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3 Financial Mistakes to Avoid as a Freelancer

By Maurie Backman - Jul 13, 2017 at 10:02PM

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If you're self-employed, knowing what not to do can help protect your finances.

There's a reason so many workers are drawn to the freelance lifestyle. Not only do freelancers often get to work from home and set their own hours, but they get a number of tax benefits as well. In fact, as of last year, freelancers made up 35% of the workforce on a whole.

On the other hand, the one thing many freelancers don't get to enjoy is the steady paycheck salaried workers collect. If you're a current freelancer or are planning to venture off on your own in the near future, it's important to have a solid plan for managing your immediate and long-term finances. With that in mind, here are a few key mistakes you can't afford to make.

A freelancer working on his laptop outdoors.


1. Not having an emergency fund

All adults need an emergency fund, regardless of income level or whether they're salaried versus self-employed. But if you're a freelancer, having emergency savings becomes all the more crucial. That's because you never know when a client might drop your services or stiff you on a major payment you've been counting on for weeks. Furthermore, because freelancers tend to experience income fluctuations even when things are going smoothly, it's important to have extra cash on hand in case you encounter a couple of slow months.

Now most people are advised to sock away three to six months' worth of living expenses in an emergency savings account, but if you're a freelancer, you'd be wise to aim even higher. How much should you save? That'll depend on your circumstances. If you're not financially responsible for anyone other than yourself, you might set aside nine months of living costs to ensure that you're covered. If you have several dependents, on the other hand, you should consider saving a year's worth of living expenses or possibly more.

Additionally, if you're going from salaried employee to freelancer and haven't yet established a strong client base, it's especially critical that you amass some cash reserves before making the move. Building a business takes time, and if you don't have a safety net, you could run into trouble early on.

2. Not saving for retirement

Permanent employees whose companies sponsor 401(k) plans have an easy time saving for retirement. But you can save for retirement just as easily as a freelancer, even if it means taking matters into your own hands. In fact, you can still participate in a 401(k), albeit a solo one. Solo 401(k)s work just like regular 401(k)s, but come with much higher annual contribution limits. Currently, you can put in up to 25% of your self-employment income for a maximum of $54,000 per year if you're under 50 or $60,000 per year if you're 50 or older.

Then there's the IRA. Not only can you open a traditional or Roth IRA (depending on your income), but self-employed individuals have additional options for socking money away for the future. One such option is the SIMPLE IRA, which lets you contribute up to $12,500 a year if you're under 50 or $15,500 if you're 50 or older. There's also the SEP IRA, which allows you to contribute up to 25% of your net income for a maximum of $54,000. Both the SIMPLE and SEP IRA come with much higher annual contribution limits than traditional and Roth IRAs, which currently max out at $5,500 for workers under 50 and $6,500 for those 50 and over.

No matter which type of retirement account you choose, be sure to focus on saving for the future while you still have enough working years left to take advantage of compounding. The longer you wait, the less growth your savings will enjoy -- and the more you'll put your retirement at risk.

3. Not following up on missing payments

Not only are most freelancers forced to grapple with the absence of a steady paycheck, but in some cases, they also have to deal with clients who are late with payments or, worse yet, fail to pay at all. If you're dealing with a host of missing payments, you may be inclined to throw your hands up in defeat after some time or write those invoices off as unpaid debts. But before you do, it pays to make an extra effort to collect what's yours.

For starters, send a certified letter to the clients in question demanding the payments you're due. You may want to allude to the fact that if you aren't paid, you'll be forced to get an attorney involved. Furthermore, include a firm deadline for getting paid in each demand letter so that your clients understand your expectations.

If that doesn't work, and you're dealing with a sizable amount of compensation for services rendered, it might pay to hire a lawyer to pursue that money on your behalf. But no matter what, don't give up on your missing cash without a fight.

Though the freelance life has its ups and downs, if you're smart about how you manage and save your money, you can enjoy the perks of self-employment with far less stress. Avoiding a few critical mistakes can help ensure a degree of financial security, both now and in the future.

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