When I started on the independent contractor path 14 years ago, I made all the common freelance budgeting mistakes in the book. I didn’t know any better, because I’d never freelanced before. I also didn’t care to know any better — I’d devoured author Dan Pink’s first book, Free Agent Nation, in a week, and soon after, I resolved to become a free agent.
I should’ve shared my enthusiasm with my wife, who in turn, would’ve insisted I map out a budget and a plan for success. Instead, I just dove in, reassuring her I knew exactly what I was doing when the truth was exactly the opposite. If I listened, I could’ve avoided all four of these common freelance budgeting mistakes.
1. Failing to Seek out and Sign Long-Term Deals
Freelancing sounds freewheeling and fun, and it is — but you still need to take it seriously. Even if you generate side income while fully employed, you are, in effect, building a business that’s supposed to generate consistent, growing revenue. The only way you can do so is by finding clients willing to sign deals for a year at a time. When I started building a stable of clients I could count on, month in and month out, my freelancing hobby became a full-fledged business.
2. Not Allocating Enough for Taxes
If you’re like me, nothing feels quite as good as getting a fat payment for a job well done. All those zeroes are alluring, but they’re also deceiving. Only a portion of that money is actually yours — get used to it. In fact, learn to live with half of everything you bring in and set up monthly electronic payment plans with the IRS and your state tax department.
That way, you can regularly pay tax deposits and avoid the temptation to keep money that was never yours to begin with. Also, it’s better than getting certified letters from the IRS. (Yes, that’s happened to me, and trust me when I say you do not want it happening to you.)
3. No Working Capital Set Aside
Every business has working capital for investing in itself. As a freelancer, you’re a business owner, which means you need working capital. You can get it by borrowing if you’d like, but a better strategy is to take a portion of what you don’t set aside for taxes and use it for future investments, like new equipment, an improved office space, trainings, a conference or something else entirely. Not once in my 14 years have I been able to successfully make this work, but that’s because I didn’t start early enough.
Repeat it with me: Learn to live with half of what you make as a freelancer. Your life will be so much easier if you do.
4. Moving Forward With a Lack of Forecasting
Big companies do extensive budget planning and forecasting. You don’t need to, but you should at least forecast what you need and what you want. What you need is the minimum to cover all your taxes and known expenses. What you want is your income goal for the year ahead. I avoided this process for years and suffered regular cash shortages as a result. Now, I use a spreadsheet to set targets and project income. Working this way also makes it easier for me to get motivated about pitching new business, because I can see when the pipeline will run dry.
All of which leads me to one, final piece of advice: Learn the difference between cash flow (i.e., when invoices get paid) and revenue (i.e., when you bill). Failing to make the distinction is one of the most common freelance budgeting mistakes you can make, and it’s one that’s torpedoed me multiple times.
How did I overcome it? Credit, again, goes to my wife. She insisted we track payments in our regular bills book, including amount and date. That way, we’d get a better sense of when we’d have the money to pay certain bills. We could also track how much we paid just to keep the lights on.
Today, I’m still not 100 percent on target, earning what I need exactly when we need it, but I’m doing better than I have in years. For an old freelancer like me, that’s as good as it gets sometimes.