5 Lessons Learned About My Finances as a Freelancer

I’d be willing to bet that you didn’t become a freelance writer so you could be an expert at analyzing profit and loss statements or balance sheets.

No, you wanted to write awesome articles. Fabulous books. And sizzling sales copy for big corporate clients. The fact that you’ve never created a profit and loss statement for your writing business just isn’t as important as impressing the editors you’re about to meet at that writers’ conference.

And you, the photographer over there. Didn’t you spend all that money on equipment so you could shoot photos? Or was your goal in life to deal with those government authorities who keep wondering why you haven’t paid taxes? And those people just won’t leave you alone.

Last but not least, there’s you, the designer who wants no part of this discussion. Could this have something to do with that chat you just had with your father-in-law? The one where he asked you how your business was doing? And how much money it was making? And you had no idea.

By the time you got home to your wife, it was too late. She’d already heard from her parents about her choice in husbands. Let’s just say that her parents aren’t too impressed with you right now.

As you can see from the above scenarios, keeping your distance from accounting and finance can hold you back in business. And in life.

While creative freelancers aren’t generally known as numbers people, it’s important that we know enough about accounting and finance to stay in business, keep the taxing authorities happy, and earn the respect of our relatives. Especially our in-laws. They’ll really be impressed with our financial literacy.

To help you get up to speed on the numbers that your business is generating, I wrote Finance for Freelancers. It’s the latest book from Envato’s Rockable Press, which is releasing shortly. My goal is to make finance and accounting concepts fun and friendly.

To give you a taste of what’s in Finance for Freelancers, I’d like to share the following 5 lessons I’ve learned about my finances as a freelancer.

Lesson 1: None of us have been financially literate since birth

Why so much financial avoidance among freelancers? One of the main reasons is because finance involves math. And math may not have been your best subject in school.

Part of this problem has to do with the way math has traditionally been taught. While you were paying attention, you probably heard a lot of talk about “solving for x.”

Even then, you probably had the sneaking suspicion that adult life would not be overflowing with opportunities to solve for x. And you were right. The math you were being taught had very little to do with the realities of the workaday world you’d eventually join. No wonder you tuned out during math class.

However, your bored nine-year-old self probably missed a lot of important math concepts that are useful in the business of freelancing. But here’s the good news: Math is a skill that gets better with practice. As you gain experience in dealing with the financial side of your freelancing business, you’ll get plenty of mathematical practice.

Lesson 2: Learn to keep your own business books

A lot of small business advice notes the importance of hiring a bookkeeper because, as the business owner, you’ll be too busy to deal with that data entry stuff. Well, I’m here to tell you won’t know how your freelancing business is doing unless you get deeply involved with your numbers.

So, how do you get to bookkeeping nirvana? With training. I strongly recommend that you hire a bookkeeper or accountant to train you in the use of accounting software.

What made me into a fire-breathing advocate for using accounting software happened on the third day. I started data mining! Pulling reports! Learning about how well my business was really doing!

If you’re like a lot of creative freelancers, you’ll find your first days and weeks of using accounting software to be scary (what if I charge this expense to the wrong category?), tedious (all this data entry is boring!), and time-consuming. (Be patient with yourself. You’re learning a new skill.)

Believe it or not, one of the most frightening things I saw my accountant do was reconciling my business bank account. That’s accounting-speak for “balancing the checkbook.”

Why did this task appear so heart-stopping? Because she did it so quickly! I thought she was doing something wrong. (She wasn’t.) These days, I can reconcile the business bank account in the same minute or two that it took my accountant during my training days.

Okay, that was the fearsome side of training. The tedious side came from the eBook business I had while I was learning to use accounting software. I quickly grew to despise creating invoices for e-v-e-r-y single sale I’d made. (Darn that successful eBook business!)

What’s worse, my mean old accountant insisted that I see this boring job through to its conclusion. Which took two very dull days.

The fact that I wasn’t just creating invoices – I was logging payments in full with each one – didn’t resonate. What made me into a fire-breathing advocate for using accounting software happened on the third day. I started data mining! Pulling reports! Learning about how well my business was really doing! I called the accountant! I was excited! So was she!

I wish I could say that I became an accounting software ninja after just three days. Not true. Actually, basic mastery of my software took seven months. And that was seven years ago. I’m still learning things now.

Lesson 3: Understand the difference between saving and investing

Simply put, saved money is money you don’t want to lose. Investment money is your risky money. Meaning that you could lose some of it. Or all of it. You could also make a very nice return on your money. You just have to be willing to tolerate risk.

If you’re like a lot of people in business, you might be more concerned with the return OF your money than the return ON your money. So, investing might not hold much appeal. After all, you’ve taken enough risk as a freelancer in a very uncertain business world.

Not to worry – I’m not going to lecture you about all the things you’re missing by not investing in the stock market. Matter of fact, I had a very dear friend who felt the same way. My friend came of age during the Great Depression, and he wouldn’t touch the American stock market with a barge pole.

