By the end of 2016, 4.695 million Brits were self-employed, working on a freelance, contracted or flexi basis. It’s estimated that this will grow to as many as one in two members of the workforce freelancing in some capacity by 2020 and it’s growing year on year. What’s more, it’s a scenario replicated throughout much of the western world: in America 27% of workers are self-employed; in France 30%; Spain 31%, and Sweden 28%. While breaking the bonds of full-time employment can bring numerous perks, going solo comes with many of its own problems. And they can be expensive. From ill-advised borrowing, to a lack of budgeting or a reliance on a single revenue stream, the freelance lifestyle has countless potential pitfalls which could see your burgeoning income dwindle away. How, then, can you protect yourself against falling into the traps that have swallowed so many before you?
The Freelance Problem
The greatest difficulty most freelancers face is inexperience. You might know your chosen profession inside out, back to front and sideways, but there's more to it than simply doing what you know how to do. In becoming a freelancer, you become a business. Sure, you may not have personnel and payroll to worry about – to begin with – but in every other sense, you are You Incorporated, and you need to know how to manage everything that comes with that, from invoicing and taking payments to filing your tax return… Which can be more easily said than done.
Many of the issues you face and mistakes you make can be overcome and chalked up as part of the learning process. Where you need to be careful, however, is in the areas where your mistakes could cost you money.
Money is always a priority for the freelance professional. But, it’s in the early days, when you’re just starting out, with a minimal client base (if you’re lucky), a reputation to build, a limited budget, and all of the overheads and outgoings that you complacently covered when you had a regular wage coming in to deal with, just a few small mistakes can be all it takes to turn your dreams to tatters.
So, what pitfalls should you be aware of if you want to keep your funds in check and your freelancing dreams afloat?
Most Common and Costly Freelancing Faux Pas and How to Avoid Them
Failure to Budget. The reason why budgeting for the freelancer is unlike budgeting for any other professional is the same reason why it’s so vitally important to do so: unpredictability. The very nature of your work – the flexibility that may have attracted you in the first place – means that your workload has the potential to not just change exponentially from week to week, but day to day. On Monday you might work until midnight, with half a dozen clients urgently knocking at your door. The same might happen on Tuesday, on every day for the next week. But then one of them will go on holiday without letting you know, so the slot that you’ve saved for them remains empty. Another client may fall sick. A third will decide to reduce their budget and cut you out of their working equation, while the fourth, fifth and sixth will complete their respective projects, and what follows is a month of drought. If managed carefully, it’s a perfectly tenable and rewarding lifestyle. On your down days, you get to play with the kids, travel, see your friends, work on your passion project (or, if you’re sensible, hunt for new clients), but fail to budget and you could find yourself on your financial knees. Quickly.
When you’re living with a variable income your budget can become your saviour, so before you start out, calculate your absolute baseline of needs – food, rent/mortgage, utilities, clothing – add an extra 10% for treats, then try to live within that figure. By saving any additional earnings any drought that comes – and it will come, at some point – can be weathered.
Business Vs Personal Banking. Written down, it seems like such an insignificant thing, but separating business and personal bank accounts can make life so much easier, not least in facilitating budgeting. In separating your accounts, you can pay yourself a wage – and keep track of it easily. If you have a need for investment – for marketing, new equipment, or hiring a freelancer – you can see, at a glance, exactly what you have available, without risk of overspend, or leaching from personal buffers. And as if that weren’t enough, when it comes to bookkeeping and filing your tax return, everything you need will be in one place, saving time, stress, and consequently, money.
A Single Revenue Stream. Landing your first ‘big’ client, the one who offers you a contract large enough to cover all of your baseline budget, is one of the most exciting moments in a freelancer’s life. But it is also one of the most dangerous. You breathe a gushing sigh of relief. You begin to relax. And then you become complacent. After six months or a year of having that one, single, reliable source of income, it’s easy to forego the effort of making new contacts. So, when that client goes bust, or your contact at that company moves on, or budgets are cut, and your expected weekly email briefing turns out to be one of severance, you find yourself floored.
Working with a wide number of clients can help to protect against this, but it’s also wise to have a backup plan, and investment could help. FastInvest provides a fee-free investment service, with a buy-back guarantee. With interest rates notoriously low at present, traditional savings options offer a depressingly low return. With a FastInvest investor account, you could see as much as a 13% return in less than a year.
Clients. The unfortunate thing about freelancing is that you just can’t do it without clients! Whether you’re a hairdresser, accountant or programmer, your business is entirely at the mercy of your clients. Now, most of them will be lovely. They’ll be clear in their expectations and they’ll pay their invoices when they’re due, but even the lovely ones have lapses, and funds will fail to materialise. If you’re not prepared for this – and again, this feeds back into the budgeting line – you can become unstuck very quickly. It’s only a very few unethical people who won’t cough up in the end, but if you’re eking out your last tin of beans, knowing that the money will come one day is of very little comfort.
Health. When you are your business the state of your health is paramount. Of course, we all want to live long and prosper, but when you’re entitled to paid sick days, the odd cold isn’t that unwelcome, and if something serious develops, then you don’t need to worry whether the bills are going to get paid or if the kids will have new shoes. When you’re a freelancer, you’re on your own. Of course, there are Government benefits that you can apply for, but they don’t go very far. Not paying for self-employment health insurance can be a seriously false economy.
Passive Income. If you’re good at what you do there will come a time when your earnings will exceed your baseline budget. At that point, you can either spend with wild abandon, or you can be sensible and save for future droughts. But of course, as we’ve touched on before; there is saving and there is investing. At present, you’ll be hard-pushed to find an ISA that delivers as much as 1.5% ROI. FastInvest in the right place and you could find that your money makes money while you sit back and watch.
Tax. In this world nothing can be said to be certain, except death and taxes, so said Benjamin Franklin, but he was wrong. You can also be certain that if you forget to save enough funds to pay your taxes, you will be fined. And this fine can be as much as £900 in the UK… Which is more than many new freelancers earn in a month.
Borrowing to Invest. As a freelancer, it's easy to think of yourself as footloose and fancy-free, but the reality of it is that in some respects you're as tied down as any other business. You will need to invest at some point – in office equipment, software, materials, marketing, other niche experts to get your business going – and you will need to finance this. High-interest credit cards and short-term loans can become a nightmare, spiralling costs out of all control. Rather than looking for a short-term fix, think in the long-term and find a low-cost loan which you know you can afford to repay – then work those repayments into your baseline budget!
Short-term Thinking. When you’re starting out, self-employment becomes all-encompassing and every single penny counts, so it’s hard to keep a weather eye on the future. Failing to invest in that future, however, could see you working until you reach your grave. Comfortable retirement used to be more or less guaranteed, but with state pensions likely to fall and retirement ages increasing, if you want the luxury to enjoy your older age, you need to start preparing now, whether you’re 25 or 55. FastInvest’s interest rates are some of the best around, offering an ROI of 9-13%. Even if you’re working with relatively small sums, the benefits of investing in such a way can quickly add up.
Freelancing comes with endless potential pitfalls, and after most of them you’ll pick yourself up, dust off your knees and carry on. It’s money that can make or break you. Invest in your business and your future, and you’ll stand a far great chance of being among the ones who make it.