by Eyal Shinar, CEO and founder of Fundbox
The typical 9-to-5 (or let’s be honest, the 8-to-7) workday is becoming less prevalent as the first generation of freelance natives carve out a new frontier: working from wherever, whenever, on select business ventures of their choosing.
As the gig economy expands, freelancing is becoming a viable and attractive option for many millennials and recent college graduates. It’s an exciting time but the decision to become a freelancer is not one to be taken lightly. According to a recent study by the Freelancers Union, the freelance workforce is adding $715 billion annually to the economy through their freelance work. Additionally, 77% said they make the same or more money than they did before they started freelancing — indicating that freelancing can be an even more lucrative career path than traditional jobs.
A freelance career is more than sleeping late in the mornings and playing video games at home during a conference call. In fact, this career path can frequently lead to clocking in more hours of actual work than those with traditional desk jobs; however it provides the chance to purse dreams, whether it’s a freelance photographer, a travel writer or a computer programmer. Freelancing also gives the flexibility to schedule tasks, meetings, and assignments at days and times that bests suit the individual.
Even with all the positives, every industry whether freelance or not, lends itself to a unique set of financial challenges. There are some common economic obstacles every freelancer will likely face at some point during their career. Here are some financial tips for young professionals contemplating whether or not to launch a freelance career
Do: If you are uncertain, enter the freelance workforce slowly.
More than 14 million people consider themselves to be moonlighters – meaning that they work a full time job and freelance during the evenings and weekends. This provides an accessible entrée into the freelance workforce and allows you to start generating revenue as you access if there is a solid market for your skills.
Don’t: Rely on personal finances.
Avoid dipping too heavily into your savings to sustain your freelance business. If you don’t have enough clients to sustain your lifestyle, then don’t cut the connection to your regular source of income. In fact, it’s advisable to keep ahold of a steady paycheck until you have so much work that you simply can’t do both jobs.
Do: Consider incorporating.
Incorporating or forming an LLC can keep your business cash flow separate from your house and car payments, it will also protect those personal assets in case of a lawsuit. Forming an LLC or corporation won’t save the day if you are personally negligent when providing services, but it will cover you if you hire employees, contractors or subcontractors and are hit with a lawsuit caused by their negligence.
And since no one loves paying extra to the government, incorporation also helps minimize your self-employment taxes. Elect to be taxed as an S Corporation and pay yourself in both salary and distributions. Your salary is subject to self-employment tax, but the distributions are not. Be cautious, because the IRS will double check to ensure you pay yourself a fair salary.
Do: Commit to a time management strategy.
Being your own boss is great, but it also means you won’t have a manager to set your priorities.
To manage your time effectively from day one, research the tools you’ll need to be as productive as possible. Are you easily distracted by email and the Internet? Try downloading a tool like Focus, which blocks access to time-sucking social media sites like Facebook and Twitter. There’s also RescueTime, which provides analytics on how you spend time on your computer, so you can adjust accordingly. Do you bill your clients hourly? Digitally track your time with free apps like Toggl or Hours.
Don’t: Accept every project that comes your way.
When money is tight it’s tempting to take any paying gig that promises a paycheck. But some gigs simply won’t provide a positive ROI. Assess each job carefully to determine whether you’ll actually make your hourly rate. Sometimes client demands and endless revisions will detract from your bottom line and compromise other projects. While more work means more money, overloading your schedule with projects could mean sacrificing quality, which could lose you clients in the long term and lead to burnout. Keep close tabs on your time and you’ll soon realize which projects generate the most revenue and push your enterprise into exciting new categories.
Do: Streamline your cash flow.
Staffers at larger business can expect checks every two weeks, while freelancers are constantly chasing checks. Some months you may see several invoice payments rolling in, other months you could be sweating whether or not you’ll make rent. You need to treat your freelance gig as if you’re running your own small business. It’s up to you to come up with a budget that fits your income, but there are a few ways to ensure you get paid faster. Most companies pay freelance invoices within 30-60 days, but make sure you ask before taking on a client. Some pay within 60 to 90 days. Try to work out a payment schedule ahead of time and see if you can negotiate to get some payment upfront or for hitting certain milestones during the course of a project. Be sure to invoice on time. It sounds simple, but when you get busy it’s easy to let this fall by the wayside. If you do run into a problem where customers or clients aren’t paying their invoice on time you can also turn to an advancing company. This will allow you to close the cash flow gap.
The freelancing trend shows no signs of slowing down. 82% of Millennials who are currently freelancing are optimistic about the future of this new work model. Additionally, Millennials, the largest generation in the U.S. workforce, have embraced freelancing as a viable career option whereas previous generations have not. Technology and financial services are helping to propel this trend even further into rapid growth mode and are enabling freelancers to achieve financial success while creating flexible work schedules.
Eyal Shinar is an expert in financial services and technology management. Prior to his current position as CEO and Founder of Fundbox, he served as a Vice President at Battery Ventures where he led many projects and investments in the areas of finance, machine learning, SMBs and SaaS. Additionally, Eyal was one of the first employees of Old Lane, a $5.5B NY based global hedge fund (later acquired by Citigroup), and also worked for Castle Harlan, a leading $6B NYC-based buyout firm.
Two downsides to freelancing are that if you’re working on fixed-price contracts, you don’t get paid for the time you spend emailing or on the phone (maybe a good reason to go with hourly payment, if your client will agree), and there aren’t any benefits… but often, these two downsides can be worth when balanced against the freedom you get from working, essentially, for yourself. From personal experience, an application that blocks Facebook temporarily definitely comes in handy, unless, of of course, your freelance work requires the use of Facebook.
Before the work starts rolling in, be sure you’re prepared for it. Set prices, create invoice templates, establish an accounting plan and consider how much to set aside for taxes. It’s easier to keep up with your accounting along the way than to deal with it all later. So create processes so you can start off by keeping organized financial records.
I always despised all those articles saying that you should quit your day job immediately and become a freelancer. As if! If it was that simple, everyone could do it. It was a no way out situation for me though. The only option I had left at that moment was freelancing and it wasn’t an easy journey. I managed to get a client in the first month of working though, but working without a safe net when it comes to finances and being really frustrated about it most of the times makes you stressed out and unable to do your job properly.
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