Common Financial Pitfalls Freelancers Make When Starting Out
Have you ever thought you would master something only to find yourself falling flat? In my early days, this was me and my money skills as a freelancer.
When I made the big shift to solopreneurship full-time a few years ago, one of the first things I set out to do was tend to my financials. I was a money nerd, after all. I was one of those eccentric souls who spent their leisure time reading up on money app reviews, tinkering with budgeting spreadsheets, and confabbing with colleagues on our respective money flows. I got this, I thought to myself.
How quickly we fall.
Over the first few years, I made many mistakes in handling my money in my freelancing business. Here are some financial stumbles I made during my first few years as a solopreneur, and what I should’ve done instead:
Not Creating a Business Budget The first year or so as a freelance content creator, it didn’t cross my mind that I should create a spending plan for my business. As I transitioned from a day job, I didn’t think that any money I spent toward freelancing should be put into the “business expense” bucket.
In turn, I paid the price for my foibles. Not only was it hard to figure out how much I should be raking in each month from client work to meet my expenses, but when tax time rolled around, it ended up being a bit of a headache.
Sure, some business expenses that one could write-off for tax purposes were obvious, such as work-related supplies, equipment, and the like. But other expenses? Not so much. Could I deduct drinks purchased by working at a local coffee shop? (Turns out I couldn’t.) However, I could write-off meals only when they were somehow related to my work, such as meeting with clients or during professional conferences. And while my health care premiums were considered a business expense and thus tax-deductible, my premiums for long-term disability were not.
What should go under your business budget can sometimes be murky territory. It was only after I talked to tax professionals such as accountants, CPAs, and did some research that I was able to pin down exactly what could be considered a business expense.
Not Opening a Separate Checking Account for Business Whether it was due to a laziness or lack of foresight, I mixed my business expenses with my personal ones. That’s bad news when you’re trying to make heads or tails of what your actual business expenses were, and how to create a spending plan as a solopreneur. And of course, pulling out the business expenses to file my tax return was a royal pain.
It was only after I opened a separate business account that my financial housekeeping became a ton easier. When I was a sole proprietor, I created a simple system: All my income from clients went straight to my business account, and I paid myself a salary at the end of the month.
Whatever remained, I squirreled away to separate savings goals based on percentages. So if I had $600 of “extra” money after I paid myself and my taxes were set aside, I put half toward my emergency fund, a quarter toward retirement, and the other quarter toward a fun fund, such as for a vacation.
Not Maintaining My Books Properly Not only did I fail to maintain my books properly, but I had no legit way of tracking my income and expenses. I created a master spreadsheet with every single writing assignment and content project that included due dates, rates, and if I submitted an invoice. The sad thing? I was actually proud of my spreadsheet.
And when I finally met with an accountant to go over my books, he had a palm face moment. This is what you call your bookkeeping? He scolded. He sat down with me and explained that didn’t matter when the assignments were due, or even when I sent out an invoice.
What was really important when it came to my income was when money actually hit my bank account. That’s because my business went by cash accounting, and not by accrual accounting. What’s the difference? Accrual accounting records revenue when it’s earned, whereas cash accounting counts income when you actually receive it.
As you could imagine, reconciling my income and trying to figure out which year it should be counted was a bit of a nightmare. My accountant and I had to devote a hefty chunk of time to wade through the morass of transactions to keep them organized.
Failing to Come up with Income Goals I haphazardly took on jobs without figuring out how much I should be making. This ties in to creating a spending plan for your budget. If I didn’t know how much I should be raking in on a regular basis, I wasn’t sure how much I could reasonably spend on my business expenses.
A total game-changer was when I sat down to come up with income goals. This helped me figure out how much work I should hustle to bring in. Doing some simple math helped me figure out how much I needed to make to stay afloat. For instance, if I worked five days a week, or 20 days a month, to earn $48,000 a year, you’d need to bring in an average of $200 a day. If I wanted to make $70,000 a year as a freelancer, my daily income goal was about $300, or $1,500 a week.
This didn’t count for any vacation or sick time I wanted to take. So I would just figure out how many days I wanted to work a month, how much money I wanted to earn, and go from there.
Of course, these are markers to go by. And with the inevitable ebbs and flows of freelancing, you can’t expect to earn the same money on the regular. I also broke down my income goals by month and by quarter. That way I wasn’t super stressed out if I didn’t hit my goals consistently.
Undercharging for Your Services We freelancers are notorious for undercharging for our services. There are several reasons why we’re guilty of this. Negotiating rates when you freelance is like the wild, wild west. There’s no go-to source with standard rates for all freelancers. For one, if we offer creative services, we might get weirded out by the fact that someone might want to pay us for something we enjoy and would do for free.
What’s more, there’s all this self-doubt about what to charge, and how to go about talking about money. And of course, there’s this fear lurking underneath that you might be charging too much, and someone else might land the gig.
Here’s the thing: It’s not about what you’re worth. It’s about what your work is worth. When I’m not sure how much to charge, I’ve learned to start by researching consulting/freelancing rates. While rates can vary greatly based on industry, scope of work, and your level of experience, look toward reputable companies and organizations that offer information on rates based on reputable sources.
For instance, if you're a writer you can check the Editorial Freelancers Association Editorial Rates, which provides a rough guideline as to what to charge for different types of editorial work. As for rates from specific publications, the content platform Contently offers a freelance rates database.
But don’t end there. Sometimes the rates you find online haven't been updated, might be too general or pertain to in-house roles, which tend to be lower rates than freelance rates. You can also reach out to fellow colleagues you’ve already established rapport with to see if they have any pointers.
And if you are working with a new client, do a quick search to see if any freelancers you know have done work with them. You can potentially find this by scouring Linkedin or portfolio pages of freelancers.
There you have it. A handful of financial pitfalls I made in my first few years of freelancing. While I knew that treating freelancing like a business was necessary, I definitely was sloppy in how I managed my money. By being more mindful and prudent from the get-go, creating a spending plan for my business expenses, and figuring income goals, I would’ve avoided making costly blunders.
Hi there! This post exists to offer you (hopefully) useful information and insights, but it cannot take the place of personalized professional advice. Please consult a qualified expert if you have questions about your business. Also, Azlo doesn’t endorse any third-party sites that are linked here.
Back to Guides