With great freedom comes great responsibility. Freelancers can earn more, can set our own schedules and can have more creative freedom, but as masters of our own destinies, we get no paid sick leave, no built-in retirement plans and no guaranteed wages. That last one is an especially powerful factor, as it’s impossible to predict when the incoming flow of projects might dry up.
Indeed, as a freelancer, staying afloat financially is hardly a given – it depends not only on having a robust client base, but also on billing them in ways that are both equitable and financially viable for you for the long haul. How much you bill for the work you do, then, may in fact be the greatest determining factor of your solvency.
What You’re Worth and What You Need
Ah, but how to price your services? How much is your time really worth? Depending on your levels of self-confidence, you may answer that differently, but emotions aside, you’re facing a tricky balance. On the one hand, you need to make sure that your rates are competitive within the market, while on the other hand, it’s imperative that you don’t sell yourself short.
You also need to consider your budget. How much must you bring home to have enough bacon to fry it up in that pan? Ideally, you want a buffer to help cover you should you suddenly encounter a few lean months. You also need to remain financially solvent while spending unpaid time on growing your business, professional enrichment, administrative tasks and, for that matter, sick days and vacation time.
In what way should your household spending needs factor into your fee structure? Practically speaking, moreover, are you best off if you bill per hour, keeping a timesheet, or per project? Depending on the kind of work you do and the terms your clients and prospects respond best to, your answer will differ, but no matter what, you need to be compensated in a manner that is commensurate to the time and effort you invest.
How Your Magic Number Helps You
When it comes to earning as a freelancer, in order to get what you want, you need to first know what you need. In other words, if you’re going to successfully address your financial and business growth goals and must-haves into your billing rates, you need to be intimately familiar with what those thresholds are.
You’re probably best off not sharing this figure with anyone, but having a magic number in mind should greatly improve your ability to successfully negotiate with prospects. You’ll use your magic number in a few different key ways.
- Determining Your Billing RateAgain, you want to be equitable – in this context, that means fair to the client – and also keep yourself afloat. Charge too little, and you’ll risk locking yourself into a Sisyphus-like situation. Charge too much, and you’ll risk losing out on bids you need to close.Even per-project billing is ultimately constructed according to secret time investment estimates on your end, so no matter how you look at it, bidding on gigs wisely hinges on knowing your magic number.
- Keeping Your Business ScalableWhat would happen if all of a sudden, your marketing efforts started to be dramatically more effective and at the same time your conversion rate on proposals issued shot through the roof? Could you handle a huge spike in project volume? That’s your goal, isn’t it? To prepare for that day – which would be challenging but a desirable challenge, to say the least – you need to maintain scalability.When you get too busy, you’ll need to delegate and outsource more aspects of your business operations and project fulfillment – and hiring others costs money. When is it worthwhile to outsource some of the aspects of your life, both directly work related and otherwise? When is it critical that you do so? How much do you need to bill clients while delegating less so that you’ll have the budget to delegate more when the time comes? Your magic number will reveal the answers.
- Making “Expensive” DecisionsWhat happens when you want to reduce your rates so that you can land the gig you want with that high-profile client, for creative fulfillment or portfolio building? If every last penny is critical, then you have no leeway to “give up” some of your income in favor of non-financial rewards.Similarly, you probably got into freelancing for its lifestyle freedoms. You may want to take an afternoon off now and again – or a week or more. If you volunteer your services to help a cause, what does that generosity mean to you financially? When does it make sense to invest in tools that improve your efficiency and productivity? These are all components to your non-billable life that need to be covered by billable projects.
How to Arrive at Your Magic Number
There are plenty of methods for calculating the number of dollars each hour of your week is worth to you. But they all hinge on the same basic principles.
Start by mapping out a viable work schedule that includes enough availability for both billable and non-billable tasks. If you know that you end up unsustainably exhausted during the weeks that see you working over 50 hours, then make that your starting point. Just be honest with yourself about how time-consuming non-billable tasks like marketing, tax reporting, networking and skill enrichment demand. Also make sure to take into account whatever percentage of your time that you’ll need to fully disconnect from work for sick leave, vacation and the like.
Next, make a list of all of the expenses that you need to budget for. Here’s a basic breakdown:
- Outsourcing work tasks as necessary to maintain scalability
- Outsourcing non-work tasks
- Work-related overhead expenses
- Non-work living budget, including any long-term investments you need to make so you can eventually retire
Finally, take the number of hours per week that you’re available for billable projects, divide that by the total of your weekly spending budgets, and boom – you’ve got a number that represents what each hour is worth to you.
Are you pulling in less money than your magic number? You may soon find yourself in a tight spot. Are you exceeding your magic number, at least on some of your projects? Then you should have a nice cushion built into your finances that gives you some leeway to make lifestyle or business reinvestment choices.
There are no two ways about it. To succeed as an independent contractor, you need to know your own financial tipping points. Track your expenses, configure your fees accordingly, and use your newly found economic savvy to manage your time, billing models and spending patterns from an informed place.