6 Financial Bummers of Going Freelance — And How to Make Them Not Suck

Ditch your cube, not your money.

Going freelance is a dream. No more bosses. No more commute. And you can work from anywhere — Costa Rica, Thailand, or maybe just the coffee shop down the street.

But then reality hits.

When you leave your 9-5, you leave a lot of great benefits with it. It’s a tradeoff, of course, but losing your cushy employer-paid health care, well, sucks.

So what financial pitfalls should freelance-hopefuls watch for?

We asked veteran freelancers what they’ve learned from their experiences working outside the cubes. Here’s what they had to say.

Bummer No. 1: Inconsistent cash flow

Just because you quit a 9-5 job doesn’t mean the bills stop. The reality is far from that:, The rent or mortgage still needs to be paid and food still needs to appear on the table. Unfortunately, none of these costs adjust depending on your income. Freelancers need to brace themselves for an inconsistent income until they are well-established in their field with several reliable clients.

How to make it not suck

Ben Taylor, founder of Write Blog Earn

One of the biggest challenges of freelancing is the “feast and famine” nature of freelance earnings. Busy times and lean times are inevitable, and this isn’t really something that changes regardless of how long you’ve been freelancing for.

There’s not really that much you can do to mitigate this, and all companies have busier and quieter times. However, you can learn — over time — to cope with the uncertainty and not be unduly fazed by it. You can also, in some sectors, learn your normal seasonal trends so that they come as less of a shock. Having a rainy day fund for the really slow periods is no bad thing either!

Amanda Kendall, Elevating Profits, LLC

Being a freelancer does not mean that you have to go without a paycheck, or that you cannot get to a point where your paycheck is guaranteed; it just takes some focus and prioritizing.

When starting out, one of the best things you can do for yourself is to ensure you have a financial cushion to get you started. Next, you need to set financial goals. How much do you need to earn personally from your new venture? What are your costs of doing business? What do these two numbers [amount to] in the needed revenue generated each month? By working these numbers this way and setting a goal for your revenues, you can have a target to work towards every day, week, and month to get you to the end result.

Beyond this, start paying yourself right away. I know…seems impossible when you are starting out, but trust me, you will thank yourself for prioritizing your paycheck and doing it from the beginning. It does not have to be much at first. Start with what seems comfortable. What you don’t want to do is wait to pay all the expenses and then take “what is left” because the truth is that what is left in the beginning is usually nothing. But, if you pay yourself something first, [you can] get a little more creative in what [you spend] money on beyond that since [you] now have less to spend.

If you have a $100 to spend in your business, you can do it, no problem. If you have $90 to spend in your business, you can spend it just as easily and not even notice the missing $10. Create a habit around prioritizing yourself, and before you know it, a steady and guaranteed paycheck will be all yours again.

Brett Downes, SEO contractor

I now work with [a client] on a retainer — so it is peace of mind as I know I get a minimum payment each month. I have one other client, who I do outreach for, and am paid per link I get. My main role is equal to my previous job in salary, but less hours — and the paid- per- link gig doubles my salary.

Bummer No. 2: No paid time off

One of the drawbacks to working freelance is the lack of benefits, like paid holidays or vacation time, that are standard at most companies. Being your own boss means that you can take off as much time as you’d like, but at a price — quite literally. You won’t be paid. Freelancers need to understand that initially they might have to work nights, weekends, and maybe even holidays in order to get to a comfortable place financially.

How to make it not suck

Keara O’Connor, owner of Break Free From the 9 to 5

Doing your research beforehand and knowing what it is you’ll need to pay for yourself is essential. It means you can set your rates at a price that is going to let you live well and not work huge hours. I know freelancers who have just divided their normal salary by their monthly hours to work out their rate and obviously then struggled to make ends meet as they hadn’t taken any of the other costs of freelancing into account.

Once you know how much you need to make for basics, bills, living expenses, and a small buffer, you can use this to sense check your freelance plans and make sure you’re charging enough money per hour so you don’t end up working all the hours under the sun and being miserable.

I also use this to help me take time off. When I was travelling in Europe, I’d have a monthly income goal to make and once I hit that I’d just unplug and stop working. Sometimes I’d hit it the first week of the month and have 2-3 weeks off.

Bummer No. 3: No employer-provided health care

Health insurance is costly for self-employed workers since there often isn’t the same discount benefiting companies who purchase for a high-volume of employees. Even worse, workers with a preexisting condition might have an especially difficult time finding health care coverage.

How to make it not suck

Sean Sessel, founder and director of The Oculus Institute

No employer-provided health care…is the single concern that I hear the most from people who are worried about independent income.

The average health insurance policy in America costs $5,000 in out premiums, copays, and other out-of-pocket expenses. However, it’s possible to pay much more than that or to pay for something that doesn’t cover what you need if you get the wrong plan. State health insurance exchanges may provide subsidies, depending on your income (and your official income is evaluated after deductions, so it may technically be lower than you think, which means more subsidy for you).

Consult a good health insurance agent with integrity and understanding of the market to get the right policy. Fortunately, increased earnings should more than offset this expense. Plus, keep note of these expenses because they can be deducted later.

Bummer No. 4: No employer-sponsored retirement fund

Not every employee may be taking advantage of their employer-provided retirement benefits, but at least it’s an option. Freelancers aren’t given the same opportunity to contribute to a preestablished retirement fund, like a 401(k) or IRA. Plus, those sweet company match dollars are nonexistent.

