People don’t pursue a career as a freelancer because they want to be rich. The freelancer lifestyle is about independence, freedom and a love of the craft.
That doesn’t mean you can ignore money entirely. The pursuit of wealth may not be your priority, but you can’t sustain your existence as a freelancer without paying attention to the green.
To reach the point where your freelance income is enough to provide a full-time living takes organization and an acute understanding of your income/expenditure balance.
The reality is that many freelancers dabble but still maintain a day job or wrestle with a small business. Other times freelancing is something performed on a temporary basis in between employment opportunities.
There’s nothing wrong with this, but it won’t deliver the lifestyle that a successful career in freelancing offers.
Our aim, as aspiring freelancers, is a steady stream of jobs to work on, enough income to pay the bills, AND a little extra to put aside for quiet spells.
But that’s just for starters.
With enough experience and clients, it’s entirely possible to earn MORE as a freelancer than you can as an employee.
In my “working for the man” days, my income never exceeded $20k. But as a freelancer, my annual income has never dropped below $40k. And in my best years, it’s just about edged into six figures.
It’s worth noting that I don’t generally count my most lucrative years as the most satisfactory or successful. Freelancing is about enjoying a lifestyle that isn’t obsessed with work. My most enjoyable periods of freelancing are those that combine exciting projects, an acceptable fee, and a modest number of working hours.
But I’m getting ahead of myself. Turning your freelance dream into a profitable reality requires two things.
- Find the right clients.
- Charge the correct fees.
We’ll cover finding clients in a future article. Today let’s focus on the money.
Be ruthless – minimize your costs
Successfully turning your freelance operation into a full-time living starts by making your definition of “living” as small as possible. It’s usually easier to adapt your outgoing to match your income than the other way around.
Fortunately, freelancing has very low overheads. You don’t have inventory to worry about, your marketing costs (we’ll discuss this in a future article) are virtually nil, and because the volume of clients is usually low, your accounting is pretty straightforward.
Your biggest cost is likely your equipment and your insurance. Don’t scrimp on what you need to properly service your clients but take advice on the best way to finance it. In the UK, for example, there are certain tax benefits to leasing equipment as opposed to buying it outright, so explore your options.
After that, there are three software applications that I consider to be essential and that, aside from specialist software required for your freelancing skill, take care of all your business needs.
I dearly wish this had been available when I started freelancing. Running a free blog on WordPress was fine, but once I needed to upgrade to something more commercial there was a lot of time and money spent finding the right plugins and a suitable template. And even more time looking after the build.
One of the drawbacks of WordPress is that you host the software yourself which means an awful lot of time wasted on software upgrades, managing script problems, and fighting spammers.
Kartra, on the other hand, is a managed service, so all the upgrades and security are handled for you. And once you have your account, all the pre-made templates are included without any extra charge.
As a freelancer, all you really need for your website are some web pages to showcase your portfolio and endorsements, an email manager for tracking your clients and prospects, some video hosting, and an analytic program to tell you where your traffic is coming from. Kartra has all this in one package.
When I eventually get around to updating my website, I’m looking forward to nuking WordPress, Aweber, and all the premium templates and plugins (that are no longer quite so premium), and transferring everything to Kartra.
Toggl, in its simplest form, is a timer that tracks how long you spend working on a project. You categorize your work by project and by client, and with the reporting facility quickly and easily print out time-sheets to send to your customers.
For reasons that I’ll come to later, you should avoid taking jobs where you charge by the hour, but always track your time on all your freelance work, just the same. It’s the only way to accurately calculate whether you’re charging your clients enough for your work.
A basic Toggl account is inexpensive and is highly recommended for tracking your operations.
On the face of it, this is a software application for managing your personal budget. Dig deeper, however, and you’ll discover an accounting system and philosophy that is designed for a single purpose:
To teach you to spend less than you earn, so you have money to save.
At least to begin with, you’re more likely to find freelancing sustainable if you learn to cut back your expenses and simplify your existence.
Always remember that a career in freelancing prioritizes lifestyle over the generation of wealth. You may find that freelancing pays you, at least initially, less than your current job or business. But it’s a trade worth making to take charge of your work schedule.
And besides, learning to budget and live on less is incredibly rewarding. The first time my freelance income dipped a little and I acknowledged that I needed to cut back on my expenditure I was astonished to discover how much I could save.
Prior to my budgeting drive, I had no disposable income. But after trimming a few luxuries and non-essentials, I wound up earning $300 a month less but still had $400 a month disposable income to add to my previously non-existent savings!
Calculating your fees – a simple formula
With online job boards filled with freelancers offering their services for pennies, it’s easy to get sucked into the trap of undervaluing your services.