By living frugally – or simply, as he called it – he was able to save enormous amounts of money, which he put into U.S. Treasury securities. My friend died in January 2008 and left a substantial estate. A lot of local organizations have benefited from his bequests – and from the gifts he made during his 93 years of life. In short, it’s okay to be a saver. It worked out beautifully for my friend – and for our community.

Lesson 4: Plan and save for good times and bad times

People who fund their growth via operations revenue are sometimes referred to as bootstrappers. You might find yourself in this club after your business plan fell flat with lenders and investors. Or you may just prefer to grow your little business yourself.

If you’re going the bootstrapping route, you’ll be free of the expectations that come with loans or other outside money.

You’ll be growing your way into affording things like that cool new tablet that would be so lovely for showing your portfolio to potential clients. And, until you can afford them, you’ll just do without.

If you’re going the bootstrapping route, you’ll be free of the expectations that come with loans or other outside money. The downside is that you may not have the money you need when a big, career-making project comes along. Yes, you could ask the client for an up-front deposit, but it might not be enough. And final payment might be weeks, if not months down the road.

If you find yourself in this situation, you might be in a better position to ask for a loan from a bank or an investment from that rich Uncle Steve. After all, you’ve proven that you’re a winner who can actually land that career-maker of a project.

Ahhh, it’s nice to dream.

Back in the real world, where we grow our businesses while plodding along, we’ll eventually need to replace computers, cameras, and other capital equipment that wear out; save for retirement; pay taxes; and cover day-to-day expenses. For these things, we’ll need to have a cash stash – and this means more than just having enough money in the checking account.

In The Money Book for Freelancers, Part-Timers, and the Self-Employed, Joseph D’Agnese and Denise Kiernan recommend saving 30% of your gross income. Yes, I know. That’s a lot to save.

But since you don’t have an employer withholding a portion of each paycheck for your taxes and retirement, you have to do it. So, stash 10% of your incoming cash in a tax savings account. Drop another 10% into your retirement savings.

Savings Bucket #3 is for your emergency fund. Give it 10% as well. Many financial gurus advise that you have six months of income saved up. D’Agnese and Kiernan, who are freelancers just like us, advocate having a whole year saved up. Speaking as someone who has an emergency fund – and has been forced to tap it more than once – I think this is very sound advice.

As mentioned above, 30% is a lot to save from your gross. So, make that your goal. Start smaller, say, at 10% of the gross and allocate something like 3% to taxes, 3% to retirement, and 4% to the emergency fund. As your income increases, raise your savings rate.

Then there are those special projects. Things like your upcoming wedding, a six-month sabbatical from your freelancing business, a new computer, or a house. If you’re going to fund those out of the money that’s coming in, they’ll need special funds too. So, you might aim for that 30% of your gross goal and divide the savings among four savings buckets. Or five.

If you suspect that having all these savings buckets is great motivation for increasing your income, you’re right! Nothing like an impending wedding to motivate you and your fiance to raise those rates while seeking more lucrative assignments.

Lesson 5: Financial literacy will protect you

One of the biggest benefits of being a financially literate freelancer is that it can keep you out of trouble. You’ll become adept at avoiding bad business deals before you sign on the bottom line. Here’s an example that many photographers will recognize:

You’ll be contacted by some organization that really likes your work. Might be a non-profit. Or it could be a for-profit. Doesn’t really matter because the pitch is the same.

The organization will tell you that it really wants to work with you. But, alas, they have no budget for photographers.

To sweeten the deal, they’ll offer you a photo credit – think of the exposure that will give you! Well, you know photo credits. They say “Photography by Your Name” in six-point type that can only by read with a magnifying glass. Not the sort of endorsement that will bring prospects flocking to your door.

As a financially literate freelancer, you immediately recognize a “work for exposure” offer for what it is. It’s coming from someone who can probably afford to pay you, but you’re being asked to work for free. Even though you’ve whittled your expenses down to what’s truly essential, you still have bills to pay.

Now, you could be like British photographer Tony Sleep, who slaps these people silly in his essay, “We have no budget for photos.” Here’s Tony, getting underway:

‘No budget’” is a euphemism for ‘we think photographers are mugs’. This offensive interpretation can easily be verified by trying the phrase at your local restaurant, eg ‘I have no budget for dinner but I’d like to eat’. Adding a promise to tell all your friends where you ate will not deflect your head from the kerb as the manager throws you out.

The slapping continues for 11 more paragraphs, and I think you’ll find it quite enjoyable. Sleep says he replies to the numerous “work for exposure” requests by linking to his essay.

If you’re not in the mood to slap people around, tempting though it may be, here’s a politer response:

Sorry, I’m going to have to pass on this job. I simply can’t afford to work for free. Got too many bills to pay.

Once you pop that into an e-mail, it’s doubtful that you’ll ever hear from the freebie freelancer-seekers again.

Grab the new Rockable eBook Finance for Freelancers for more financial advice for freelancers.