The Most Common Freelancer Money Mistakes

My dad once described me as a guy that worked in the "gig economy," which I always thought was a weird way to describe what I do. I’m a writer, designer, and small business owner. I’m a professional freelancer of sorts; I create things for clients, they give me money for them, and that’s that. Somewhere in all that I also manage the money, but that’s not a lot of fun to do or talk about, right? And it’s not like I’ve ever made a mistake in that whole process. Never.

OK fine, I’ve made tons of mistakes, and they’ve become hard lessons to learn. But if I were to talk to my younger self about what to do and not do with my funds, I’d have quite a lot to say. (That, and I’d advise myself against bleaching my hair. I don’t know where that came from).

Let’s do just that. I’ll explain some of the mistakes that I’ve made along the way, and you can laugh at my ineptitude. That, or take notes, because you don’t want to fall down my well. Seriously. I was dumb.

They Don’t Manage Their Time Well

Wait — I thought we were talking about money stuff, right? Don’t worry, I’ll get there.

This month I have eight articles to write, and as of this moment, I have 18 days until my deadline. As a seasoned freelancer, I can take a look at my workload for other projects, and then pepper these eight articles in around those 18 days, or, I could do what I’ve done way too many times in the past, and try to get it all done the night before the deadline like I’m cramming for a test.

Believe me, that never works.

And how is this about money? Let’s break it down a bit further. I’ll invoice for each one of those articles and turn them in by the deadline. But I don’t get paid until the 15th of the following month, so I have to be sure that my cash flow is good both before then and after. Since I generally have the same amount of cash coming in on that date, I plan for that. And if I don’t turn in all my articles on time, I won’t be able to invoice as much, and therefore not take as much money home.

Is managing your time a money issue? Absolutely. And poor time management is a mistake I’ve made too often to count, and it’s always bitten me right in the keister.

They Rely Too Much on One Client

A few years back, I was the editor in chief of this magazine here in town, and I knew things weren’t going too well. Advertising was down, management was grumpy, and things just were off. But I needed just a little bit more time to get some backup income going, otherwise I was going to be in the tank. I didn’t get it. Instead, I was fired via text message on New Year’s Day.

The problem was that I had all of my eggs in one basket. I was managing my clients, sure, but not my money, and that caused a problem when a large portion of my income went away. Today, I try not to let any of my clients produce more than 20-25% of my earnings. That way, if they go south on me, I’m still covered. I mean, don’t get me wrong, losing 1/4 of your income is a bummer, no doubt. But losing 50% or more is worse.

So how bad did it get financially for me when I lost that gig? For the next six months I took home $1,000 a month total for all of my clients. If my wife hadn’t been working, we would’ve been screwed. Learn from my lesson, kids. Plan ahead.

They Don’t Save for (or Report Their) Taxes

I started freelancing in 1999, way before I had an accountant. And even though I didn’t make a lot of money doing anything, I still noticed that my tax refund was less than it was the year before. In 2006 I cleared $10,000 writing and taking pictures on the weekends and evenings, and that was when I realized that I was going to have to put some cash away for the tax man, otherwise I would be paying in the end. And believe me, that sucks.

Now I’m no accountant, so don’t take this as good advice, but this rule of thumb has served me well. I typically take 25% of my income and put it into a separate savings account specifically for taxes. Then, per the advice of my accountant, I write out a check every quarter to pay the IRS a portion of my expected income. If I don’t do that (as I have in years past), then I have to pay all at once in April, which sucks pretty hard. What sucks even worse though is not paying, because then you have to get into an installment plan and pay that off completely in the following year, because you can’t have two installment plans at once and … man, it’s tiring just thinking about it.

Point is, put away some funds for taxes. It’s the smart (and legally responsible) thing to do.

They Don’t Plan for the Ebb and Flow

Let’s go back for a minute to that story I told about losing a big client on New Year’s Day. There’s another aspect to that whole thing that also caused me to crash and burn, and that was improper planning for the ebb and flow.

Today, as I’m writing this, I have a few things on my plate. There’s some content work for one of my oldest clients, an article to research for a magazine, and my personal projects. The magazine article won’t pay me until 30 days after the article is published, which is likely 60 days out. And my personal projects may never pay out, because who knows when or if I’ll get to them.

Real motivating, right? To manage all of those things, I use a spreadsheet. In it, I put down what I did, who I did it for, how much it pays, and when I can expect payment. I give myself weekly and monthly goals to hit, and that helps keep me sane throughout all of the ups and downs.

But wait, there’s more. Let’s say that I need to take home $50,000 a year to pay my bills. That’s fine, but remember: taxes. So technically, I need to produce $66,667 a year of income, because of the 25% I’m estimating for taxes. But because I also know about the ebb and flow, plus there may be a client or two that doesn’t pay (I was out $10k one year from unpaid clients), I probably should shoot for $75,000 (including taxes) a year. If I don’t hit that mark, I’m fine, but if I do, I’ll be ahead of the game. Breaking it down further, I should shoot for $6,250 a month, $1,442.31 a week, or $288.46 a day (assuming I take weekends off). In the grand scheme of things, $300 a day isn’t that difficult to do, and if I hit those numbers in averages, I’ll be fine. But again, it’s about the ebb and flow, because there will be dry spells in your work, and you need to prepare for them.

They’re Not Prepared for the Worst Case Scenario

In 2010, my wife had our first child. In 2011, just as we were paying off those hospital bills, my throat swelled to mammoth sizes, to the point where I could barely breathe. I had a peritonsillar abscess that required surgery and put me down for about two weeks. A month or so later I went in to have my tonsils removed, and because of complications, I was put in the hospital again for a few days, and then had further issues with the medication. All tolled, I lost at least a month in work time to those problems.

Did I have a buffer? Yes. So we made it through the storm OK, and even though it wasn’t fun, we survived. But the other kicker here is that we had health insurance, and without that we would’ve been out over $25,000 in medical bills.

Talking about health insurance in today’s political climate is tricky, so let’s not get into all that jazz. Back then there was no public option, and since I wasn’t working for any company full-time (and neither was my wife), we had to pay for private insurance through Blue Cross Blue Shield. It was expensive, but we did it mostly for our son, never thinking that we would need the benefits, too. Point is, if you don’t have health insurance or access to it, don’t wander about thinking that you’ll be fine without it. Things happen, and if they do, you don’t want to be out of work and facing mountains of medical bills.

Not Keeping Their Personal and Business Accounts Separate

When I started freelancing full-time, I had two options: I could keep it going as all personal, or I could start an LLC. I opted for the latter, starting Whipps Industries, LLC in 2009, which also meant I could open business banking accounts to manage my funds. And that was a good idea.

Now you don’t have to do what I did to freelance; being on your own is fine. But that smart idea was to separate my personal and business accounts, and that’s crucial. See, with the ebb and flow thing being what it is, it’s easy to find yourself thinking that you have more money on hand than you actually do. For example, I could have $5k in my business account right now and think it would be OK to buy a new computer. But if that was my personal account, I’d be wondering if I have enough funds to get through the month. And if you co-mingle the two, it just becomes a mess.

At a bare minimum, open up a separate checking account for your freelance work, even if it’s a personal account. That way you can keep your funds separate, but still accessible via a quick transfer.

Now Get Out There and Work!

This may sound all doom and gloom at first, but don’t worry, because it’s all manageable. I’ve been freelancing full-time since 2009, and even though I’ve had some rough patches, I’m still pushing forward. And you can, too. Learn from my mistakes, young padawans, because they will serve you well in the future.


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