time & money: a freelancer’s perspective
As you progress in a career as a freelancer you may think a lot about the concepts of “time” and “money”. Often for freelancers – time IS money. If you work by what’s called “the billable hour” every hour of work that you put it equates to compensation. There are times where I’m struggling to keep my eyes open at 9pm and I JUST need sleep, but I am not okay with leaving money on the table – even more so when I feel I’m not making enough to begin with. One less hour of work can have a big impact on income.
From an overall perspective, I side with many of the “cons” of the billable hour personally, but that’s not what this post is about. If you can’t get around the billable hour, there are many things that you should consider when coming up with your ballpark number for how to price your services as a freelancer. As a company hiring a freelancer – there are things you should understand about the needs of a freelancer to assure that you are compensating fairly. If you annualize an hourly rate, it “could” make it seem like you are giving a great “salary” to a contractor or freelancer – but failure to understand the differences between and employee and freelancer’s time could actually make that number a bit misleading.
I’m writing this article because frankly, I forgot. I forgot to account for at least half of these things and truth be told – they directly correlate to many pressure points I have as a freelancer. They directly correlate to the times where I’m closest to stressing out (but of course, don’t. That’s an article for another day).
So please benefit from learning from my mistakes.
- Know your estimated expenses. This was one piece of advice that was not originally mine. But I found an easier way to break down my expenses. While most articles I read suggested that you DOUBLE your hourly wage to cover expenses, I knew that would far out price many potential clients. Think about your recurring expenses, including healthcare and the costs of running your business each year. Email, phone, website, finance software and even the lightest travel expenses can add up quickly. Divide by 52 weeks and 40 hours to get the dollar amount you need to add per hour to cover your expenses. You may find that it’s more like an additional $5-10 an hour rather than an additional $30. It’s likely that as your business grows or as you grow as a professional, that this number will increase, but it’s important to know your absolute minimums so you can understand how this relates to your actual income.
- Consider a work day is less than 8 hours of billable work. Running a business requires things you don’t think about, including the bathroom. (Okay, half serious). There are finances, budgeting, taxes among other things that we forget need to be factored into our work days. At the very beginning, I thought that the amount of financial “stuff” I would have to do would be so minimal, that I could just pull a 10 hour day here or there if I needed and it wouldn’t be a big burden. But as my business grows, so does the time spent doing other necessities and thus – it ends up lengthening my day far beyond “burn out” time, which reduces productivity. Work in at least 1-1.5 hours per day of your own time into the maximum amount of hours you take from clients. Consider a normal work week to be about 7 hours a day instead of 8, which leaves 1-2 hours for personal business responsibilities.
What does that mean for setting an hourly rate? If you have a number in mind of what you should or want to be making as a pre-taxed salary, make sure that when you break it down into an hourly rate, that you divide by 35 hours a week instead of 40.
For example, if I want to be making $60,000 a year pre-tax – to figure out the hourly equivalent, I would divide by 52, and then by 35 (hours in a week). To make $60k a year, I would have to be at an average hourly rate of $32. Add in point one, expenses – in order to take home $60,000 with $10,000 in expenses per year, I would have to charge at least $37 per hour.
- Vacations and Holidays. I’m not too keen on having to be off on Martin Luther King Jr’s birthday, but the last thing you want to be doing is to feel “stuck” working on Memorial Day or Christmas Eve. If a typical work place gets at least 5 paid holidays a year (which is on the low side!) that’s another thing to consider into your calculation. The same goes for vacations. Taking vacations means losing time when you are not being paid by clients to take them – but if you are “up” on current workplace literature, it’s becoming a complete necessity to have time to unplug, even from a job you love. Be reasonable in this approach. One of the pros of freelancing is the ability to have a flexible schedule. If there are 5 paid holidays a year, which equates to 40 hours per year of time off, it breaks down to a loss of only 3.3 hours a month. It’s feasible to “make that time up” each month by planning days where you work a little longer than your typical 7-8 hour day to make up for holidays. Same for vacations. 3 weeks of vacation time breaks down into 10 hours per month extra. Even if you do not want to commit to working 13 extra hours per month, it’s quite feasible to commit to working an extra 7 hours per month or 2 extra hours a week to allow you to take needed time off and holidays.
You can factor the rest into your calculation. 7 hours a month works out to be about 84 hours per year. Or a little over 2 weeks of your time. If you wish to make that $60,000, divide by 50 weeks of time, and again by 35 hours in a week and you have an hourly average of $35 per hour. Add in expenses, you sit realistically at $40 an hour.
- Ideas and learning. They are pertinent to both your own growth and success and your client’s growth and success. Think of it this way – if you scope out a proposal from a client to exactly how long it will take you to do it, you don’t leave any time for extra brain power. It’s extremely easily, especially as a freelancer – to spend all your time just trying to get the work done and not enough time thinking of ways to grow the work or bring in new ideas. Getting caught up in the day-to-day operations can be a creative drain. Racing the clock is not always a good thing when it comes to being productive, useful and performing well.
