Thinking About Money: What Freelancers Need to Understand

Every freelance editor I know thinks about money, especially in these tough economic times. It isn’t that money is the uppermost concern, but it is pretty darn close. Yet few freelance editors really understand the financial end of our business.  

Editors tend to look at the money they receive or bill for as the amount they are earning, not realizing that they are actually earning less than they think (or possibly more than they think). For example, someone who charges $25 an hour thinks they are earning $25 an hour. They really aren’t; they are earning less. Why? Because they aren’t thinking in terms of the effective workday hourly rate, which is, in the end, for a business like ours, the only true indicator of what we are earning. This was the meat of what I discussed at the Finding Your Niche conference, but it really needs to be taken one step further than the workday effective hourly rate: it needs to be determined over a longer period of time, even as long as the fiscal year.  

Here is how to calculate your workday effective hourly rate (EHR):  

Calculating the Workday Effective Hourly Rate (EHR)

The formula is essentially the same if you charge by the page or by the project. Here is the formula for a per-page rate: 

 

What this requires is that you keep track of your time — both working and nonwork-related (e.g., time spent making tea or walking the dog) — during your set business hours. Here is an example of a calculation made using an hourly rate: 

 

Note how what was once $30 an hour has become significantly less.To have a true picture of what you are earning, you need to calculate your EHR over longer periods — 1 month, 3 months, 6 months, 1 year. Only with that calculation in hand will you know what you are really earning.It is nice to think that we are earning $30 an hour, but we need to recognize that the $30-hour represents billable time and doesn’t include all of the nonbillable time we spend each day, week, and month doing such things as chatting with friends on Facebook, searching for a better source for pet food, and the like.

Why is this information important? Because knowing what you are truly earning can help you put your business in proper order. It can be the impetus to seeking more work or to spending less time doing nonproductive things.

Freelancers tend to kid themselves about their earnings. Even if we earn a decent income by the end of the year, we may have had to work much too hard to earn it or perhaps we could have increased it significantly had we only worked smarter. Everything about our business flows out of knowing what our true EHR is over an extended period of time.