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Financial Management Challenges of Freelancers and the Self-Employed

"Freedom isn't Free" says the bumper sticker - for the self-employed, the freedom to be your own boss also comes with a cost: having to manage your business finances. Although the Bureau of Labor Statistics' outdated survey method doesn't capture the entire trend, more and more Americans are leaving the 9-to-5 routine of a regular job working for someone else. Whether that is voluntarily to go chase an entrepreneurial dream or involuntarily as careers end in an industry disrupted by change. We talked about side-gigs in a prior post; there is a point where your side-gig has blossomed and it may make sense to cut the leash to your day job to go fully self-employed. Maybe your skills and talents are working with your hands, rather than business. Maybe your trade relies on being good with languages, rather than math. Regardless, now you have to manage those finances, like a boss!

We scoured the finance blogs for nuggets of wisdom that might help you, as a new entrepreneur or freelancer, and we found a few simple themes, often repeated:

1). Separate your personal and business accounts

2). Keep good records

3). Be aware of your expenses and revenue

4), Have a conservative budget that includes taxes (including the portion of social security paid by employers), health insurance and a buffer for emergencies

5). Save for your own retirement

6). Use technology well for handling receipts and accounting - get help from a professional CPA if you can afford it

All of these pieces of advice sound like common sense, very simple and hard to argue against. Simple doesn't mean easy, though. So many otherwise talented and smart people have fallen on their face by tripping over the simple (seeming) steps above.

The first problem is that the list isn't really simple - it's oversimplified. It's a mishmash bundle of one-time projects and ongoing behaviors you will need to include in your routines. The list needs to be unpacked into the individual next actions it takes to get each of the above done once and well, or put on the schedule with the correct frequency.

Learning some fundamental personal organization skills and putting in place a robust system for managing your workflow and ideas is your first necessary step for getting and staying in control of your life as an entrepreneur. My top recommendation in the area of necessary reading is David Allen's Getting Things Done, the art of stress-free productivity, known as "GTD" by its fans. In the book, Allen tells us that most to-do lists fail to prompt action and are no more useful than a pile of sticks with which to beat yourself up. There is one practice I want you to take-away from the entire book: the concept of Next Actions.

[Click image above for 1 minute video]

A "next action" is the very next thing that you have to do to move a project or task closer to complete, and by complete we mean obtaining the outcome that you desire in the area in question or determining you've done everything you can. In some cases it may be a phone call you have to make or conversation. You've got to be really disciplined and specific in defining those next actions because for some, you'll find that you can't take the action because something is missing - like the phone number to call or a prior decision you have to make. Guess what? that mean making the phone call wasn't the next action after all. It's only when you ask yourself and answer these Next Action questions for each of the projects you have open that you will start to make real progress.

Take our case of the intention to separate personal and business accounts: that involves taking a number of individual actions, from researching and deciding which bank or credit union to use, physically going to their website or picking up the phone to open the new account, transferring funds or depositing a check, etc... Until the next actions to move the project forward are defined and scheduled into your calendar at the appropriate times, the intention to separate your accounts may just remain a vague "yeah, I know I should really do that someday" that never gets acted on.

It's even worse when we get to something like "Save for your own retirement" because the way the mind works is that we tend to focus on the immediate minor problem today but discount or disregard the future looming disaster. In terms of the complexity of something as "simple" as saving for retirement, it's actually a number of decisions and individual actions you'll need to take. You may decide to open an IRA or Individual Retirement Account and schedule a quarterly task of looking at your budget to decide how much money you move into the IRA every 3 months. You may schedule a review and re-balance of your investments at that time and checking how you are doing on progress towards your goals.

Small confession: I lied when I said I wanted you to take away ONE thing (the Next Action concept) from Dave Allen's GTD approach. There's one more practice from the book you absolutely should consider and that's the Weekly Review where you check your open projects and survey whether all the Next Actions you planned for the week got done or whether the actions list needs to be refreshed. It's critical to have that periodic check-in with yourself to make sure your new habits and resolutions you committed to, like "keep all business receipts in shoe-box", aren't slipping. You'll be grateful come tax filing deadline!

Remember that all this is going to be a process and that small continuous improvements in how you handle your personal productivity and workflow on the one hand, and how you handle your finances on the other, are going to benefit you in huge ways. The last piece you need to make sure you stick to the plans and goals is to get support from talking with other entrepreneurs and freelancers. Consider joining FiClub or another organization where you are able to commit to any of the practices that make sense for your business in front of a group and then hold yourself accountable for meeting those goals.

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