Common Freelance Money Mistakes (And How to Avoid Them)
Making mistakes is how we learn.
Happy Wednesday, fellow freelancers!
I hope everyone made it through Tax Day with minimal stress. After a brief pause, we’re returning to our usual schedule.
It’s good to be back!
This week, I thought it would be helpful to talk about some common financial missteps freelancers make and, more importantly, how you can avoid them.
Unfortunately, there’s no official guidebook for managing finances as a freelancer. (Wouldn’t that be nice?) We’re left to figure it out as we go, learning through trial and error along the way.
Sometimes that means learning hard lessons, some more costly than others.
Money missteps happen. Let’s talk about some of the more common freelance money mistakes so we can be more aware of potential pitfalls and learn what to do to get ahead of them.
As a reminder, I’m not a financial advisor or tax advisor. This is not financial advice. If you have questions, please reach out to a professional for guidance.
Skipping Quarterly Taxes
One money misstep many freelancers make is skipping quarterly estimated tax payments. Some freelancers skip them altogether, while others make late payments or underpay.
When you’re self-employed, you’re responsible for paying income tax and self-employment tax through quarterly estimated tax payments.
If you don’t keep up with these payments, you’ll have an unpaid tax bill to deal with come April, plus underpayment penalties and interest fees. But you can avoid that by staying on top of your payments.
The best way to prepare financially is to set aside a portion of your income regularly. This way you’ll have plenty of money saved by the time the next estimated tax payment date rolls around.
For those who struggle with remembering to stash away money throughout the year, I recommend leaning into automation. I explain how automated bank transfers help me manage my estimated tax payments.
Basing Your Budget on Your Average Earnings
Fluctuating income is the norm for most freelancers. When your earnings vary from one month to the next, putting together a realistic budget can be tricky.
Many freelancers use their average monthly earnings as a budgeting baseline. This approach isn’t wrong. But it may make things harder during slower months.
When your income dips below your average, your budget may not stretch far enough to cover your actual expenses.
Try this instead: Rather than calculating your average monthly income, consider using your lowest earning month for the last 6 to 12 months as your baseline.
This will enable you to be financially prepared for leaner months. You’ll be in a better position to weather slower work seasons without the added financial stress of coming up short.
During busier months when you’re earning more, you can put more money toward financial goals, like saving, investing, or paying down debt.
It’s good practice to review your budget annually to determine whether any adjustments need to be made.
You want your budget to reflect your current financial situation.
Neglecting Retirement Planning
As a freelancer, you’re in charge of planning and preparing for your future non-working years. There’s no fancy employer-sponsored benefits package with an employer match on retirement account contributions or auto-enrollment in a retirement plan.
When you’re busy juggling multiple client projects, it’s too easy for retirement planning to fall to the bottom of your to-do list.
But if you only focus your attention on your day-to-day business needs, you may end up neglecting to plan for your future. And the longer you put it off, the less time your money has to grow through compound interest.
Taking the time to research and contribute to a retirement plan is one of the smartest financial moves you can make as a freelancer.
A Roth IRA is one option to explore. It’s a tax-advantaged retirement account funded with after-tax dollars. You pay taxes on your contributions now, but enjoy tax-free growth and tax-free withdrawals in retirement.
Other retirement account options for freelancers include SEP IRAs and Solo 401ks. Contributions made to either account are tax-deductible, which can help reduce your taxable income, and any growth in the account is tax-deferred until retirement.
If you’ve been putting off investing in your future, it’s never too late to start.
Having no financial safety net
Your freelance income can change significantly with little notice. Clients can pause projects, shift strategy, or reduce or cut budgets.
Life also has a habit of throwing curveballs. An unexpected expense can pop up when you least expect it.
For example, an unexpected repair bill.
A bad windstorm could leave you with a damaged roof that requires repairs. (Recent personal experience here. 🫠)
Unfortunately, many freelancers lack emergency savings. Without a financial cushion, one slow month or a costly, unexpected expense can cause financial stress and put you in a difficult situation.
If you have minimal savings, or no savings, you’re not alone.
But don’t put off building an emergency fund. It’s never too late to start. And it’s okay to start with a small savings goal.
Setting aside a small amount of money each month can add up over time.
Don’t be hard on yourself
Nobody gets it perfectly right all the time, and that’s okay. Making financial mistakes doesn't make you bad with money — it makes you human.
Every misstep is an opportunity to learn and adjust. The most important thing to remember is it’s never too late to build new financial habits.
The planning the budget around the lowest month is a great tip!