The Financial Side of Freelancing: Myths & Mistakes
The number of people who freelance has grown exponentially over the past years. The advancement of technology, an increased focus on everything digital, and the impact of COVID-19 and remote work have all contributed.
Working as a freelancer offers a considerable degree of freedom, but it also means foregoing the security of a set monthly salary.
While this can sound risky, working as an independent contractor means that you have more control over your time. It can even be more financially rewarding than being an employee at a company.
Freelancing has many pros and cons. It’s not for everyone, but it can become a gratifying way of living and working for those who find their niche.
When people think of freelancing, they usually think of someone working from home with a flexible schedule and plenty of time for fun.
While this impression can be accurate sometimes, it’s not how most freelancers work.
Some common myths about freelancing include:
- You earn more for working shorter hours
- Freelancing doesn’t provide a reliable income
- You’ll have to negotiate payment with every client
- It’s ok to take non-paying jobs for exposure and experience
- You don’t need to sign contracts with clients
- Mixing personal and business expenses isn’t an issue
- You’ll have extra money when you don’t commute to an office daily
- Mixing personal and business expenses isn’t an issue
But these myths are just that. Myths. We’ve debunked them to show you why they don’t have to apply to the world of freelancing:
Myth #1: You’ll earn more for shorter hours
While this is possible, it’s improbable that you’ll make much more money than when you were working for an employer—especially when you’re starting.
There are several reasons for this:
- You won’t start with a stable client base
- You pay for self-marketing before earning more
- You’ll pay for health insurance by yourself instead of having it subsidised by an employer
- Saving for retirement is solely your responsibility
- There is no such thing as paid leave or a paid sick day
Of course, some of these are more about your expenses than your income. But the costs you have to cover do ultimately determine your take-home salary.
When working for a boss, your computer, software, electricity and office expenses are paid for. As a freelancer, these things are not free, and you’ll have to pick up the tab.
Myth #2: Freelancing means no reliable income
This seems paradoxical to the myth that freelancers earn easy money, but many people believe that freelancing is a financially risky move.
If you’re unable to build up a client base, this is a danger, but freelancing appropriately done results in a steady income.
One way to guard against this financial hazard is diversifying your income.
Instead of one salary from a single employer, a freelancer gets paid by several clients. If one falls away, it doesn’t mean the loss of all earnings.
You can also set up retainers with clients for a set period, ensuring that you have at least some stability for several months at a time.
Myth #3: You’ll have to negotiate payment with every client
There will be some clients who will attempt to bargain with you. Some people see freelancers as individuals doing odd jobs.
The reality is that working freelance has a demanding schedule and involves the same level of professionalism as any other career.
It’s a good idea to put together a catalogue of your prices for various services, and not deviate from that.
Some pointers are:
- Display prices on your website or have a rate card ready to send to potential clients
- Create watertight contracts to guard against clients trying to evade timely payment
- Send professional and detailed invoices
Being upfront with your rates saves you from spending time negotiating deals and endlessly debating prices for individual projects.
Clients can see upfront what you charge and are less likely to try to talk you down if your rates are clear, transparent and professionally provided.
Myth #4: Take non-paying jobs for exposure or experience
This ties in closely with the previous point. While there might be a place for unpaid work in some circumstances, not receiving pay when providing a service is unacceptable.
True, you will need to get exposure and experience in your field, but whatever you’re working on takes time that you’ll never get back.
Some people believe that freelancers without an established reputation don’t deserve to get paid.
Something that wouldn’t occur to them if they were going grocery shopping or hiring a plumber.
Even the most minor job is worth charging for, and there’s nothing wrong with initially charging less if you have minimal experience and need a foot in the door.
Not charging at all shouldn’t even factor into the equation. Freelancing is a real job. And real jobs get paid.
Myth #5: Client contracts aren’t important
Just because you’re a freelancer doesn’t mean that you don’t need to formalise your working agreement.
While you may enjoy word-of-mouth referrals from clients or friends and family, you cannot afford to take a relaxed approach to contracts.
Ensure that you put down in writing what’s expected of you and the rates you’ll charge.
You cannot open yourself up to endless changes or additions that you’ll essentially complete for free.
By having a contract, all parties know exactly what the agreement is.
If the idea of calling it a contract sounds too formal, call it a letter of agreement—it’s still a written document that may end up protecting you if things go south.
Myth #6: No commute means you’ll have extra money
What you save in gas or other transport costs will more than likely not be “extra” money when you re-examine your earnings and expenses as a freelancer.
While the cost of commuting will disappear, other expenses will emerge.
Paying for health insurance with no help from an employer, navigating the tax system as a self-employed individual, and marketing yourself as a professional for hire are just a few new expenses that crop up.
