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Freelancers And Consultants: 3 Reasons You Shouldn’t be Billing Hourly

Freelancers And Consultants: 3 Reasons You Shouldn’t be Billing Hourly

Imagine a method of paying for a time-sensitive service whereby the slower the service provider is, the more they’re paid; and by contrast, the faster they are the less they earn.

One bizarre consequence of this arrangement is that the more experienced professionals in a given field, whose experience typically makes them faster than newcomers to the profession, will be treated as less valuable than the inexperienced practitioners who usually take longer to complete the same amount of (often inferior) work.

And consider also that this payment method means not only that the service provider has incentive to drag out his work as long as possible, but also that the client paying for the final product has incentive to rush the work.

Insane, right?

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And yet this is how tens of millions of service providers, consultants and other freelancers charge their clients. Hourly billing. What on earth are we thinking?

For the same reason the “Print Screen” key persists on desktop keyboards years after its real estate should have gone to, say, a “.com” key, consultants in just about every profession continue to bill by the hour. Because we always have.

If you’re a consultant, freelance contractor or the sole proprietor of a service business, there will of course be times when a client insists on paying you by the hour. (That simply means the client hasn’t given enough thought to this arrangement, either, because it works against their interests as much as against yours.) In those cases, what can you do?

But if you’re given the choice, or asked to define your preferred method of billing, here are 3 reasons you should not opt to charge by the hour:

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1)  It creates an adversarial relationship between you and your client — when such conflict is totally unnecessary and another billing arrangement would better benefit both sides.

Say you’re a graphic artist, and you and your client agree upfront that the new icon set you’re going to create for their website is worth $1,000 — for the first set, plus one round of revisions. (Tweaks beyond that are another matter, not important here.) You’re happy with that figure, and your client is as well.

Now that you’ve got that out of the way, you both have an incentive to arrive at an icon set everyone loves as soon as possible. The sooner it’s done, the sooner your client starts reaping the benefits of their new icons — on their website, in marketing collateral and in other branding channels. And the sooner it’s done, the more time you have for other paying projects — and the more “per hour” you’ve earned, if you want to think of it that way.

In other words, once the client has determined what the final work product is actually worth to them, the fact that you can bang out an excellent icon set in a hurry becomes a virtue for both parties. When you’re billing by the hour, by contrast, you have a perverse incentive not to finish your excellent first draft too quickly, because it means you’ll get paid less.

And this inherent conflict of interest carries through your entire relationship with your hourly-paying clients: If you demonstrate you can complete an icon set very quickly (and in fewer hours than the job’s compensation would be worth to you), you also have to worry you’re setting a precedent that the client should expect all of your design work to be completed fast — and not to have to pay you much for it.

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2)  It measures and rewards the wrong things (and neglects the right ones).

Let’s stick with our $1,000 icon set example. Imagine you’re billing hourly — say, $50 an hour — and you nail the icons on the first shot. Your client is thrilled with the work! You’re thrilled with the great feedback you’ve gotten. And because the job took you 20 hours, you can bill them $1,000. Not bad!

Now a different scenario: Your first draft falls flat. The client calls you frustrated and a bit panicked. After an unpleasant conversation, you crank out a second draft and, after you send in the new icons a couple of days later, the client responds that they’re pleased. Not thrilled, but pleased. And because the two drafts took you a combined 31 hours, you can bill the client… $1,550?

But wait. In the first scenario, you nailed the work on the first try. And they loved it. Second scenario? Not so much. It took you two tries, you shook your client’s faith in you, and you didn’t turn in an approved draft for an extra couple of days. But they paid you 50% more!

In a perfect scenario — or at least one where the client pays you for your work based on criteria less arbitrary than the number of hours the job takes — you’d whip up a brilliant design ASAP and then get yourself back out there working on other billable projects. And your client would start reaping the benefits of your completed work sooner.

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But in this nonsensical hourly-billing arrangement, you and your client are actually both working counter to your own best interests. You are, because you’re spending more time than necessary on the project (or at least holding back on delivering until you’ve racked up a number of billable hours you can live with). Your client is as well, because they’re rushing you to hurry the work rather than take the time you need to make it outstanding.

All because you and your client are measuring the project’s worth based on the totally arbitrary “total hours worked” rather than what really matters.

3)  It creates a built-in mechanism to make your work less compensated as you gain more relevant knowledge and expertise for your client.

Imagine you’ve been working with your icon-set client for a few months now. You’re learning about their organization, products, vision, customers and competitors. In short, you’re becoming faster at understanding new projects and banging out great work. Doesn’t this mean you’re becoming more valuable to your client than you were on your first assignments for them?

And yet, if you’re billing them honestly, the fact that you’re becoming quicker at completing assignments — and turning in work that delights your client — means that your compensation from this client goes down the more the relevant knowledge and experience you gain for them goes up.

