For freelancers, bad financial habits can be the difference between success and failure. From client invoicing procedures and bookkeeping to savings, long-term planning, and overspending, a freelancer’s financial habits heavily influence the course of a self-employed career.
Repeating the same mistakes hampers growth while learning and adapting can result in quick improvements in both income and lifestyle. Unfortunately, bad financial habits are all too common among freelance professionals and it is why more small businesses fail than succeed.
So what are some of these poor habits and what changes can be made to improve your cash flow and wealth?
- Failing to keep accurate records
Many freelancers fail to keep accurate financial records. When it comes to paying taxes each year, there’s a mad scramble to calculate income and expenditure. It’s illegal to under-declare your income and so without proper records, it’s very easy to accidentally fall foul of the taxman.
Maintaining accurate financial records not only ensures you stay on the right side of the law but it also helps you to improve your freelancing business. When you clearly see what you’re earning and spending, you can make intelligent adjustments and fix any cash flow problems, thereby making better business decisions.
Learn simple bookkeeping strategies for your business and make a habit of setting a short period of time every week to monitor and update your records.
- Neglecting to save in the long-term
When you work for yourself, the onus is completely on you to arrange long-term savings for things like pensions and healthcare. For example, there are no employer contributions. To enjoy a comfortable and secure lifestyle when in your retirement years, it’s imperative to set aside a portion of your freelancing income throughout your career.
You can schedule automatic transfers into a pension account at set times each month, quarter, or year. By doing so, you ensure you have a nest egg when you reach retirement age. This will allow you to maintain your current lifestyle – or an even better one – after you’ve worked with your final client. Savings accounts are something to explore if you haven’t already.
- Forgetting to plan ahead
Emergencies happen. When something goes terribly wrong and you need to stop work for a few weeks or months, it’s a relief to have a financial cushion in place. Many freelancers don’t plan ahead for these emergency situations and simply hope for the best. This is very dangerous.
Unlike employees in a company, you can’t take paid sick leave. When you don’t work, you don’t earn, and expenses like mortgages still need to be paid. This can potentially be catastrophic for your family’s livelihood.
As soon as possible, grow an emergency fund. It’s advisable to add enough money to cover six to nine months of no work. This allows you time to make alternative arrangements and put plans into action without needing to change your living circumstances or fall into debt.
- Spending too much on non-essentials
Buying things on a whim is very tempting when you’ve had a good income month. You feel on top of the world and you want to celebrate or invest in your business. Unfortunately, when you feel high on success, it’s all too easy to forget that your freelancing income is susceptible to peaks and troughs. Next month might not be so lucrative.
It’s important to spend money wisely, both in general, and especially when it comes to work expenses. It’s great to invest in learning courses, equipment, web design, delegation help, and a whole load of other improvements, but it’s important to make these decisions only after careful consideration.
Sometimes a rebrand can wait another year or a flashy education course might not be as good as it seems. Research carefully before spending money.
- Charging too little
Whether it’s “impostor syndrome” or a lack of knowledge about good rates, charging your clients too little can put a big strain on your finances. It’s surprising the number of freelancers who fight to undercut one another when instead they could be earning more and still working fewer hours.
If you’ve been freelancing for more than a few months and you’ve received positive feedback, then there’s no reason not to raise your rates. It takes a little courage but the results are worth it. (See also: How Female Freelancers Can Close the Gender Income Gap)
You’ll have more money to save, invest, and use as an emergency fund, as well as spare cash to take a well-earned vacation a few times a year (or even to travel the world while working!).
- Maintaining a poor financial understanding
As a freelancer, you’re a business owner. To grow your freelancing career and meet with lucrative results, you need to learn the core principles of running a business. Some of these principles include finance. In fact, good financial habits in business are just as important as knowing how to market your business and sell your services.
Too many freelancers fail to understand the basics of finance related to running a successful freelancing business. And it’s this poor financial understanding that can lead to problems with cash flow, savings, invoicing procedures, payment options, rates, insurance, and paying taxes, among other things.
Make it an important new habit to learn as much as you can about self-employment finance options.
- Nurturing a poor financial mindset
Like with everything in business, mindset is key. Negative thinking or a lack of seriousness will always impact badly on any success you need. Conversely, a positive business mindset and a professional attitude can help even an averagely skilled freelancer make a lot of money.
It’s the same with your financial mindset. If you don’t believe you have the ability or right to earn a certain income level, then you won’t. If you’re lax with bookkeeping, planning, saving, and investing in the right financial software, then your business will never reach the heights you dream about.
Work on changing your mindset to one of positivity. Demand better rates and drop bad clients. Actively work on improving your cash flow, money education, time management, productivity, self-confidence, and even the niche markets you target. Set your sights on earning as much money as you can and make a new habit of believing in yourself.
Developing good financial habits as a freelancer
When you recognize bad financial habits, you have the ability to change them for the better. Consider whether you’re making any of the above mistakes and look for ways to make improvements. It might simply be a matter of opening a new savings account or modifying the way you ask for payments from clients (as well as the amount).
With a few simple changes and the cultivation of good financial habits, your freelancing business can be free to truly blossom.