How to make it not suck

Sean Sessel, founder and director of The Oculus Institute

Get a simplified employee pension (SEP) IRA [(a type of retirement fund for self-employed individuals and business owners)]. Even though there may not be matching contributions from employers, you can contribute a lot more (as much as $53K per year).

Bummer No. 5: Tax consequences

As a freelancer, you’re subject to an extra self-employment tax from the government in order to cover FICA, Medicare, and Social Security.  Freelancers don’t have taxes automatically deducted from their client paychecks so they need to be responsible in saving up money to pay taxes at the end of the year. Bummer, right? This means lots of carefully documented records. Trust us, it’ll save you a headache later.

How to make it not suck

Sean Sessel, founder and director of The Oculus Institute

There is so much else that you get to deduct that you can definitely pay lower taxes. The most important of these is the use of your home as an office, which allows you to deduct a portion of your rent and utilities using Form 8829. Also, depending on your income, you may also qualify for the pass-through deduction, which will further reduce your tax bill.

Naresh Vissa, founder and CEO of Krish Media & Marketing

For tax and legal purposes, incorporate your business as soon as you land your first client. Your accountant will get creative and make sure you save money on your taxes. This is one of the biggest benefits of having a small business.

I’ve been through lawsuits. They’re not fun. But at least my incorporated name was liable and not me personally. All you have is your name and your word. All your business has is its name. You can always shut down a business. But it’s not wise to shut down yourself.

Bummer No. 6: All the bummers

With all of the financial downsides to going freelance, it might sound like clinging to a 9-5 is the right choice. But many people have left the office and thrived.

Few would dispute the intangible perks of freelance work — flexible hours, flexible workplace, year-round casual attire. But there can be financial benefits, too. The trick is to use them to offset the drawbacks.

How to make it not suck: Make more money

If you’re entrepreneurially focused and gifted with amazing charisma, then maybe the freelance life is calling your name. A company salary may be consistent and reliable, but it’s also limiting for outperformers. Freelance work is entirely what you make of it, and with a few big name clients agreeing to keep you on retainer, then it might just mean a bigger paycheck.

Brett Downes, SEO contractor

I made more money than my previous job in my first month; however, this isn’t really the norm, as people usually take a few months to build a client base and recurring revenue similar or above their previous salary.

Sean Sessel, founder and director of The Oculus Institute

[Y]ou should be able to earn tens of thousands of dollars more for the same task when you are freelancing if you know how to sell yourself properly. This extra money will be used to offset certain expenses.

Bottom Line

Is freelance life all it’s cracked up to be? For many people, the answer is a resounding yes — but you have to do it right. So before you turn in your notice, prepare for the pitfalls. That way you can sidestep the downsides and enjoy all the benefits that your new life brings.

Contributors

Alexandra FungBrett Downes was born and bred in Wales and is a former lifeguard turned professional link builder. Downes has the most life experience in the office, having travelled around the world for seven years. It was on his travels that he fell in love with digital marketing, cultivating his herculean link building skills alongside playing football and speaking spanish. He is not just a link builder though; Downes is also a Richard Branson mini-me, winning manager of the year out of 42 health clubs.
Amanda Kendall, owner of Elevating Profits, LLC is a mom to two rambunctious but sweet boys, dog mom to three pups, and a numbers nerd who started her career in the tax world. Taking her 16+ years of tax and accounting experience and her 7+ years as an entrepreneur, Kendall works with her clients in the financial aspect of their business. Author, profit coach, and math geek, she takes the financial piece—something that so many people struggle with—and simplifies it, making it easy to understand and follow. She helps her clients to create a financially viable business that pays them their worth and generates profits so the business’s life can be expanded.
Keara O’Connor is the founder of Break Free From the 9 to 5 (www.breakfreefromthe9to5.com) and a freelance project manager. She began her career as a PA and worked up to several project management roles in major UK nonprofits. She quit her corporate job in 2018 to travel Europe in her campervan and became a successful freelancer, working with clients all over the world. After enjoying success as a freelancer, she was inundated with questions from people looking to do the same. She now teaches people how to build a sustainable freelance business through her podcast, courses, and coaching from Break Free From the 9 to 5.
Shyam K. IyerSean Sessel is a voracious learner with a fervent belief in the ability of the individual to better themselves, which led him to start The Oculus Institute. Through the Awaken program (which shows people how to escape burnout jobs and craft careers that truly inspire them) and associated content, Sessel has inspired more than 10,000 people and personally worked with more than 1,000 people. Before Oculus, Sessel was a director of quantitative research and co-portfolio manager at Tectonic Advisors (a registered investment adviser with more than $1 billion in assets), a six-figure freelancer, and an associate at Boston Consulting Group.
Ben Taylor has been a freelancer since 2004 and is the founder of WriteBlogEarn.com, where he provides coaching and mentorship to aspiring writers and bloggers.
Shyam K. IyerNaresh Vissa is the founder and CEO of Krish Media & Marketing—a full service e-commerce, technology, development, online, and digital media and marketing agency and solutions provider. He has worked with CNN Radio, Clear Channel Communications, J.P. Morgan Chase, and others. He is the bestselling author of “Fifty Shades of Marketing: Whip Your Business into Shape & Dominate Your Competition,” and the latest release, “From Nobody to Bestselling Author!: How To Write, Publish & Market Your Book.” He has a master’s degree from Duke University’s Fuqua School of Business and has been featured by USA Today, Yahoo!, Bloomberg, and MSNBC.

How do you navigate the financial pitfalls of freelance life? Tell us your tips on Twitter @OppUniversity.