My advice: Bill by the project. Once you and your client agree on the ultimate worth of a given task or service, your interests become nicely aligned from that moment forward. And you can both get on with the business of generating the best work possible in the shortest time possible.

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robbie hyman

Copywriter

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Last Updated on August 20, 2019

How to Set Financial Goals and Actually Meet Them

How to Set Financial Goals and Actually Meet Them

Finances can push anyone to the point of extreme anxiety and worry. Easier said than done, planning finances is not an egg meant for everyone’s basket. And that’s why most of us are often living pay check to pay check. But did anyone tell you that it is actually not a tough task to meet your financial goals?

In this article, we will explore ways on how to set financial goals and then actually meet them with ease.

5 Steps to Set Financial Goals

Though setting financial goals might seem to be a daunting task but if one has the will and clarity of thought, it is rather easy. Try using these steps:

1. Be Clear About the Objectives

Any goal (let alone financial) without a clear objective is nothing more than a pipe dream. And this couldn’t be more true for financial matters.

It is often said that savings is nothing but deferred consumption. Therefore if you are saving today, then you should be crystal clear about what it is for. It could be anything like kid’s education, retirement, marriage, that dream vacation, fancy car etc.

Once the objective is clear, put a monetary value to that objective and the time frame. The important point at this step of goal setting is to list all the objectives, however small they may be, that you foresee in the future and put a value to it.

2. Keep Them Realistic

It’s good to be an optimistic person but being a pollyanna is not desirable. Similarly, while it might be a good thing to keep your financial goals a bit aggressive, going out of the line will definitely hurt your chances of achieving them.

It’s important that you keep your goals realistic in nature for it will help you stay the course and keep you motivated throughout the journey.

3. Account for Inflation

Ronald Reagan once said – “Inflation is as violent as a mugger, as frightening as an armed robber and as deadly as a hitman”. And this quote sums up the best what inflation could do your financial goals.

Therefore account for inflation whenever you are putting a monetary value to a financial objective that is far away in the future.

For example, if one of your financial goal is your son’s college education, which is 15 years hence, then inflation would increase the monetary burden by more than 50% if inflation is mere 3%. So always account for inflation.

4. Short Term vs Long Term

Just like every calorie is not the same, the approach towards achieving every financial goal will not be the same. It is important to bifurcate goals in short term and long term.

As a rule of thumb, any financial goal, which is due in next 3 years should be termed as short term goal. Any longer duration goals are to be classified as long term goals. This bifurcation of goals into short term vs long term will help in choosing the right investment instrument to achieve them.

More on this later when we talk about how to achieve financial goals.

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5. To Each to His Own

The journey of setting financial goals is an individualistic affair i.e. your goals are your own goals and are determined by your want to achieve them. A lot of times we get on the bandwagon of goal setting only to realize later on that it was not meant for us.

It is important that your goals are actually your goals and not inspired by someone else. Take a hard look at this step at all the goals you’ve set for after this step, you will be on the way to achieve them.

By now, you would be ready with your financial goals, now it’s time to go all out and achieve them.

11 Ways to Achieve Your Financial Goals

Whenever we talk about chasing any financial goal, it is usually a 2 step process –

  • Ensuring healthy savings
  • Making smart investments

You will need to save enough; and invest those savings wisely so that they grow over a period of time to help you achieve goals. So let’s get down to ensuring healthy savings.

Ensuring Healthy Savings

Self realization is the best form of realisation and unless you decide what your current financial position is, you aren’t heading anywhere.

This is the focal point from where you start your journey of achieving financial goals.

1. Track Expenses

The first and the foremost thing to be done is to track your monthly expenses. Use any of the expense tracking mobile apps to record your expenses. Once you start doing it diligently, you would be surprised to see how small expenses add up to a sizeable amount.

Also categorize those expenses into different bucket so that you know which bucket is eating the most of your pay check. This record keeping will pave the way for cutting down on un-wanted expenses and pump up your savings rate.

2. Pay Yourself First

Generally, savings come after all the expenses have been taken care of. This is a classical mistake which almost everyone of us do. We pay ourselves last!

Ideally, this should be planned upside down. We should be paying ourselves first and then to the world i.e. we should be taking out the planned saving amount first and then manage all the expenses from the rest.

The best way to actually implement is to put the savings on automatic mode i.e. money flowing automatically into different financial instruments (for example – mutual funds, retirement corpus etc) every month.

Taking the automatic route will make us lose control of our money and hence will compel us to manage in what’s left with us thereby increasing the savings rate.

3. Make a Plan and Vow to Stick with It

Budgeting is the best to get around the uncertainty that financial plans always pose. Decide in advance how spending has to be made.

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Nowadays, several money management apps and wallets can help you do this automatically. It’s easy and who knows, you may just end up doing what people fail to do.

