Replace Your Day Job Income Through Freelancing
So your freelance business is finally getting off the ground. You’ve already landed your first few gigs, and your freelance rates are now similar to what you’ve envisioned when you first started thinking about working independently in the first place.
Does this mean you’ve made it? And while we’re at it, is there any objective criteria to help you assess how successful you are as a freelancer?
And one more thing. How are you supposed to know when to quit your day job? When will you manage to completely replace your day job income? Believe it or not, some basic math is all that you need in order to find the answers to all these questions.
- Step 1 – Calculate how much it will cost you for: Health insurance, retirement fund contributions, gym membership, supplies (accounting software, computer, desk, etc.)
- Step 2 – Figure out how much you will save by not working in an office, primarily the commuting costs. Subtract this from the above costs.
- Step 3 – Figure out how much money you earn hourly. For example, if you’re salary was $60,000 a year, if you work a 40 hour week, you earned $31.25 an hour.
- Step 4 – If you’re new freelancing costs from step 1 are $700 a month for example, but you’ll save $200 in commuting costs from step 2, then your new costs are $500 a month. In this example, you’d need to earn an extra $3.12 an hour to cover these costs.
- Step 5 – You must factor in times where you won’t have a solid workflow, so add an extra $5-$10 an hour to your rates.
- Step 6 – Your hourly rate in this example would be $44.37 an hour ($31.25 + $3.12 + $10), before even considering to leave your day job.
Math: a skill that all freelancers should possess
Don’t worry; I’m not talking about calculus, derivatives and all that. You don’t need to be Matt Damon in Good Will Hunting for this type of math.
I’m just trying to stress that it doesn’t matter if you’re a writer, a translator, a graphic designer, or a web developer. There’s always some math involved in freelancing.
Setting your hourly rate isn’t as simple and straightforward as you’d imagine. In fact, what you may consider a pretty impressive rate is most likely too low to keep your pretty little freelancing business afloat.
An example will work better.
Let’s say your corporate job pays $30 per hour when you breakdown your salary to a gross hourly amount.
Well, imagine you find a client who’s more than willing to pay $40 for an hour of your time.
Sounds awesome, right? I mean, you’d be working at a higher rate than you normally do.
In theory, this may seem good. You’ve leveled up, for sure. But if you think about it, the expenses you have as a freelancer are much higher than the ones you have while working, say, an office job.
And, you don’t necessarily have the benefits that a standard salaried job offers such as retirement, health, vacation, and dental.
Which is exactly why comparing your day job rate and your freelance job rate is completely pointless. Apples and oranges, you know?
Don’t let yourself be fooled by the false sense of security and well being that a higher rate provides. You can’t replace your day job income by being paid at the same rate
Unless you plan to go back to your old job in a couple months. Or however long it’ll take you to go broke and not want to hear the word “freelancing” ever again in your life.
But like I said, you need to think twice – at least! – before deciding what your rate is going to be and whether or not it’s worth taking on certain projects where clients offer less than what you had in mind.
So basically, the golden rule of freelancing is:
Ignore the math and you’ll end up penniless.
Simple as that. The best advice I’ve ever received as a freelancer is to keep a day job as long as possible. After all, you’re getting two salaries!
Benefits and expenses of day jobs
It’s not just that going freelance will cost you a bit more, a regular job also comes with some benefits.
These are easy to ignore when all you can think about is the flexible schedule, the freedom to choose your own clients, and all the other marvelous stuff that being a freelancer comes with.
First of all, and most importantly, a full-time day job typically guarantees you at least 40 paid hours. Unless a catastrophe happens, you’re unlikely to end up jobless anytime soon.
You also get paid personal days, sick time, healthcare, and the best part – paid vacation.
The company will usually pay for disability and life insurance too. And they’ll most likely cover part of your employment tax too.
Things are pretty rad in the learning department too. Courses, conferences, and everything related to professional development are typically covered at a full-time day job.
Raises are more or less predictable. Pension plans and benefits are dealt with early on, and you don’t have to worry about heat and lighting costs either.
And you get leave time for childbirth too.
There are some costs as well: commuting and paying for lunches and coffee more often are the big ones.
There’s no perfect answer here, but recognize that a day job does provide some important benefits that you may not be able to live without.
What freelancing actually costs you
So overall, it seems like your salary is only one of the great many things that a job within a company offers you. Perks are an important part of a corporate position, and let’s face it; they’re worth thousands of dollars – or even more!
Yes, you can replace your day job income by working as a freelancer. Just don’t expect the ride to be so smooth.
Don’t get me wrong. Nothing compares to the freelance gig market. I love it. But when you’re a freelancer, everything comes at a price. Even freedom itself.
And I’m not talking only about health care, life insurance and the like. But also about your laptop, your phone, your iPad, which need replacement at some point. And guess who’s going to have to pay for it?
Yeah, you. There’s no boss to go to and complain about that faulty screen, because you’re the boss. Duh.
And if you have to meet a client for dinner, well, hope you have enough funds on that card, because again, there’s no company to cover your costs.
Also, freelancers have no paid leave. Regardless of what’s happening to you, clients won’t pay for work you don’t deliver or hours you don’t put in.
Hidden freelancing benefits
One benefit of freelancing that many don’t consider is the tax advantages. Having a home office gives you yearly tax deductions that can amount to a substantial amount. For instance, if your office comprises 20% of your living space, then you can deduct 20% of almost ALL your expenses – mortgage, utilities, internet, taxes, etc.
Further, if you opt to form a corporation for your freelance business, you can benefit from an even lower tax rate on income earned. There are important implications with this maneuver so please consult a certified accountant before tackling this.
How the math works when quitting your day job
The basics of figuring out whether or not to quit your day job for full-time freelancing boil down to the numbers. Figure out how much the following will cost you:
- Health insurance
- Retirement fund contributions
- Gym membership
- Supplies (accounting software, computer, desk, etc.)
Then, figure out how much you will save by not working in an office, primarily the commuting costs. Subtract this from the above costs.
We can then figure out how much money you earn on an hourly basis. For instance, if you’re salary was $60,000 a year, if you work a 40 hour week, you earned $31.25 an hour.
So, if you’re new freelancing costs noted above are going to be $700 a month, but you’ll save $200 in commuting costs, then your new costs are $500 a month. You then need to earn an extra $3.12 an hour to cover these costs.
Further, as a freelancer, you will have times where you aren’t working 40 hours a week, and other times where you’ll work 80 hours a week. It totally depends! To factor in times where you won’t have a solid workflow, add an extra $5-$10 an hour to your rates.
In this example, you need to be steadily earning $44.37 an hour ($31.25 + $3.12 + $10) before even considering to leave your day job.
Wrapping it up
It’s not easy to replace your day job income (plus the perks). However, you can manage. Set aside enough money to last you a couple of months in the event of a dry spell in your freelancing life. And, be sure to add the buffer into your hourly rates.
How much you set aside depends on your lifestyle and risk tolerance. I’d recommend at least 3 – 6 months worth of expenses as your rainy day fund. That should tide you over as you look for other clients.
You can also try to minimize your expenses until you’ve completely transitioned to being a full-time freelancer. Hold on to your full-time job as long as possible!
Finally, remember not to give up easily. Freelancing isn’t easy, but if you give it your best, it will give you the freedom and flexibility you’re looking for.