When you need a writer who understands what you're talking about.

Financial Security for Freelancers – Top 10 Steps to Challenge a Myth

Financial Security for Freelancers – Top 10 Steps to Challenge a Myth

Do you lose financial security by becoming a freelancer or consultant? A colleague once told me, “Being a consultant is just another way of saying you’re underemployed.” This was a few years before I started my own consulting business, when I was still an employee. This assertion stayed with me, likely delaying when I decided to become self-employed. More generally, many freelancers complain of the famous “feast or famine” cycle. So, if you hang out your own shingle, whether you call yourself a freelancer or a consultant, does that mean you’ve just completely given up on financial security? Far from it!

It’s All about Risk Management

“Nothing is sure but death and taxes,” goes the saying. In life, there are risks wherever you turn. Since it’s impossible to avoid all risks, we have to manage them. When I work as a systems engineer on NASA projects, one of my responsibilities is to work with discipline engineers (electrical, mechanical, thermal, etc.) to identify the top risks facing us, and develop a risk management plan.

We might avoid a certain component because it can’t survive the mission’s radiation environment, thereby avoiding that component failure risk. More often, we can’t completely avoid a risk, and have to mitigate it instead. This might call for higher margins to accommodate gradual loss of efficiency, incorporating redundant systems, or sometimes designing the system for so-called “graceful degradation,” wherein some capabilities may be lost over time, but the system can still perform most of its required functions.

The same holds true when we manage our finances. There are some risks we can avoid, such as ignoring scam emails offering a $10 million prize from a lottery we never entered. Others, we can only mitigate, such as a possible long-term illness or a downturn in our business. Risk mitigation includes the appropriate use of insurance products, and other strategies which are beyond the scope of this article.

My Top 10 List of Freelance Financial Risk Mitigations

Recognizing that most of us aren’t wealthy enough to avoid all financial risk, whether we’re employees or freelancers, I put together my top 10 things every freelancer (and most employees) should do to minimize financial risk.

1. Learn how to market yourself in your niche, including identifying and stating to prospects what sets you apart from your competition

The first step here is to assess your strengths and weaknesses, and identify your most marketable skills. These are things clients would be willing to pay you for, and that you’d be happy to do for the rest of your career. Clients may be willing to pay you to do data entry, but if the thought of typing long data strings into the client’s database causes you to shudder, that’s not work you should be targeting.

Next, learn the basics of marketing. This starts with the simple realization that clients don’t really care what positions you’ve held, what you like to do, what you’ve done for others, except as these things impact what they need done. This being the case, your marketing has to address everything from the perspective of your prospective clients’ pain points. What keeps him up at night? What’s preventing her from growing her business? What’s making their lives miserable?

An important marketing strategy is to clearly present your discriminators to prospective clients. These are the things that set you apart from your competition, making you the right solution to the client’s problem.

Address all those in your proposals and you’ll often need to beat clients off with a stick (or more accurately, raise your rates so you’re making more money without overworking yourself).

2. Go beyond customer satisfaction when working with your clients

For better or worse, most freelancers now work in a global marketplace. This means your competition includes people who live in places where $10/hour is considered a great wage and even $3/hour is more than acceptable. If you live in the West, that’s not enough to survive, let alone prosper.

Thus, you can’t, and shouldn’t, compete on price. You need to compete on value. You have to prove to prospective clients they should hire you so they’re happy to pay you more than they could hire others for, because your services are so great that they justify your higher rates. To get to that point, it’s not enough to provide customer satisfaction. You need to shoot for delighting your clients.

3. Diversify your income streams as much as possible in terms of clients, platforms, and sizes and types of projects

Since we’ve concluded that we need to mitigate unavoidable risks, the biggest risk to mitigate is what NASA calls single-point failures. This is where poor design means that failure in a single $100 (or even $10) component can kill a billion-dollar mission. We avoid that through redundancy.

In freelancing, this redundancy means you have to develop multiple income streams. You need to have multiple clients, use multiple platforms (preferably not all online), and even vary the types and sizes of projects you take on, so a downturn in one arena doesn’t kill your business.

4. Create a complete budget for your business and personal expenses

If you don’t know what you’re spending, you have no way of determining what your income needs are. Further, you have no way of knowing what you can or should cut back on when needed. Make sure to include in your budget any taxes you have to pay, and money you set aside for retirement (preferably at least 15% of your revenue), as well as shorter-term goals.