Most freelancers forget that being self-employed removes the protections that typically come with employment. Sick pay, holiday pay, redundancy pay are all costs that you now have to bear alone.
And that’s before you consider accounting, general business administration, and hunting for clients. All jobs that are essential but for which you won’t be paid.
All of these things must be taken into account when figuring out how much to charge for your work.
In the long run, once you have tons of experience and endorsements, you can charge however much the most desireable clients are willing to pay. But until then, you need to know how much to charge to provide you with a full-time income.
Step One: Calculate how much you need to earn per month and add 50%.
For example, if you need $2,000 to cover all your outgoings, your target monthly earning should be $3,000. This gives you some breathing room if you don’t quite make your target.
If you aim for $2,000 and only make $1,700, you’re going to struggle. But if you aim for $3,000 and only make $2,700 you’re still in good shape.
Step Two: Estimate the number of billable hours you can comfortably manage.
Don’t go nuts and shoot for 60 hours per week. You need to factor in non-billable work. And, presumably, you’re hoping to work fewer hours than your old day job.
Pick a number that will be consistently manageable and give you room to work longer hours on the odd occasion when it’s required. Always remember that you’re looking for a lifestyle that affords you less stress and more time to stop, look around, and enjoy your existence. You don’t get there by working more and longer hours.
Let’s say you’re going to work around seven hours a day – five hours doing client work, and two hours taking care of emails, marketing, accounting, etc.
Five billable hours a day, times five days a week, times four weeks per month, equals 100 billable hours per month.
Step Three: Divide your earnings target by billable hours, and add 50%.
Continuing with the above example, $3,000 divided by 100 hours is $30.
But what about holidays? What about sick days? What about periods when you don’t have enough work coming in to fill 100 hours per month?
To allow for contingencies, add 50%, bringing your target hourly rate to $45.
Step Four: Add some wiggle room.
$45 is not what you’re going to quote to your clients. This is the bare minimum you need to keep the lights on. You need to charge more so you can build up some reserves.
So, add another 50%. Taking us to about $70 per hour.
Just so we’re clear, I’m not suggesting every freelancer should charge $70 per hour. This figure is based on an example monthly earnings target and number of monthly billable hours. Your hourly rate may come to more or less than $70. But whatever number you’ve calculated, you should avoid dropping too far below this figure without good reason.
It’s possible that the number you’ve calculated is still less than the average for your industry. It’s unlikely, given that most freelancers make the mistake of trying to compete on price rather than quality and professionalism, but it’s possible. In which case, don’t be afraid to increase your figure to something higher than most are charging.
We equate high cost with high value, so by charging above the mean, you’re more likely to attract the attention of desirable clients looking for above average talent.
Step Five: DON’T charge by the hour.
Now that you know how much you need to charge per hour to create a sustainable business, try and keep this number to yourself. There may be instances where a client wants to retain you for a set number of hours, in which case you’ll have little choice but to negotiate on that basis, but otherwise you should always aim to agree on a fee for the overall project.
You can usually make a pretty good estimate as to how long a project will take you to complete (once you’ve been using Toggl (see above) for a while, you’ll be able to do so with even greater accuracy), but no two projects are alike. Sometimes everything will go smoothly, and you’ll complete a task in record time. In which case, if you’re charging by the hour, you’ll receive less compensation, despite the fact that you helpfully delivered your client’s project in record time. Your client will be happy. You… less so.
Sometimes things won’t go smoothly and you’ll run long. In which case your client will either pay more than expected or, if you’ve put a cap on the fee, you’ll wind up effectively working a bunch of hours for free. Now, nobody’s happy.
On the other hand, if you charge a specific fee for the project, your client gets a predictable cost, and if you finish the project quicker than expected your effective hourly rate goes up. It’s like being rewarded for efficiency.
This does mean that, on the occasions when the project unexpectedly runs over, your hourly rate dips. But the trick to keeping these instances to the minimum is to quote a price for the project that always ASSUMES things are going to run over.
You can play with this number but I usually allow 50% more hours than I hope to complete the project with, which allows for unexpected delays or complications.
For example, if I estimate a project will take ten hours and my rate is $70 per hour, I quote a price based on fifteen hours. Which would be $1,050.
Or if my estimate is twenty hours, I quote based on 30 hours at $70 per hour. Which would be $2,100.
Don’t mistake this for bill-padding. This is how you calculate realistic fees that allow you to build a sustainable freelance business. In eight years, I’ve only had three months when I failed to hit my monthly income target.
The above formula is one of the primary reasons that I’ve been able to accomplish this result.
Now that you know how much to charge, there’s just the small matter of finding clients willing to pay your rates.
We’ll cover this subject in the next article. It’s not an easy part of the process but it’s decidedly uncomplicated.
Questions about working as a freelancer? Post them in the comments below.