At first, you may not be able to stick to your plans completely but don’t let that become a reason why you stop budgeting entirely.

Make use of technology solutions you like. Explore options and alternatives that let you make use of the available wallet options and choose the one that suits you the most. In time, you will get accustomed to making use of these solutions.

You will find that they make it simpler for you to follow your plan, which would have been difficult otherwise.

4. Rise Again Even If You Fall

Let’s be realistic. It’s not like the world will come to an end if you made one mistake. This isn’t called leniency but discipline.

If you fail to meet your budget for a month, don’t give up the entire effort just like that. Instead, start again.

Remember that flexible plans are the most realistic plans. So go forward and try to follow your financial goals as planned but if for some reason, the plan gets out of hand for you, do not give up on it just yet. This has a lot to do with your psychology rather than any material commitment.

All you have to do is to stay on the road and vow to stay on it, no matter how much you fall down.

5. Make Savings a Habit and Not a Goal

In the book Nudge, authors Richard Thaler and Cass Sunstein advocate that in order to achieve any goal, it should be broken down into habits since habits are more intuitive for people to adapt to.

Make Savings a habit rather than a goal. While it might seem to be counter intuitive to many but there are some deft ways of doing it. For example:

Always eat out (if at all) during weekdays rather than weekends. Usually weekends are expensive. Make it a habit and you would in turn be saving a great deal.

If you are travelling buff, try to travel during off season. Your outlay will be much less.

If you go out for shopping, always look out for coupons and see where can you get the best deal.

So the key point is to imbibe the action that results in savings rather than on the savings itself, which is the outcome. Focusing on the outcome will bring out the feeling of sacrifice which will be harder to sustain over a period of time.

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6. Talk About It

Sticking to the saving schedule (to achieve financial goals) is not an easy journey. There will be many distractions from those who are not aligned with your mission. And it would be rather easy to lose the grip over your discipline.

Therefore in order to stay the course, it is advisable that you keep yourself surrounded with people who are also on the same bandwagon. Daily discussions with them will keep you motivated to move forward.

7. Maintain a Journal

For some people, writing helps a great deal in making sure that they achieve what they plan.

So if you are one of them, maintain a proper journal, where you write down your goals and also jot down the extent to which you managed to meet them. This will help you in reviewing how far you have come and which goals you have met.

Use this journal to write down all essential points such as your short term, mid term and long term goals, your current sources of income, your regular expenses which you are aware of and any committed expenses which are of recurring nature.

When you have a written commitment on paper, you are going to feel more energised to follow the plan and stick to it. Moreover, it is going to be a lot more easier for you to follow you and track your progress.

At this point, you should be ready with your financial goals and would be doing brilliantly with savings; now it’s time to talk about the big daddy – Investments.

Making Smart Investments

Savings by themselves don’t take anyone too far. However savings when invested wisely can do wonders and we are at that stage where we will talk about making smart investments.

8. Consult a Financial Advisor

Investments doesn’t come naturally to most of us therefore rather than dabbling with it ourselves, it is wise to consult a financial advisor.

Talk to him/her about your financial goals and savings and then seek advice for the best investment instruments to achieve your goals.

9. Choose Your Investment Instrument Wisely

Though your financial advisor will suggest the best investment instruments, it doesn’t hurt to know a bit about them.

Just like “no one is born a criminal”, no investment instrument is bad or good. It is the application of that instrument that makes all the difference.

Do you remember we talked about bifurcating financial goals in short term and long term?

It is here where that classification will help.

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So as a general rule, for all your short term financial goals, choose an investment instrument that has debt nature for example fixed deposits, debt mutual funds etc. The reason for going for debt instruments is that chances of capital loss is less as compared to equity instruments.

10. Compounding Is the Eighth Wonder

Einstein once remarked about compounding,

Compound Interest is the eighth wonder of the world. He who understands it, earns it… He who doesn’t… Pays it.

So make friends with this wonder kid. And sooner you become friends with it, quicker you will reach closer to your financial goals.

Start investing early so that time is on your side to help you bear the fruits of compounding.

11. Measure, Measure, Measure

All of us do good when it comes to earning more per month but fail miserably when it comes to measuring the investments; taking stock of how our investments are doing.

If there is one single step where everything (so far) can go wrong, it is at this step – Measuring the Progress.

If we don’t measure the progress timely, then we would be shooting in the dark. We wouldn’t know if our saving rate is appropriate or not; whether financial advisor is doing a decent job; whether we are moving closer to our target or not.

Do measure everything. If you can’t measure it all yourself, ask your financial advisor to do it for you. But do it!

The Bottom Line

This completes the list of tips for you to set financial goals and actually achieve them with not so great difficulty.

As you can see, all it requires is discipline. But guess that’s the most difficult part!

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Featured photo credit: rawpixel via unsplash.com

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