I can’t say I really blamed her for her reaction. After all, I had a good job with decent pay, they insured me, my wife, and our newborn daughter. Not to mention considering the mortgage, car payments, and other debts that we were on the hook for—and we didn’t exactly have a ton of money stashed away.
But… I wanted to run my own business. I’d been freelancing on the side for a few years, and I always dreamed of being able to make it my full-time gig. I loved working with clients, and I loved the flexibility and freedom that came with being your own boss.
If you’ve been considering making the leap from employment to being your own boss, then this one’s for you. I’m not going to butter you up with motivational quotes about embracing risk or perseverance. Instead, I’m going to assume that you’re in a similar situation to the one I was in back in 2008: You’re ready to make the leap and you don’t exactly have a trust fund at your back.
Here are five mistakes that a lot of employees-turned-freelancers make:
1. Not coming to terms with your needs
We live in a world of fixed expenses. You probably have a mortgage or rent payment, a car loan, student loan payments, and other monthly expenses.
Salaried employment gives you a steady, predictable source of income. You can budget and plan against the direct deposits that hit your checking account on the 15th and 30th of each month.
When you go out on your own, your income will no longer stay consistent. In order for you to offset your expenses, you’re going to need to make more than you’re spending—or at least be able to tap into your savings until you get there. Sounds simple, but the notion of a regular paycheck can be so ingrained that you never consider the alternative.
Before we talk about cash flow, you’re going to want to catalog how much you’re spending each month. Using a tool like Mint.com, go through your expenses for the last few months and group them into needs and wants.
- A “need” is anything that you absolutely require to stay afloat. These are things like mortgage payments, school tuition, groceries, utilities, estimated taxes (we’ll talk about this in a second), and so on.
- A “want” is everything else. Dinners out, designer clothing, the newest iPhone, and everything else that’s not essential to your survival.
Sum up how much you spend each month on needs (this is hopefully pretty constant), along with how much you’ve been spending on your wants. You must be able to cover your needs, but you can sacrifice your wants (only for now, hopefully).
2. Reverse engineering your salary
Most new freelancers underprice themselves: “I make $100k a year, and given a 2,000-hour work year (50 weeks x 40 hours a week), that means I make $50 an hour. So I’ll charge about that.”
The problem is that there’s a lot of overhead that goes into freelancing that is often not taken into account. As a freelancer, you’re going to need to find project leads, persuade and prove to them that you’re best for the job, update your website’s portfolio constantly, propose briefs to prospective clients, create and stay on top of invoices, commute to meetings with both prospective clients and existing clients, and more. This takes a lot of time, so if you expect a similar (or better) standard of living, you’re going to need to charge a lot more than your employed counterparts.
On top of that, employees have more hidden costs. Employers need to pay for recruitment (job ads, HR’s salary, finder’s fees, and recruiters fees). There’s also a cost in onboarding new employees into the company, which can sometimes take a few weeks or even months. Employers are also on the hook for health benefits, vacation time, retirement funds, sick days, and the hours a day their team dedicates to lounging around Facebook and Twitter.
When you’re figuring out what to charge, remember to take this into account. To a client, you’re like a faucet—you’re only billing them when you’re providing them legitimate value. You’re not an employee any longer; you’re a business who provides an in-demand product.
A simple rule of thumb is to double the effective hourly rate that you’re making now. Savvy clients know that you don’t have the overhead that a typical employee has, and you’re much easier to hire and fire. Ultimately, though, you’re going to want to learn how to quantify the value you bring to your clients and charge for that.
3. Treating revenue like profit
As an employee, you’re used to having available to you whatever money is in your checking account. That’s your money, which you can spend on whatever you want to spend it on (though, preferably, you’re earmarking much of it for your “needs”).
When you become a freelancer, you’re going to need to draw a distinction between revenue and profit. Revenue is the money that comes in as a result of the invoices you dispatch; profit is what you keep.
To begin, incorporate yourself (in most US states, it costs ~$100). If you think you’re going to make more than $100,000 this year, ask your accountant to have you file as an S-Corporation, which allows you to avoid Social Security, Medicare, and other self-employment taxes in a way that other tax election statuses don’t offer. Check out this article on the subject by a CPA for more information. Open up a business bank account, and work with your bank to make it so you can transfer money to other accounts easily.
Two big things to remember:
- Your clients aren’t withholding taxes for you. As an employee, your employer legally needs to withhold part of your income for taxes, and when you file your taxes, anything you paid in excess is returned to you as a tax rebate check. This goes away when you run your own business—you’re responsible for withholding money whenever you get paid. To keep it simple, stash 30 percent of whatever you make into an account you won’t withdraw from (except to make tax payments). And don’t think you can outwit Uncle Sam. The tax man will always catch up with you.
