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You should NEVER charge an hourly rate

You should NEVER charge an hourly rate

If you’ve been freelancing or consulting, chances are, you charge an hourly freelance rate. But what if you want to earn more?

You’ve got financial and life goals, and earning more offers one of the best ways to reach your goals. Maybe you want to:

  • earn enough to quit your lousy day job and freelance/consult full-time, or
  • pay off those nagging student loans and credit cards, or
  • buy that sporty red Ferrari (or Honda) you’ve had your eye on, or
  • afford a trip to Europe.

But at your current hourly freelance rate, you’d have to work 80 hours a week for the next year(s) to afford any of those things. That is, if you could even find that much billable work.

But do you really want to work that much? Me neither.

And what if you want more freedom, flexibility, or free time?

Your day job is probably enough of a treadmill rat race already. Working more would be moving in the opposite direction.

The alternative to your treadmill of an hourly freelance rate

So, do you really want to work all the time? Not me. I’d rather work less and earn more.

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What if I told you there was a way you could actually earn more and work less? Yes, I know, it sounds too good to be true. You’ve heard that pitch before on late-night infomercials about flipping real-estate. No money down, get-rich-quick, sipping mai tais poolside. Well, that’s not what I’m talking about.

What I’m talking about requires hard work, but maybe more important, it requires a mindset shift.

I’ve been consulting since 2007, and for much of that time, charged hourly. But over the past 2 years, I’ve experimented with ways to earn more–without having to work more–and what I’ve found has been both surprising and exciting.

For example, I’ve been able to boost my effective rate by 70%, 100%, sometimes even 600% (yes, that’s no typo). By effective freelance rate, I mean the amount I earn divided by how many hours I work. So, if you currently charge $100/hour, wouldn’t you rather earn $170/hour, or $200/hour, or $600/hour?

Sticking with that example, if you charge $100/hour and bill 20 hours a week (earning $2,000/week), boosting your effective freelance rate by 50% would mean you’d earn $3,000 for working the same amount of time.

Think about how earning an extra $1,000 a week would change your life.

For 99% of us, an extra $1,000 a week would be a huge change. You could actually quit that day job, pay off those debts, afford to take time off, or maybe even achieve some of the other dreams you’ve been putting off until “someday.”

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What’s wrong with charging hourly?

Before I get into the details of how to boost your freelance rate like this, I want to highlight a couple other big problems with charging an hourly rate that you may not have considered. You already know that charging hourly puts a ceiling on how much you can earn, but there’s something else you probably haven’t considered.

Billing hourly actually gives you incentive to work LESS efficiently. Since you’re being paid not for the outcome but for your time, you’ll end up taking more time to do the work. And that’s a disservice to your clients–the same clients for whom you’re supposed to be safeguarding their best interests.

Sure, you THINK you work efficiently. But I guarantee you’ll be far more productive if you get paid the same amount no matter if it takes you 2 hours or 10 hours to achieve an outcome.

The other problem with charging a hourly freelance rate is that you get into a nickle-and-dime mindset, where you want to bill for every minute you work on something for a client. And charging for every single thing can get annoying to clients. Besides, building a profitable freelance business is built on giving your clients results–not billing in .1 or .25 hour increments.

First, think differently to charge differently

OK, let’s get down to brass tacks, and talk about how this is possible.

I mentioned that this requires a big shift in your mindset. And, yes, billing hourly is how almost everyone does it.

But if you’re doing what everyone else is doing, you’re never going to be able to create the kinds of breakthroughs that make huge changes in your life. After all, if you do what everyone else is doing, you’ll end up with what everyone else is getting–which is just another day, week, month, year, decade on the treadmill. It’s time to step off.

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The first step off the treadmill is to realize there are alternative ways to price your services. The most common are:

  • flat fee, also known as per-project fee
  • daily, weekly, and monthly rate
  • performance-based compensation

I tend to favor per-project pricing which is based on the value the client receives for my services. (Performance-based compensation–such as revenue sharing–can be very lucrative, but it requires high trust with your client, and intimate knowledge of and access to their financial data).

So, with per-project pricing, when I scope out a project, I also determine the full extent of the value the client gets, and then quantify that value. Here’s a simple example: if you can help the client make a small change–maybe by increasing website traffic, or increasing their conversion rate, or increasing their pricing–which increases their average revenue per client by, say, $50/month, you can quantify the annual value like this:

  • $50/customer * 100 customers * 12 months = $60,000 revenue

Now that you have a rough calculation of the value, you can peg your pricing to that value. Generally, you’ll want to use a 1:10+ ratio of price to value. So in this example, a price of $6,000 will make it a pretty easy decision for the client: if they pay you $6,000, they’ll receive $60,000. If you gave me $10, and I gave you $100 back, would you take that deal? Of course!

Daily, weekly, and monthly rates–sometimes called retainers–also work well, especially, again, if you can tie the value received to your price.

Easy in theory, harder in practice

The trick to succeeding with non-hourly pricing is to identify and quantify the value your client will get.

