.
If you’ve been freelancing for a while now, you probably know how difficult keeping track of all your expenses can be. Especially when tax time rolls around.
If you’re going to buy anything business related, it’s better to be using a business account. And the same goes for buying anything personal life-related.
This helps make your life easier for tax purposes as well as for reviewing your business.
3. Not having an emergency fund
Alright, so now that you have a monthly budget and a separate account for business and personal finances – you should also have some money set aside for an emergency fund.
As mentioned above, some months go better than others as a freelancer. And there’s not much you can do about that. So, regardless of your skill and income level, you need an emergency fund.
You never know when a client might disappear and leave you unpaid. And here’s where your emergency fund comes in.
The best way to handle unexpected situations like that is to have some money set aside. The next time life throws a curveball at you – you’ll be ready.
How much money you should set aside each month depends entirely on your circumstances. But as a rule of thumb, it’s a good idea to a few months’ worth of living expenses in case of an emergency.
Finally, you should also keep in mind that your emergency fund should be separate from your personal saving accounts. And you shouldn’t tap into it unless an actual emergency comes up.
4. Not following up on missing payments
If, for some reason, you indeed had a bad income month – you should definitely follow up with your clients who haven’t paid you on time.
Many freelancers often fall into the trap of ignoring and moving on overdue clients. If this is the case with you as well, you need to seriously reconsider your position.
Sending a follow up asking for money might seem awkward at first, but it’s the right thing to do.
You deserve it.
If you did as you were asked for and haven’t been paid for it yet, you’re absolutely in the right to demand your money.
They simply might have forgotten it. It’s not that your clients are necessarily refusing to pay you. But regardless of the case, be sure to chase late payers. It’s your responsibility to make sure you get your payments from them.
Start with a polite email and a follow up at first. If they’re still not responding, consider placing a phone call. Either way, be sure to get their attention and stand your ground.
5. Not planning for taxes
Taxes are another tough financial obligation. Even worse for freelancers.
Now, before we even begin with this, it’s important to note that taxes depend on where you live.
For self-employed individuals, taxes are generally trickier to figure out. Depending on how much you earn, you’ll most likely have to report your own income and withhold your own taxes yourself as well. You’ll also probably need to pay self-employment tax.
That’s a lot of paperwork and a lot of headache if you’re not sure what you’re getting yourself into.
So, it’s best to research your country’s regulations and laws on freelancers having to pay tax.
There’s a lot of opportunity for freelancers to make mistakes on their tax forms. Of course, hiring a tax professional is a sure way to make sure you’re correctly filing your taxes. But if that ends up being too expensive, you can play it safe and set aside 20-30% each month of your total paycheck aside for tax deposit.
But regardless of the approach you decide to take, it’s worth looking up your local tax laws and familiarizing yourself first as to what you’re getting yourself into.
6. Not using online accounting or invoicing software
Finally, if you want to take things to the next level and absolutely make sure everything gets tracked – look into using an online accounting and invoicing software.
One of the best things about using accounting software is the fact that you get to automate some, if not all of the manual and tedious tasks. Paying bills, sending out invoices, and more become easier than ever – especially since you’re keeping track of them on the go.
This, in turn, saves you a lot of time and money in the long run.
As a freelancer, you’re responsible for every job you perform.
You are the accountant and the CEO.
Hence why you have to be on top of your finances and make sure you’re managing and tracking everything as efficiently as you can.
Automating your invoicing process through software is a sure way to increase efficiency and save time on creating invoices. It also allows you to manage and track your invoices to get monthly overall finance reports.
Accounting software meanwhile, helps you better track where your cash flows are going from and to. If you want to step up your accounting and financial skills, the software can improve all parts of your financial areas and make sure everything is optimized for efficiency.
Avoiding financial mistakes
If you have what it takes to be self-employed, then you also have to be capable of managing your personal and professional finances. While this might seem like an intimidating task, you’ll only get better at it as you go.
And while experience is the best teacher, there are still some common financial mistakes that most freelancers make when starting out.
To avoid the many financial mistakes, you need to keep track of your income and expenses all year long.
While you might be tempted to bust out an Excel file and get to bookkeeping, using a business accounting software to automate your processes is more convenient in most cases.
Finance is often a scary field for freelancers and business owners alike but it doesn’t have to be the case.
Assuming control over your finances is one of the best things you can do as a freelancer to get ahead. And by putting all of the above tips into practice, you’ll be spending less time worrying about your savings and more time perfecting your craft and making more money instead.