5. Set your rates so the work you do covers at least the above budget

As implied above, you income has to cover all your budgeted expenses, including savings for a rainy day. For example, if you estimate your expenses at $50,000/year, and believe you can reliably bring in 1000 billable hours each year, your rate can’t be lower than $50/hour. In fact, it should probably be significantly higher, in case your billable hours estimate turns out to be overly optimistic.

6. Create a just-in-case budget that minimizes all your expenses

Since risk is intrinsically unavoidable, you have to plan for “something bad” happening to you or your business at some point. This includes loss of a major client, extended illness, economic downturn, a shift in the marketplace that makes your niche less profitable, etc. No matter the cause, you have to plan for such “just-in-case” scenarios.

One mitigating aspect of such cases is that if your income drops significantly, your taxes will drop by a larger percentage due to the progressive nature of income taxes. You can also temporarily remove the savings component of your budget, at least until your fortunes improve. Thus, even if you don’t lower your standard of living, you can reduce your planned expenditure significantly.

7. Set aside enough cash to cover a year of expenses, at least at the just-in-case budget level

Although most employee positions don’t ensure complete job security, it’s clear that self-employment offers even less, at least in the short term. Thus, while the accepted wisdom is that people should set aside a cash cushion sufficient to cover three months of expenses, as a freelancer you should be more conservative and set aside enough for a year.

Since you can choose to cut back on at least some expenses, you can use the above “just-in-case” budget as the basis for how full your cash cushion needs to be. Invest your cushion in something with minimal risk of loss of principal, and no liquidity limitations, so you can use it whenever the need arises without concern for penalties or locking in market losses.

8. Continue to expand your expertise, what Stephen Covey called “sharpening the saw”

As I mentioned in an earlier post, “Should I Become a Freelancer or Consultant?,” one of the benefits of being self-employed is that it pushes you to constantly learn, grow, and expand your skills. As an employee, if your job requires putting together widgets, entering data, or even editing copy for your employer, you may never need to learn anything new. At least, it may seem that way until the day your employer lets you go because your seniority makes your salary higher than what he’d need to pay a new hire who can easily replace you.

When you’re in business for yourself, new jobs have a tendency of slowing down and drying out if you don’t constantly improve your skills and learn new ones. The market’s feedback is more immediate than an employer’s, but also more forgiving once you learn your lessons.

9. Continue to market your services to new and existing clients.

One of my favorite lessons in marketing asks the question, “When should you plant a tree if you need lumber right away?” The answer to this trick question is, “If you need the lumber now, it’s too late. You should have planted the tree 20 years ago.”

Phrasing this in marketing terms, the right time to market is before you need the work. The right time is always, but especially when you’re busy. That’s because (a) marketing takes time to bear fruit, and (b) if you’re not hungry for the business, you’ll be more likely to wait for the right client and right project, and less likely to cut your rates.

10. Network with colleagues and prospective clients

This final point relates to both of the previous two. By mingling and networking with colleagues and prospective clients, you keep track of where your marketplace is moving, so you know what skills you need to sharpen. You’re also front-of-mind when your prospective clients need someone with your skills. Finally, by consistently networking, you’ll interact with your prospects when you’re not hungry for business, when you don’t need anything from them. Instead, you’ll simply build relationships, which is the best marketing of all.

Challenging Myths about Financial Security

You may have thought the point of this article was to bust the myth that there’s no financial security in freelancing. In fact, if you follow all the above suggestions, you’ll be able to weather short-term downturns in your business, and most medium-term ones. If you’re lucky enough to avoid any major long-term downturns until late in your career, you may even become wealthy enough that you can retire with ease. However if you hit a major downturn early, and it becomes quasi-permanent, you may need to redefine your niche, or even consider getting an employee position until your business recovers. While that’s not the preferred avenue, it’s better than having to declare bankruptcy.

The myth this post actually challenges is that being an employee guarantees financial security. If you followed my argument carefully, you noticed I said there’s no way to eliminate all risks. This is true whether you’re a freelancer or an employee. What you can, indeed what you must do in either situation, is mitigate your unavoidable risks. Being a freelancer just helps mitigate the single-point failure risk of depending on a single entity, your employer, for your financial security.

Share Button