You won’t earn any money if you take a holiday either, so the money you save on commuting (and work lunches, coffee’s and drinks) is easily spent elsewhere.
Myth #7: Combining personal and business expenses isn’t problematic
A survey has shown that only 22.43% of freelancers have a debit or credit dedicated to business expenses. This is a recipe for disaster.
Mixing your business and personal expenses creates not only a tax nightmare but also makes it far tougher to track your earnings and expenditure.
If all your financials are lumped together, you won’t know your gross and net income numbers, nor will you know whether your income is rising or falling annually.
You’ll struggle to create a business budget or to create any forecast for your financial future.
Setting aside these myths, many freelancers trip upon their beliefs about themselves and this career choice. Some common mistakes made by freelancers include:
- Not budgeting
- Charging too little
- Neglecting to plan for taxes
- Doing work for “exposure”
- Not having an emergency fund
- Avoiding following up on invoices
- Saying “yes” to all jobs without discretion
We’ve outlined why these mistakes are best avoided so you can ensure they don’t derail your freelance career:
Failing To Budget
Many freelancers think that because they’re a singular entity, budgeting isn’t that important. But while budgeting on a steady paycheque is good practice, as a freelancer, it’s imperative.
It would help if you tracked how much money you have, how much money you’re owed, and what you’re spending money on.
Your cash flow position can make or break your freelancing business, and if you budget correctly, you ensure you stay on top of your figures.
Not knowing your financial situation can be scary, and it’s easy to get into debt if you don’t budget properly.
Charging Too Little
It’s easy to see the mistake here. Undervalue your services, and you’ll never earn what you’re worth.
When you start freelancing, there can be an urge to charge meagre rates to get as much work as possible. This is not a sustainable practice.
Your rates must take into account your overheads and hours worked. If you’re not sure what to charge, use a mark-up calculator to ensure you cover your overheads and make a profit too.
If you start with too low rates, you’ll struggle to increase them to a reasonable level within a short time frame.
Repeat clients won’t be happy if you suddenly hike your prices, and you may lose referrals from them.
Not Planning For Taxes
Don’t fall into the trap of landing up in tax season and being unprepared. From the first day that you start freelancing, ensure that you have a tax plan in place.
Whether this involves saving a portion of money from each job completed or enlisting the help of an accountant to do your books, take the necessary steps to get organised.
Tax season involves much paperwork, and you may have to pay out a large sum in taxes before a set date. Make sure you have everything in place to avoid any potential tax headaches.
Working For Exposure
While some freelancers charge too little, others might fall into the trap of doing jobs for exposure or experience. There are plenty of clients who would jump at the chance to avoid paying for a service.
The more you fall for their offers, the harder it will be to charge what you’re worth—and to establish yourself as a professional.
Word will get out that you happily work for free, and backtracking on this is tough.
Asking clients who’ve previously taken advantage of your willingness to work for exposure to pay for future projects is challenging too and may cause a breakdown in your relationship.
Neglecting To Set Up An Emergency Fund
As a freelancer, you need to prepare for lulls in work or decreases in income.
Or you may need to tide yourself over while you finish a large project for a client that is only paying on completion. This is where your emergency fund comes in.
An emergency fund isn’t just for when disaster strikes; it’s a buffer that can carry you through the leaner months.
Not having a fund that you can dip into when needed could spell disaster for you financially—both short and long term.
Avoiding Chasing Up On Unpaid Invoices
It’s never easy confronting clients who owe you money, but it’s an essential skill as a freelancer.
Often, freelancers write off an invoice that goes unpaid as following up on it is stressful and intimidating. While sending a payment reminder may seem awkward, you will get used to it.
You’ve earned money. The client knows this. It’s up to you to remind them until they meet their obligation. After all, you’ve met yours!
Saying Yes To Everything
This could mean taking on too many jobs, agreeing to work on a project you detest or feeling obliged to take on work because of some personal or emotional connection.
Overloading yourself will lead to burnout and long-term loss of income, as working on job after job gives you no satisfaction.
It may be hard to turn down work, but if you spread yourself too thin, the quality of your product will suffer, and you may lose clients in the long run.
Myths, Mistakes, Pros And Cons
In summary, working as a freelancer has both pros and cons, financially and otherwise.
Myths about freelancing either underestimate or overestimate earning potential and suggest this career is for mavericks that can’t compete in a traditional job market, far from the reality that many independent contractors experiences.
As with any job, finances can be a challenge, but discipline and organisation can result in a personally and financially rewarding career.
Avoid buying into these myths and making the mistakes mentioned above, and you’ll be on the path to success.
Author Bio: Megan Hudson is a content champion for various online publications, often covering various business topics from finance for startups to small business accounting tips.