This isn’t always easy. Often, it can be difficult to know how to identify all the potential value your client will get from your services–especially if you don’t directly increase revenue. Do your services make clients more efficient? Do you give them easier access to data? Can you make it more likely that your clients will meet deadlines?

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And after you’ve identified all the potential areas of value, how do you quantify them? For example, how do you put a dollar value on reducing anxiety for a business owner?

What’s the upside?

Yes, charging an hourly freelance rate is easy. You don’t have to think about what value the client will get–and which is often tricky to determine. So why would you want to stop charging hourly?

For starters, here are a couple advantages:

  • Non-hourly pricing incentivizes you to work very efficiently to maximize your effective hourly rate (your revenue / your time). You’ll be amazed at how much more you can get done in the same amount of time.
  • Non-hourly pricing highlights the complete value the client will receive–which makes them conscious of how much they’re getting. As a result, it becomes easier to charge more, and the client still feels like they’ve gotten a great deal. This isn’t about pulling a fast one just to charge more–it’s about providing amazing value to your clients.

What’s more, non-hourly pricing allows you to significantly increase your revenue–not just increase incrementally. I’m not talking about incremental 5% annual rate increases. I’m talking about increasing your effective rate by 50%, 80%, 100%, or more. Yes, I know that sounds outrageous, but I’ve created those kinds of increases in my own consulting practice and for the students who’ve taken my courses.

So yes, it may sound outrageous. The alternative is to stick with what you’ve always done, what everyone else is doing, and what you’ve always gotten. If you’re ready to step off the treadmill, make the switch and stop charging hourly rates!

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Last Updated on November 27, 2020

How to Set Financial Goals and Actually Meet Them

How to Set Financial Goals and Actually Meet Them

Personal 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. 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 to set financial goals and actually meet them with ease.

4 Steps to Setting Financial Goals

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

1. Be Clear About the Objectives

Any goal 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’s for. It could be anything, including your child’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 that you foresee in the future and put a value to each.

2. Keep Goals 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 beyond what you can realistically achieve will definitely hurt your chances of making meaningful progress.

It’s important that you keep your goals realistic, as 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.” This quote sums up what inflation could do your financial goals.

Therefore, account for inflation[1] whenever you are putting a monetary value to a financial objective that is far into the future.

For example, if one of your financial goal is your son’s college education, which is 15 years from now, then inflation would increase the monetary burden by more than 50% if inflation is a mere 3%. Always account for this to avoid falling short of your goals.

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4. Short Term Vs Long Term

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

As a rule of thumb, any financial goal that is due in next 3 years should be termed as a 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.

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

How to Achieve Your Financial Goals

Whenever we talk about chasing any financial goal, it is usually a two-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.

Ensuring Healthy Savings

Self-realization is the best form of realization, 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 spending. Use any of the expense tracking mobile apps to record your expenses. Once you start doing it diligently, you will be surprised by how small expenses add up to a sizable amount.

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

If you’re not sure where to start when tracking expenses, this article may be able to help.

2. Pay Yourself First

Generally, savings come after all the expenses have been taken care of. This is a classic mistake when setting financial goals. We pay ourselves last!

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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 manage all the expenses from the rest.

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

Taking the automatic route will help release some control and compel us to manage what’s left, increasing the savings rate.

3. Make a Plan and Vow to Stick With It

Learning to create a budget is the best way to get around the uncertainty that financial plans always pose. Decide in advance how spending has to be organized

Nowadays, several money management apps can help you do this automatically.

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. 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 counterintuitive to many, there are some deft ways of doing it. For example:

  • Always eat out (if at all) during weekdays rather than weekends. Weekends are more expensive.
  • If you are a travel buff, try to travel during off-season. You’ll spend significantly less.
  • If you go shopping, always look out for coupons and see where can you get the best deal.

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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5. 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.

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

6. Maintain a Journal

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

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.

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

Making Smart Investments

Savings by themselves don’t take anyone too far. However, savings, when invested wisely, can do wonders.

1. Consult a Financial Advisor

Investment doesn’t come naturally to most of us, so it’s 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.

2. Choose Your Investment Instrument Wisely

Though your financial advisor will suggest the best investment instruments, it doesn’t hurt to know a bit about the common ones, like a savings account, Roth IRA, and others.

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[2].

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 compared to equity instruments.

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3. 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.”

Use compound interest when setting financial goals

    Make friends with this wonder kid. The sooner you become friends with it, the quicker you will reach closer to your financial goals.

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

    4. 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 and taking stock of how our investments are doing.

    If we don’t measure progress at the right times, we are shooting in the dark. We won’t know if our saving rate is appropriate or not, whether the financial advisor is doing a decent job, or whether we are moving closer to our target.

    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

    Managing your extra money to achieve your short and long-term financial goals

    and live a debt-free life is doable for anyone who is willing to put in the time and effort. Use the tips above to get you started on your path to setting financial goals.

    More Tips on Financial Goals

    Featured photo credit: Micheile Henderson via unsplash.com

    Reference

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