Seven Financial Mistakes Freelancers Make in Their First Year
There are many joys that come from starting life as a freelancer or small business owner – the empowering feeling of striking out on your own, the freedom to set your schedule, the sense of accomplishment when your ideas come to life. But one of the biggest headaches is suddenly being in charge of your own finances, from payroll to budgeting to taxes, especially if you have limited experience in these areas.
Here are seven financial mistakes new freelancers often make, and how to avoid them.
1 Sloppy accounting
It’s time to get reacquainted with your old friend, the spreadsheet. You need a clear system factoring in dates, expenses, income streams, savings and budgeting targets; play around until you find something that works for you. Use an additional sheet to keep track of how your business finances intersect with your personal ones. There are various accounting software options available, but in the early days, the most important thing is to simply keep track of the details.
Take time at least once a week to make sure your spreadsheet is up to date. Doing it at the same time, like on a Friday morning, will turn it into a habit. Using a cloud-based programme such as Google Sheets will make it easy to access your accounts on multiple devices and share them with others. Bookmark the page on your browser or desktop and don’t ignore it.
2 Mixing personal and business banking
Getting a business bank account is invaluable, not only because it makes your financial situation much clearer, but because banks offer extra services such as budgeting help, expense categorisation and business-oriented financial products. Getting a business-specific credit card can also be hugely beneficial. You can read more about choosing the best business bank account here.
3 Not seeking professional guidance
Nothing will keep you on top of your finances like an accountant. Whether you need one or could just benefit from one will depend on the nature and scale of your business, but there is plenty of free support you can also access.
Contact your bank or even another bank to set up a meeting to discuss your options. Give your government’s tax authority a call if you have a tax-related question, no matter how small. You can also get involved with freelance communities such as Lance, which frequently offer webinars and Q&As on topics such as taxes and grants.
4 Misunderstanding taxes
We’ve already said the T-word, but now’s the time to address it properly. A common (and potentially costly) mistake to make in your first year of freelancing is to dismiss taxes as a problem for the future you. But now is the time to get your head around them.
Devote time to going through official government resources to figure out how much you’re going to need to pay depending on what you earn, what will count as a tax deductible expense, when you will need to pay the bill, and how you are going to budget for it.
5 Chaotic form-filing
As well as setting up your digital spreadsheet system, early in your freelance career is the time to buy robust folders with dividers to hold all your important documentation. Insert a plastic folder to keep hold of any paper receipts that are business expenses (you should also make digital copies of these). If you don’t already have one, it may also be time to buy a printer/scanner.
6 Not planning ahead
Securing your first big clients, projects or financial boosts is an incredible feeling, but it’s crucial to keep one eye on the future. Carve out time each week to check your upcoming schedule and see whether you need to send speculative emails or do additional work to line the next thing up.
But don’t feel bad about a dry spell – it’s all part of the rollercoaster of freelance life! An emergency savings pot will give you greater peace of mind during these periods.
7 Not knowing your worth
There’s often a period early in a freelance career when you will constantly feel like you’re under- or over-selling yourself. There are lots of resources available, from shared spreadsheets to articles to Facebook groups, that will help you understand the standard rates in your industry. If one doesn’t exist in your field, it may help to reach out to someone you admire, or set up a discussion group yourself.
Knowing your worth is also about demanding fair treatment from the people you do work for. Setting clear project expectations (including deliverables and deadlines), writing contracts and sending prompt invoices will help with this, and don’t be shy about pushing for payment.