When you’re an employee, you know exactly what you’re worth- it’s whatever your employer tells you. If you don’t like your rate, you either train, try to get promoted, or quit your job altogether and get hired somewhere else at a higher rate.
However, if you’re a freelancer, no one’s telling you what you’re worth or what rates you should charge. You’re paying for a lot of the benefits that your previous employer covered, including retirement, health insurance, vacation time, family leave, etc. There’s also a lot of pressure for you to bid as low as possible on projects in order to win clients.
With all these factors to consider, how do you figure out the absolute minimum price that you must charge a client so you don’t end up broke? Furthermore, how do you charge enough money so that you have some profit left over to cover retirement, sick time or even a rainy day?
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Start with a budget
Budgets may not be sexy, but they are a necessity if you wish to find out what your time is worth and how much you should be billing per hour or project. You can set up a quick budget using Microsoft Excel, keeping your income items in one column and your expense items in the other. If you’re already working as a freelancer, it’s a good idea to add a third column for business-related expenses.
Tracking your income and expenses over the course of a year is ideal because some income sources (e.g., tax refund) and expenditures (e.g., property taxes) are once-a-year events. However, even if you can maintain a budget spreadsheet for only a few months, the information gathered there will be invaluable.
For starters, your monthly budget will tell you what it really costs, on a monthly basis, to maintain you. You might also be shocked to find out how much money you’re wasting on various goods and services and tighten up a few categories. Equally as important, you’ll find out how much money you need to save in order to take a week/month/year off from work.
This is also applicable to the times you might be out of work through no fault of your own, such as when you’re first starting out as a freelancer and clients are hard to come by, you’re sick, or you need to take maternity/paternity/family leave. Work “dry spells” should also be accounted for while saving money.
Calculate your monthly “employed” expenses
Now that you have a budget to look at, add up the line item expenses that allow you to survive day-to-day such as food, gas, personal car insurance, entertainment, rent/mortgage, etc. You want to tally up everything that you would personally pay for even if you were employed. Thus, you’re not going to include things like health insurance, because quite often that’s something your employer would cover. Likewise, don’t include things like computers or business software because they are items your workplace would likely provide.
Calculate your monthly freelance expenses
Add up all the stuff you left out in your first tally, such as health/dental insurance, computer equipment , training fees and software. Estimate how much money you spend on occasional client lunches and gifts, which would all be covered by your employer if you were employed. Taking your monthly freelance earnings into account, multiply the sum by 0.06 and add it to your freelance expenses; this is the amount your employer would typically add to your 401(k) plan.
Compare your “employed” vs. freelance expenses
Once you’ve totaled up both your employed and freelance expenses, take a look at these two amounts. How much do they differ- or are they fairly similar? Perhaps your health insurance premiums are high and almost equal what you spend on your mortgage. As a freelancer, high health insurance costs are often an issue. Alternately, the equipment you use as a freelancer might be fairly expensive. There are also trainings and conferences that you must occasionally attend and cover.
It is these additional freelance expenses that many freelancers do not consider when pricing their services and determining hourly rates. As a freelancer, you need to remember that you’re paying out-of-pocket for a lot of items that most employees take for granted. In terms of dollar amounts, many employers pay more for their employees’ benefits than for their actual wages. This is exactly why employee and freelance wages are never equal and why a freelancer’s rates may be twice as high (or higher) than those of an employee.
Add your “employed” and freelance expenses together
To survive and run your freelance business, you need to earn enough money to pay for both your monthly “employed” and freelance expenses. So, without further ado, total these two expenses.
Calculate your billable hours
Finally, consider how many hours per month you work as a freelancer. How many of those hours are billable? Alternately, if you set flat fees for your services, how much time does each of your services take? It’s imperative that you know your total work and billable hours because this helps determine your efficiency as well as ability to earn a higher wage. It also alerts you to so-called “time sucks” and which clients you should fire.
Once you have your total monthly expenses and billable hours calculated, divide the former sum by the latter to obtain your absolute bare minimum rate per hour. This is the amount of money you’ll need to earn in order to keep the lights on and run your business. Earning this amount of money will make you the equivalent of an employee and even provide you with some retirement savings. There’s just one more thing to do…
Add your profit margin
If you happen to get sick, take a vacation or face some kind of emergency, you will quickly go into debt. This is because you have not yet accounted for any kind of profit margin to tide you over during dry spells or hard times. As a formality, you should “pad” your hourly/project rate by at least 10% in order to build some personal savings. This way, you can set aside extra money for major purchases like a car or to cover your mortgage payments in case you get into an accident.
If all this calculating and padding sounds like a lot of work to you, don’t worry: Various freelance websites offer freelance rate calculators that take into account all the above mentioned items (except for budget). Personally, I’ve found the FreelanceSwitch Hourly Rate Calculator to be quite useful for quickly figuring out what I can agree and not agree to for an hourly rate. This calculator also lets me input a yearly profit amount.
So, what are you worth?
I welcome I’ve Tried That readers to publish their own worth in the comments section below. Thank you!