The top 5 gig-economy habits that will leave you broke
We’ve seen plenty of freelancers fall into financial ruin because they didn’t avoid these five common mistakes.
The gig economy is booming, and it’s easy to understand why. Freelancing and gig jobs offer amazing opportunities for people who don’t want to work a traditional 9-5.
And the number of side hustles seems to be growing every day. Some jobs require specialized skills, while others have relatively low barriers to entry. You can find work driving cars, designing websites, writing blog posts, or fixing sinks.
But working as an independent contractor and being your own boss comes with its own set of challenges. You have to take full responsibility for your life, including your time and money. If you go broke, there is only one person to blame.
Freelancers and independent contractors don’t get a guaranteed paycheck every week. And without a set, steady income to rely on, many people find it difficult to budget their money.
To be successful and financially secure in the gig economy, you have to take some extra precautions and create a safety net. If you work in the gig economy and are striving for financial independence, be sure to avoid these 5 freelancer habits that will leave you broke.
1. Not Accounting for Income Taxes
Without question, failing to account for taxes is the biggest financial mistake that freelancers make. If you’re not prepared to pay Uncle Sam at the end of the year, you’re setting yourself up for financial ruin.
Independent contractors and freelancers are responsible for paying their own taxes. Unlike traditional jobs, where your federal and state income taxes are withheld for you, freelance jobs put all the money in your pocket up front.
It’s your responsibility to set aside a percentage of your earnings to pay those unavoidable taxes. The best way to account for taxes is to set aside a portion of your income every week (or month). A good general rule is to save 30% of your pre-expenses revenue. If you don’t, you might end up having to pay your tax bill with a credit card, which will only cost you more in the long run.
Keep in mind that in the United States, if you make most of your money from freelancing, you have to pay taxes four times a year. Rather than making one payment in April, the IRS requires you to make estimated quarterly payments throughout the year. You only file returns once, but you have to make four separate tax payments.
Most people aren’t even aware of this when they start freelancing, so you can usually get away with it in your first year. But after that, it’s important to make those quarterly payments. Otherwise, you can be hit with a penalty from the IRS.
In addition to federal taxes, you also have to pay state taxes. And depending on the city you live in, you may have to pay local city taxes as well.
While we’re talking about taxes, it’s best to mention one important aspect: expenses.
One nice thing about being a freelancer is that you can reduce your taxable income by reporting your business expenses. That includes everything from office supplies to computer and phone equipment to gas for work-related trips.
But don’t make the mistake of thinking that just because you can “write off” these expenses that they’re totally free. They’re not. In fact, your business expenses aren’t write-offs at all – they’re simply part of your itemized deductions.
2. Not Factoring in the Cost of Living
If you live in an area with a high cost of living, not having a steady income can have a devastating impact on your finances. So, before you decide to become a freelancer, think about how much it costs to live the type of lifestyle you enjoy.
Where you reside can be the difference of living on a tiny budget or living a life of luxury. For example, U.S. cities like New York and San Francisco have some of the highest costs of living. And freelancers, especially in their first year or two, often don’t bring in enough income to pay the bills. Depending on your situation, you may want to consider moving somewhere with a lower cost of living.
For example, if you’re willing to make a real change in your life, moving to another country can be a great way to stretch your dollars.
There are beautiful countries, like Costa Rica, where you can make a small freelance income go a long way.
3. Not Charging Enough
The freelance economy can be challenging – and it can be hard to find your footing. In the start, many freelancers make the mistake of charging too little.
Making a small amount of money is better than making no money at all, right? Yes and no.
Depending on the type of work you do, there may be instances where you have to charge a bit less than you want just to get the job. That can be a good idea, as long as you use that job as a way to gain valuable experience. But that’s only okay in the very beginning when you’re just starting out. You can’t do that forever (unless you want to go broke).
Your time is valuable, and you need to make sure that you’re being paid a fair amount for the work you do (and don’t do). A general rule of thumb is to figure out how much you want to make per hour and charge 20% more than that. That extra 20% will cover the time you need to spend on other aspects of your freelance business.
When you quote a price for a new project, don’t just consider how long the project itself will take. Many freelancers make this mistake. You have to also account for a variety of other things that might not be “billable hours” but are essential to the success of your business.
To find new clients, freelancers have to spend time marketing themselves. They have to spend (sometimes hours) communicating with potential clients and customers. They also have to take the time to send invoices and collect payments. By adding 20% to the amount of money you think a job is worth, you can account for these other factors that eat away at your time each week.
Remember, as an independent contractor you’re essentially running your own business. And for most freelancers, that means you alone have to handle all aspects of your business. Add 20% to the cost of each project so that you don’t have to spend 5 or 10 hours per week working for free.
4. Not Marketing Yourself
Regardless of what type of work you do, the key to success is to market yourself. Whether you’re providing a service or selling a product, you have to know how to market your skills and assets. It's essential if you want to grow your business and put more money in your pocket.
It’s easy to get caught up doing work for existing clients, but it’s important that you don’t lose sight of the potential to conduct future business. Successful freelancers know that a client can disappear without any notice. It’s always best to have new clients in the pipeline, so you’ll have a steady stream of work and a steady flow of income.
You have to market yourself constantly. Don’t wait until you’ve finished one project to look for another. Instead, think of yourself as a brand and use every opportunity possible to market your brand. How do you do that? There are a few ways.
You can market yourself by building your own website and showcasing the experience you have and the type of work you do. You can also write content (on your website and on social media) to promote your work. If you’re in a creative field, you can create an online portfolio that demonstrates your abilities and shows examples of prior work.
But the easiest thing to do is to reach out to your contacts to find referrals. Don’t be shy, but don’t be pushy. Instead, make your skills known and let everyone you know know what services you have to offer.
Maintaining strong connections with former colleagues and former clients can be a great way to find new work. Market yourself through referrals and you can take your business to the next level. Even jobs like driving for Uber allow you to market yourself. Uber and Lyft drivers can make a lot of money by referring fellow drivers.
5. Not Having a Backup Plan
If you want to run a successful freelance business, you have to be confident, focused, and determined to do so. But the truth is that a lot of independent contractors don’t succeed. If you don’t have a backup plan, you just might find yourself in a devastating financial situation.
Having a backup plan doesn’t mean that if your business fails you need to crawl back to your former boss and beg for your old job back. It just means that you might have to diversify your efforts a bit to make sure that you’re bringing in enough money to pay for your lifestyle.
It could be something as simple as signing up to deliver food for Postmates as a way to ensure that you have some steady income coming in. It could be that you keep in touch with former colleagues and contacts in case you need to return to traditional full-time employment. Or maybe you work a steady part-time job a few days per week and focus on your freelance business the other days of the week.
You have to have a steady stream of income. So, it’s best to find a second (or third) way to increase your income or have an exit strategy in case it doesn’t work out.
Working as an independent contractor in the gig economy can provide you with an incredible sense of freedom. It allows you to do the type of work you’re passionate about, work when you want, and enjoy that work/life balance that everyone talks so much about.
But we’ve seen plenty of freelancers fall into financial ruin because they didn’t avoid these 5 common mistakes.
Avoid these pitfalls, work hard, and have confidence in yourself. With dedication and determination, you can turn your freelance business into a successful one.
Brett Helling is the head of Ridester - a site that provides in-depth articles on the gig economy, with a particular focus on the rideshare industry. Outside of work, Brett enjoys spending time in his home city of Omaha.
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