Don’t Quit Your Day Job!

It’s also important to do this because, once you launch your freelance operation, your time needs to be spent learning how to successfully manage a business – filing taxes and other vital administrative tasks, finding clients, winning jobs, managing estimates and invoices, project management etc. Trying to do this while also learning the required skills is a recipe for burnout and failure.

Freelancing is inherently unstable. This is why it’s so important for people to not just leap head first into it. Ideally you have a stable, steady income at a day job where you can sock away 3+ months expenses while you gradually build up a client base in your off hours. This is tough because it requires you to be working both a day job AND your freelancing gigs, and it requires you to put aside a lot of money. But really i wouldn’t recommend people do it any other way

The time is right when you feel like you will earn a competitive amount and, more importantly, when you have enough of a savings buffer to weather the feast/famine cycles that a lot of freelancers experience.

In terms of making sure you can earn a competitive amount, it is very important to determine the actual cash value of your current employment (or what you COULD earn if employed), because to many people’s surprise this can end up being doubleyour salary. When you are employed you tend to get benefits, 401k, paid time off and 100% of your time on the clock is paid. The employer also pays half of FICA tax on your behalf, whereas self-employed folks must pay the full amount on top of your normal income taxes (this adds 6.25% in new tax liability). Include anything of value you get from your current (or potential) employer in the calculation, and then use this actual cash value as your basis for determining how much you need to earn for freelancing to pay competitively vs working for an employer. So if you determine you currently (or could) get $100,000 in actual cash value from your employer, this is the annual freelance earnings you need to be “made whole.”

You then need to figure out how many billable hours you can reliably expect in a given year. Some portion of your time will be spent landing new clients, generating estimates/invoices, attending meetings, planning projects and just not being booked, that you aren’t able to bill for. I personally assume 60% productivity just to play it safe, but this depends on factors like how many existing clients you have and the economy as it relates to your target clients.

So using the above information and examples, you would get something like this – there are 1,920 working hours per year for a person who takes normal holidays and basic vacation time. If you assume a 60% productivity rate, you will only have 1,152 actual billable hours. If your “actual cash value” calculation is $100,000 per my example above, then you would need to bill $87/hr ($100k/1,152) for freelancing to be competitive with employment.