How to Set Your Freelance Rates
A 5-Step Guide to Earning What You’re Worth as a Freelancer
As a freelancer, you are granted the ability to set your own rates. In fact, that’s one of the best parts of being self-employed. Still, setting your rates can prove difficult. After all, you want to earn exactly what you are worth but you also want to ensure that you’re setting your prices in a smart way.
There are a variety of ways that you can create and present your rates to potential clients. Still, the ever-lingering question of whether or not you are charging the right amount is there. In the quest to offer your clients the value that they deserve while also enabling your business to grow, knowing how to set your freelance rates in a smart way is vital. Today, I’ll be offering you some valuable tips to assist you in setting your rates right in that sweet spot.
Let’s get started!
Deciding on Your Target Annual Income
The process of establishing your freelance rates starts with a very simple question: How much money do you want to make?
There are a variety of factors that go into answering this question, however, and it is important that you keep these in mind when formulating your estimate. Do you want to earn more than you make at your current 9–5 job? While this may seem like a good guideline to follow in identifying your target annual income, it is important that you remember your cost-of-living expenses as well. This is the best place to start.
Get detailed! Start by calculating your cost-of-living expenses by adding up the following expenses:
- Cost of rent
- Emergency fund
Once you have established an estimate of how much each of these expenses will cost you each month, work how much money you would like to put into savings each year into your estimate. This will give you your target annual income, a valuable total to consider when setting your freelance rates.
Identifying the Costs of Doing Business
With income comes expenses, it’s just a way of life. For this reason, it is incredibly important that you remember that your annual income and annual earnings are two very different things. With doing business comes the costs associated with doing business. These costs are what you should always consider first when establishing your freelance rates. After all, you won’t see a profit until these costs are accounted for.
So what counts as business costs? There is everything from the large costs like the computer you complete your work on and your desk and then there are smaller fees like your task management tools and web hosting. While smaller costs may not seem like much of a thing to consider, these can add up significantly over time.
Another huge business cost area to consider is self-employment taxes and the costs of paying for your own health insurance. It is highly recommended, as a general rule, that freelancers set aside around 25 to 30 percent of their annual income to be prepared for tax season. Unfortunately, as a freelancer, you’ll be paying both income taxes and self-employment taxes and your budget has to be able to cover the costs associated with both.
In regards to paying for your own health insurance, there is a lot to take into consideration. Health insurance can get really expensive, even for the most basic health insurance plans. Check out Make a Living Writing’s comprehensive post of Health Insurance for Freelancers: 12 Viable Options for some valuable information on paying for health insurance as a freelancer. It may be helpful to you!
Time = Money
It may not occur to you to make an estimate of how much time you’ll spend in front of your computer working as a freelancer but, as the old saying goes, time is money. For this reason, it is crucial that you figure up how much time you can reasonably afford to spend working.
One of the biggest benefits of being a freelancer is that you can set your own hours and work based on your own schedule. What isn’t as great about that, however, is that time can really get the best of you and you may find yourself working nearly 24 hours a day to keep up with deadlines if you aren’t careful.
When considering how much time you can afford to work there are a few different factors you should be taking into account including:
- Mental Health Days (Believe me, all freelancers deserve them)
- Vacation/Holiday Times
- Sick Days
- Whether you will work strictly weekdays or weekends as well
Once you have a clear estimate of how many days a year you’ll spend working as a freelancer, it is time to narrow your view a bit further and decide how many hours a day you will spend working. Let’s say that I decide that I will work around 245 days a year out of 365. With this information, I can then figure up that I’ll spend roughly 7 hours a day working. 245 days of work at 7 hours of work per day equals out to 1,715 hours each year spent working.
But we aren’t done yet.
See, as a freelancer, every hour spent in front of your computer doesn’t necessarily mean you will be paid for that hour. Freelancers are their own bosses and that means that all of the tasks required in running a small business are yours to deal with as well. Make a rough estimate of how much time business management tasks like checking email and creating a cold pitch will take up on any given day. Once you have generated an estimate of these tasks, subtract it from your running total. This will give you your total annual investment of time.
Consider Your Hourly Rates
Now that we have established our target annual income, the costs of doing business, and our annual investment of time, it’s time to get to what we all came for: calculating your hourly freelance rates. Doing this is simple enough and requires the use of a fairly easy-to-understand formula:
Target annual income + Costs of doing business / Annual Billable Hours
Let’s look at an example.
Let’s say that our target annual income is $60,000. Next, we have established that our cost of doing business is roughly $9,500 per year. We’ll take each of these totals and add them together, figuring up our annual earnings of $69,500 per year. Next, we will divide this total by our calculated annual billable hours of 1,500 hours after subtracting the hours spent completing business management tasks. This total comes out to $46.33 per hour.
This means that, in order to meet your annual income, you’ll want to charge each client a minimum of $46.33 per hour. Any scenario in which you charge a client more than your minimum hourly rate is simply icing on the cake, further boosting your target annual income.
Remember the Value of Your Services
Now, although we have established a minimum hourly rate, it is crucial that you understand that not every job you complete as a freelancer should be based on hourly rates. Why? Charging an hourly rate serves you well when the job calls for an hourly rate. When it doesn’t, you’re putting a huge limit on one thing: time. There are only so many hours in one year to earn money and limiting yourself to hourly rates can put a huge restraint on your earning potential.
When considering the fact that most freelancers, on average, work less than 40 hours per week and 79 percent of freelancers report earning more money within a year of leaving their 9–5 jobs, you have to wonder how it’s done. Put simply, the key to this significant boost in income without having to work extended hours is fixed rate jobs. Fixed rate jobs are based on telling the client how much a project will cost, not how long it will take you to complete it.
The real difference made by fixed rates is in how proposals are presented to clients. Consider the fact that one job may be priced hourly at $125 per hour. Presenting this to a client may have them wondering if paying $125 per hour for the project is worth it or not. After all, they don’t know your process of work and can’t be sure how long it will take you to complete the project.
If you instead create a proposal stating that the job will cost a fixed rate of $375, the client is much more likely to consider as they know exactly what they’ll be paying upfront. In one scenario, clients are paying for what they perceive the value of your time to be. In the other, they are paying for the complete value of your service. This also allows you to start charging more money for the same amount of work as well.
When establishing your freelance rates, it is always most crucial to keep the value of your services in mind. At the end of the day, you set your own rates and you decide how much money your time and attention is worth. Take care not to undercharge due to a reluctance to demand more from your clients. How much you will make as a freelancer (and your success in turn) is dependent on your ability to know the value of what you have to offer.
Take the information highlighted in this article, apply these 5 steps to establishing your freelance rates, and go forth with confidence. Confidence plays a significant role in landing the gigs you need and want as a freelancer. When you are confident in your value, your clients will be too.
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