Finance for freelancers
Quick note, I am not an accountant nor do I have any formal education with math or money. I am just some guy that has made a lot of mistakes over the years and learned from them.
Working as a freelancer is not easy, but it can be very rewarding if you do it right. One of the biggest struggles that I feel most of us have is with money. Some months we are on top of the world and other times we are wondering why we don't just take that full-time job. I could never really figure out how to solve this issue until recently and I would like to share what has been working for me. First I would like to talk about two quick things.
That's right I give myself a paycheck as if I am working for the man. I pay myself the same amount of money on the 1st and the 15th of every month. I know some months are longer than others, but I like to keep things simple. My wife also loves this as she always can count on a paycheck.
I spend about a 1/4 of life relaxing or most likely waiting in between projects. This means I budget to only work 39 weeks out of the 52. If everything worked out as I would want it to, I would work all 52 weeks.
For this example, I am going to keep the math simple.
Monthly Expenses: $5,000
Add everything up that you spend. Everything from rent, auto payment, gas, Netflix, food, bills, etc. This includes both Fixed Expenses and Flexible Expenses.
Knowing that you know you need $5,000 a month to live, this means you need to make $60,000 ($5,000 * 12) a year, net income. Now let's figure how much you need to make gross. As I am not a math guy
(I don't know how to do it the easy way), the hard way is just a bunch of guessing on the calculator. I figured out that $85,715 * .7 = $60,000.50. but my good friend Whitney helped me out with the following math. We know that $60,000 is 70% of what we should be charging, but we need to charge more to make up for taxes. We can quickly figure out 100% of what we should be making by doing ($60,000 / 7)*10 = $85,714.29, we are breaking down the number we do know into 10s, then times it by 10 to equal 100%. If we want to know how much we should set aside for takes just take that number $85,714.29 * .3 = $25,714.29. Just to reiterate, $85,714.29 would be our Gross Income and $60,000 would be our Net Income.
Now that we have a baseline, we can calculate how much we should charge per hour. Let's take that $85,715 and divided it by 39 (the number of weeks we project that we will actually be working), which is $2,197.82. This is how much we need to make a week survive. To take this one step future, we will divide $2,197.82 by 40 (the number of working hours in a week), which is $54.95. This number is the absolute bottom line of what you should charge an hour.
Let's figure how much we should pay ourselves for everyone one of those 24 paychecks. Before I do anything, I take the 30% and put it to the side and forget about it. Pretend it doesn't exist. We know our net income is $60,000, let's divided that by 24, which is $2,500 a paycheck. A quick recap, we needed $5,000 a month to live. Pretty awesome huh?
The goal of this is to stop the feast or famine of the freelance life. To take this one step future any extra money you make, for example, let's say you can charge a client $100 an hour for a project. Take that money and put it into an Emergency fund. Build this up before you do anything else extra with the extra money. You should put aside at least 3 months of what it take to live off of, so you would want to save $15,000. This may sound like a lot of liquid money to just have sitting around, but you have to remember we want to have a solid foundation to build your freelancing life off of. You never know what life is going to toss at you and you want to be prepaid.
After that you can start paying off your debt starting with the ones with the highest interest rates. From there any extra money you have you can just invest it and plan for the future.
- Monthly Expenses = $5,000
- Yearly Gross Income = 85,715
- Yearly Net Income = $60,000
- Minimal Hourly Rate = $55
- Emergency fund = 3x Monthly Expenses
- Pay yourself on the 1st and 15th every month
I have tried a bunch of different methods. This one seems to be working for me so far. I think the important thing is to find something that works for you and stick with it.