Being a freelancer offers incredible flexibility and the opportunity to do what you’re passionate about. However, it’s not all easy—it also means taking charge of your business finances in a way that may be brand new for you. Many freelancers fall into financial pitfalls, leading to unnecessary strain on their mental and financial well-being.

As a freelancer, managing your money well is crucial for your success. By avoiding common financial mistakes, you can ensure a stable income, better plan for the future, and enjoy all the benefits of a freelancing lifestyle even more.

Let’s take a deeper look at the common financial mistakes made by freelancers, plus some practical tips on how to avoid them. 

Top 8 Financial Mistakes Freelancers Make

1. Failing to Budget
2. Mixing Personal and Business Funds
3. Not Tracking Expenses
4. Not Using Freelance Contracts
5. Not Prioritizing Your Savings
6. Accepting Low-Ball Offers
7. Not Having a Tax Plan
8. Undercharging

1. Failing to Budget

Failing to budget is one of the most common financial mistakes period, but it will catch up to you particularly quickly when running a business. Without a budget in place, you won’t have a clear picture of how much money is flowing in and out over a given period. This makes it difficult to save for taxes, pay bills on time, and set aside money for emergencies or retirement. It can also lead to the dreaded cycle of financial stress—living paycheck to paycheck, making it difficult (if not impossible) to invest in your business or pursue any kind of professional development.

Budgeting is pretty simple. The first step is tracking your income and expenses to understand your financial flow. As a freelancer, you may not have regular income every month. This makes it all the more important to make regular budgeting part of your routine. Averaging your monthly earnings over the course of a year will help you plan for leaner months.

Within your freelance budget, set aside buckets for taxes—often a quarterly estimated amount—building an emergency fund, saving for retirement, and paying bills. Keep your personal and business expenses separate (more on that later). Regularly reviewing and adjusting the budget is important to make sure it reflects any changes in your income, expenses, or financial goals. Using budgeting apps can help you keep track of things more efficiently.

2. Mixing Personal and Business Funds

Mixing personal and business funds is a common financial mistake made by freelancers that can lead to complications when tracking expenses, filing taxes, and managing cash flow. When business and personal finances mix, it becomes challenging to distinguish between business and personal expenses. Not only does this make it difficult to accurately define the profitability of your business, but it can also raise a major red flag regarding legal and tax compliance. If you’re ever sued or audited, comingled expenses could lead to hefty penalties and fees, not to mention place your personal assets at risk.

When you start freelancing, you should open a dedicated bank account for all business transactions. You should also use separate credit cards for business expenses and maintain clear records for your business finances. If this sounds overwhelming, you can use business accounting software like QuickBooks or FreshBooks to streamline financial tracking.

3. Not Tracking Expenses

Not tracking expenses is another startup mistake that can lead to overspending and muddy recordkeeping. If you aren’t keeping tabs on where your money is going, you may find yourself in a situation where you have less income than expected and are unable to cover necessary costs. 

It’s also important to note that failing to track expenses can make it difficult to accurately file taxes and reduce your tax liability. By not keeping track of expenses, you might miss out on valuable business deductions and end up paying more in taxes than necessary. 

4. Not Using Freelance Contracts

When freelancing, you might assume that a verbal conversation or informal email is enough to protect your business interests. In reality, these non-binding “agreements” can leave you vulnerable to non-payment, scope creep, or disputes with clients. Without a written contract, you have little to no legal recourse if a client decides not to pay you, or if there is a disagreement about the scope or terms of the project. This can lead to monetary loss, a lot of wasted time, and unnecessary stress.

The simplest way to draft a freelance contract is by starting with a basic template that addresses the essential elements of the agreement. This includes a clear description of the services to be provided, payment terms (such as rates, invoicing schedule, and payment methods), project timelines, and terms for termination or cancellation of the contract. The contract should also outline the expectations for both parties regarding confidentiality, ownership of work (often referred to as intellectual property rights), and how to handle revisions or disputes.

A simple Google search will point you in the direction of industry-specific templates that you can customize to suit your needs. After you’ve modified it, you may wish to have the contract reviewed by a legal professional, especially for more complex projects or if significant amounts of money are on the line.

5. Not Prioritizing Your Savings

When you’re self-employed, you might feel the urge to invest everything back into the business. But not prioritizing savings can lead to uncertainty and financial issues down the road. In any line of work, you should determine a percentage of income to save—if you ask a financial advisor, many will recommend at least 20%—and factor that bucket into your budget. It’s also beneficial to routinely check in, identifying areas where costs can be cut and savings can be increased.

A healthy savings is key to long-term financial stability, and an emergency fund will prevent you from taking on debt should you need to cover a sudden loss of income, a large medical expense, a major home repair, or even the cost of necessary business equipment. Ideally, this fund should be able to cover at least three to six months’ worth of living expenses. 

6. Accepting Low-Ball Offers

Accepting low-ball offers can be detrimental to your freelancing career because it devalues your worth and sets a precedent for future clients. It can also lead to burnout as you end up working long hours for little pay.

To avoid falling into this trap, research industry standards and consider the unique value you bring to the table. How do your skills and experience factor into that number? Pricing your services too low may attract clients only looking for cheap labor, while pricing too high could be a deterrent. Finding the right balance will help you attract clients who appreciate your expertise and are willing to pay for expert work.

Stand firm on your worth. While it may be tempting to accept any offer that comes your way—especially as a new business—you should be prepared to turn down work from clients who will not compensate you fairly for your expertise.

7. Not Having a Tax Plan

Not having a plan for taxes is a dire financial mistake for freelancers, opening you up to the risk of fees, penalties, missed deductions, and legal action from the IRS. It’s critical that you set aside funds for taxes from each payment you receive. Many tax professionals recommend setting aside at least 30% of your income in a dedicated tax savings account if you’re early on in your business. After that, you can use your previous years’ incomes to start estimating your tax burden moving forward.

Apart from setting aside money, keeping track of income and expenses is essential for accurately reporting earnings and claiming deductions. Understanding tax deductions that may be available to you—like home office expenses, certain business-related travel, and health insurance premiums—can help minimize your tax liability and maximize savings.

Consulting with a tax professional is highly advisable to make sure you’re fully compliant with tax laws and to strategize for making the most of available deductions and credits. A tax professional can give you valuable guidance on tax planning, help with your tax filing, and offer advice on how to keep accurate records. While it costs money to hire a tax professional, they often provide priceless peace of mind in knowing that your taxes are being managed properly.

8. Undercharging

Undercharging is a common hidden cost of freelancing, and it’s a habit that can start a destructive pattern. Potential clients may perceive you as inexperienced or your work as low quality due to such cheap rates. This can damage your self-esteem and lead you to doubt your own skills, leaving you stuck in a cycle of accepting sub-par projects. Plus, undercharging limits your availability for other essential tasks since you may have to take on more client work to make up for the low pay.

By charging what you’re worth, you attract the right clients who understand what you bring to the table and are willing to invest in it. You should aim to build relationships with high-value clients who recognize and appreciate the quality of your work.

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