Whether you include this as part of your 1-1.5 hours of “business” a day in your reduced hours week or commit yourself to doing this all completely in your off time, it is something you must account for. If you feel as if you aren’t being paid enough on an hourly basis – all your focus will be going into hitting max hours per month doing billable work and less on expanding ideas and growing. I truly believe accounting for this would have eased the feeling that freelancers sometimes get where they simply feel as if there is “too much work” and “not enough time” – even though mathematically, it’s not the case.
You can factor this into your hourly rate easily as well. $60,000 divided by 50 weeks of time, but by 33 hours a week is $36, plus expenses brings you up to about $41 an hour. It’s a dollar difference, but over the course of one year that $1 can make a huge difference in the success of your clients.
- Clients aren’t for certain. I learned within 30 days of venturing out as a freelancer that no client is ever for keeps – for situations that are sometimes out of your control. It’s just the nature of the business – and something you should consider accounting for either personally or professionally. After losing main clients, I dedicated myself to saving supplemental salary in the event that you lose a client or you lose time. Personally I found that there is a three-month window I may need to either buckle down and locate more work or find a full-time job and leave freelancing for good. How much you wish to supplement your salary is dependent on how much your personal living expenses are per month (what you will need to make in “absolute survival mode”) and where your work is coming from. But be sure to add that to your requirements. Let’s say that at minimum you need $2500 (pre-tax) a month to pay your personal bills. That’s a needed savings of $7500 to cover you for 3 months in the event that something happens.
Your actual needed pre-tax salary, to account for savings is now $67,500. All things above accounted for, it adjusts your average hourly rate to about $46 per hour.
- Work ethic, investment, and what you consider to be fair. This is again something completely personal, but consider your work ethic. Consider how willing you are to go above and beyond for clients. If a client asks you to go above and beyond, it’s perfectly reasonable to request additional compensation – but what about the times where its not required? Or what about the times you understand that sometimes extra time without compensation could be an investment for future opportunities? Or what I know to be called “value added services”. What about the times you work with a client on a slower build up and understandably may put in more time to secure a bigger opportunity? This happens. And if you are “pinched” for time and money, it can actually severely affect your ability to do this. If you have a tendency to work in this manner, it can relieve a big of burden and make it easier to keep this mindset and attitude if you work a few extra dollars into your hourly wage.
- Leave some for dreaming. In the business world people travel. People celebrate their successes. People spend money to make money. It may be your dream to just sustain, but it’s my dream to grow – which means that my business needs to have profits in addition to sustaining my life. Set goals for the year and factor them into expenses to get a more accurate number and leave room for personal growth. Aim a bit higher and consider there may be needed negotiation with contracts – so do not go in with your minimum number. Make sure you accurately represent your worth, your work ethic and your potential. If that means aiming to make $5,000 more per year for wiggle room, it’s a mere $8 a week and less than .50 per hour. Account for it.
So you’ve come up with a magic starting number. What do you do if that number is higher than what you are actually making? You can do one of two things: complain about it and ask for a raise. You have enough evidence here to really make a great case for it. OR understand your current limitations and create a temporary growth plan.
Understand what vacation you can afford to take and how much unpaid time you will have to put in to grow your opportunities. Understand temporarily your hours may be above and beyond a 40 hour work week. That time will be tight. That any vacations or time off you do take will need to be made up if you cannot afford to lose time. Be okay with 10pm laptop closes if it means you are going to grow. Minimize unneeded expenses both professionally and personally. Growing means you need to bite off more than you can chew and make smarter decisions. And sometimes, it also means knowing your limits – another reason why saving is a must. You will never hear me complain about putting in over 40 hours a week, but know when that number is having a reverse effect on the clients you serve. Often, we want to feel as if we are making the conscious choice to put in extra effort and put in the extra work – we don’t want to feel like we “have” to just to make ends meet. We assume we give extra, we get extra – but we do not assume we give extra, just to maintain. Set the “norm” as something that is maintainable in the long-term and the “extra” as something you consciously choose to do to grow.
Know when that number of hours you work per week is preventing you from having the space you need to relax, recharge and be at 100% for your clients. Otherwise, it’s not doing any business any good.
Last, remember the advantages you have of being a freelancer. There are many benefits of working as a freelancer, so sometimes it’s important to remember the give and take to momentarily take your mind off the money. You have the amazing opportunity to travel and still work. (I find a few coffees and a plane ride is one of the best atmospheres for me to focus on big documents and thinking.) You have the opportunity to build your own schedule in a way that works for you. There is value in that freedom. It’s not an excuse to be under-compensated, but it will help you fight through those temporary “growing pains” and look forward to a bright future.
As your business has grown – what things have you found you need to consider when it comes to accurate pricing?