- Invoices will be late and you probably will have lean months. A mistake many new freelancers make is to be overly optimistic about getting paid or finding work. Issuing an invoice isn’t the same as getting paid for it, and a great meeting with a prospective client means nothing until a contract is signed. One of the best ways to handle the ebb and flow of self-employment is to do what my friend Jesse Mecham of You Need a Budget advises: “Live off last month’s income.” Come up with at least a month’s worth of expenses and stash it away.
I’m not a lawyer or accountant, this is just a primer to point you in the right direction. Please run any decisions you plan on making about incorporating yourself and paying taxes by a professional.
4. Not knowing who your first clients are
If you’re used to fulltime employment, you’ve probably also grown accustomed to some semblance of predictability. Show up at the office each day, and you’d get paid.
This is the mindset many new freelancers have: “I just need to be at my desk every day, do good work, deliver on my promises, and clients and money will come to be.” As much as I’d like this to be the case, this isn’t true. Hiring a lawyer to write a contract, opening a business bank account, creating a business plan, and designing that perfect website can all seem like forward progress (and often are), but it’s all moot if you don’t have customers.
As a new business owner, you’re going to need to come to embrace sales and marketing. You’re going to need to have a method of predictably and regularly finding clients. In fact, you’ll need to shift your mindset: You’re not in the business of “design” or “writing”—you’re in the business of finding clients and solving their business problems.
To get started, here’s what you should be working on now:
- Make your employer your first client. You have a lot of experience and expertise in your company’s business, so you should consider whether your current employer would be open to having you convert from being an employee to a contractor. This might not exactly be the big leap forward you were hoping for, but it’s starter income. Chances are, your employer will want to ultimately replace you with somebody full-time, but in the short term you can bootstrap your freelancing business by turning to your current boss.
- Advertise within your immediate network. We all have a network, even if it’s just our friends and family. Let everyone know what you’re doing, what kind of work you’re able to do, and how potential clients can reach you.
- Build up relationships with agencies. I’m not a huge fan of subcontracting, but it can get you work quickly. A lot of agencies have projects in the queue but don’t have the bandwidth to complete them. Get to know whoever is in charge of hiring subcontractors, and give them an idea of when you’re planning on going out on your own (with a link to your portfolio, of course).
- Network, network, network. After work, try to attend as many local networking events as you can. Embed yourself in the local business community, talk with whoever will talk to you, and liberally give advice based on your area of expertise. Don’t attend with the expectation of finding immediate clients. Rather, you’re planting seeds that will hopefully yield great referral sources or even direct clients in the future. This is the strategy I use to find and cultivate business relationships at networking events.
Until you have a few signed, and ideally paid, clients under your belt, you shouldn’t quit your job.
5. Not taking full advantage of your new flexibility
Lastly, many freelancers set themselves up for burnout by not treating their business like a business.
As a freelancer, you’re running your own company. And as the new CEO of your business, you need to realize that you provide a product (business value, e.g. a redesigned website that increases online sales) to your clients.
This means that you need to take charge of your business. Often, new freelancers end up replacing one boss with many bosses. The relationship between them and their clients looks and functions like the prior relationship between them and their boss.
Freelancing should be more rewarding than your current job. It should give you the flexibility, freedom, and financial independence that you expect it to give you. But for this to happen, you need to first create a strong foundation:
- Set the right expectations with your clients. It’s easy to fall into the trap of being treated like an employee. Many of your clients probably have employees, and might even treat you as an pseudo-employee-sans-benefits. As a professional, it’s up to you to control how you fulfill your product. What I mean by this is you need to take charge in determining how requirements will be planned and prioritized, when and how you’ll communicate updates, how your clients will test and ultimately approve your work, and more. Don’t make assumptions—treat the work you do as a product, and great products are consistent in their manufacturing and delivery.
- Learn to delegate. Ask yourself, “Am I the only person who can provide value here?” Many freelancers do all their own invoicing, bookkeeping, bill paying, and more. Not only does this waste time that you could be billing, you’re also causing yourself to do more context switching, which can be exhausting. The more experienced you are at delegation, the more capable you’ll be to possibly hire your own subcontractors or employees in the future.
- Charge more and work less. Did you know that if you doubled your prices and slashed your availability in half, you’d end up with the same exact standard of living? Amazing how math works, huh? Many freelancers end up burning out because they don’t make time for their own health and happiness. Being exhausted is not a badge of honor. Work to live, don’t live to work. Build your business to accommodate the lifestyle and income goals you have for yourself. A great way to start is to charge more, and my other article on pricing can help you do just that.
If you’re on the fence (or already in the process of becoming a full-time freelancer), hopefully this guide will help you avoid a lot of the mistakes I made when I transitioned from full-time employment. It ended up working out for me—but I’ll admit, I got lucky. I got the right clients at the right time, and they mostly paid me on-time.
But my case is an exception. Many freelancers give up because of a stint of late paying clients or an inability to make time for themselves and their families. You can succeed as a freelancer, and it’s now easier than ever, too. Good luck!
Now it’s your turn:
What fears (or advice) do you have about starting freelancing?