The path to rate setting nirvana starts with knowledge

One of the toughest things to figure out, particularly when you start freelancing, is the value of your time, expertise and experience. Those factors are major determinants of what you can justifiably charge your clients. But you also need to understand another part of your rate setting equation: costs.

I’ve covered the equation I use for calculating my hourly and daily rates. The TL;DR (Too Long; Don’t Read if you’re not familiar with the abbreviation) is work out what income you need each year, calculate how many working days you have per year (allowing for weekends, illness, holidays, administrative time, etc) and do some simple arithmetic.

But here’s the hard bit – how much money do you need? To calculate that number, you need to track your expenditure.

Invest in an accounting system

Accounting software is a necessary evil for freelancers. Fortunately, we no longer live in the Dark Ages when this class of software was unintelligible to anyone who wasn’t a trained book-keeper or accountant. Today’s accounting software is designed around business activities such as invoicing, receipting and regular tax reporting, rather than the complexities of taxation law.

Whether you choose software that is installed to your computer or you subscribe to a cloud service (one that is installed on somone else’s computer and you access it through a web browser), you can easily use that software to log and categorise all of your expenses. After a couple of months, you’ll start to get a handle of where you are spending your money.

Wants and needs

After categorising and reviewing your expenses, you’ll be able to cast a critical eye over them. Some you’ll see are wasteful – do you need to have all your meetings at the local cafe and pay for the food and drinks? Is your mobile phone plan the best fit and value for you? When was the last time you checked into your insurance costs?

Once you’ve done some triage on your spending, you can create a baseline budget of what you need in order to simply operate your business.

Don’t forget to add your salary to that number. The level of salary you pay yourself will depend on your personal expenses. I always suggest paying yourself a fixed salary so that you know what your business needs to make in order for you to get by.

Add a little bit of “fat” to your spending. There will be emergencies – you might drop your phone or need to pay the excess (or deductible depending on what part of the world you’re in) on an insurance claim. Building a small bank to cover that, or slow times of the year is important. Many freelancers do fine until something unexpected happens.

Setting the rate

That budget you’ve just created will form the baseline you’ll use for calculating your rates.

Say your monthly outgoings look a little like this:

  • Personal salary: $1500 per week (remember, this is a pre-tax amount as you’ll have to manage income tax)
  • Weekly business expenses: $500

That gives an easy number to work with of $2000 per week that your business needs to bring in. Multiplied over a year that’s $104,000 per year.

By my estimate, you have around 177 working days per year (after deducting non work days) meaning you need a day rate of around $588 just to get by. That’s about $74 per hour assuming a normal eight-hour day.

Sticker shock

Those numbers might look pretty hefty and you may have some trepidation in charging like that. When confronted by an unexpected high price when we’re shopping we are often surprised – that’s sticker shock. But for freelancers we often feel sticker shock in reverse.

Get over it!

Your work is like real estate; it’s worth what the market will pay. I;ve never seen a real estate agent that’s shy about what they can sell a house for. Freelancers should adopt a similar attitude.

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