Why would you want to become a freelancer?
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I recently read the post “Why You Can’t Freelance Or Blog Full-Time“, by Sandy of Yes, I Am Cheap. She had recently quit her job and was considering blogging full-time, but ultimately decided against it. Amongst some of her reasons was the high levels of tax that she would have to pay, as well as the unrealistic goal of blogging full-time.
Sandy makes some really good points in her post, and I would recommend anyone considering becoming a full-time blogger to give it a read. At the same time, I feel that the post may be too discouraging and that everyone’s situation is different. However, if you want to become a freelancer, with a diverse mix of income sources, then that can most certainly be attainable.
The dream.
Many people dream of being able to say goodbye to their boss and work on their own terms, and on their own time. What could be more comfortable than blogging from bed, or waking up when one pleases? How about being able to blog from the beach and drink a beer at the same time, while working only a few hours per week?
It sounds really nice, but the reality is probably a little bit different.
The reality.
I have a dream of reaching financial independence. I have been saving a large proportion of my income and I have been keeping overall spending low, so that I can get closer to this dream. I have also been working on building up side income, and this blog is an important part of this goal.
I would love to be there and to have the flexibility of being able to work on demand, because I don’t require the income to survive. At the same time, I have to realize that I am not there yet, and most of you are probably not there, either. If we all were, we would probably be living in paradise.
The reality of that nothing comes for free. In order to reach the goal, we need to work hard at it, and if we go independent then that probably means working harder than we did at our day job, with weeks of 50 to 60 hours, and perhaps even more.
I firmly believe that people should choose the middle path and remain diversified in many aspects of their lives, including their choice of profession. Unless you are an author, I think that 50 to 60 hours of blogging is a sure road to burnout. At the same time, why couldn’t someone freelance and blog at the same time? I believe in the middle way, which means having a diverse mix of income sources and being skilled in several areas.
The problem with full-time employment is that we may never give ourselves the time to truly explore these other options, and we may remain beholden to our day jobs. Over the long run, this can be just as harmful as trying to make a living solely from blogging. Not everyone is making $300,000, $200,000, or even $100,000 a year, and the less we make, the lower is the opportunity cost of exploring other paths.
Preparing yourself
In this series, I’m going to talk about how to prepare yourself, as well as the lessons and trials that I have faced in my own journey, over time.
1. You need to be able to live on a greatly reduced income.
I firmly believe that while you do have your day job, you should keep a healthy gap between your expenses and your income. This will allow you to maintain a high savings rate, which will give you extra funds for when you make the leap, as well as give you a large buffer.
If you are saving 50% of net income, then that also means you could cut your income by well more than half and still keep the same standard of living in the present. Why more than half? Taxation rates decline as your income drops, so if you were earning $100,000 and saving 50% of a net income of $65,000, you could actually maintain close to the same basic standard of living on just $35,000, as your taxation burden will be significantly less. Your main taxation burden at these lower levels of income will be the regressive burdens of your country’s unemployment insurance and forced pension plans, which are usually doubly-punitive for self-employed workers.
2. You need a stash of liquid cash.
How long could you survive if you didn’t make a dime of income, and you did not sell any of your assets? To determine this, first you need to sum up all of your monthly expenses, including a realistic provision for those expenses which you are likely to face even if they are not 100% necessary. Don’t assume you will live an entirely spartan lifestyle, especially if you have a significant other or a family.
Here is an example of all the costs you might need to pay:
| Housing | ||||
| Mortgage | $550 | |||
| Property taxes | $150 | |||
| Utilities | $75 | |||
| Maintenance | $75 | |||
| Insurance | $50 | |||
| Subtotal | $900 | |||
| Auto | ||||
| Depreciation | $100 | |||
| Insurance | $100 | |||
| Gas | $100 | |||
| Maintenance | $50 | |||
| Repairs | $25 | |||
| Subtotal | $375 | |||
| Food | ||||
| Groceries | $175 | |||
| Restaurants | $50 | |||
| Subtotal | $225 | |||
| Miscellaneous | ||||
| Insurance | $125 | |||
| Gifts | $50 | |||
| Travel | $250 | |||
| Cell | $50 | |||
| Internet | $50 | |||
| Subtotal | $525 | |||
| Grand Total | $2025 |
Life is not cheap!
Truth be told, if you really weren’t making a dime you could probably bring these expenses down to near $1000, as you would probably not be eating out at restaurants or travelling much. Car costs can also be brought down by going for an older car (or buying an older car when your car is finished), thus removing most of that depreciation and some of that insurance hit. However, there isn’t really all that much you could do to cut the basic expenses of transportation or housing, and realistically, you will not want to live a very spartan life if you don’t want to burn out.
I recommend setting aside six to twelve months of expenses, assuming you don’t make a dime and depending on your risk factor. If you are a dual-income household, or if you have no dependants, six months may be more than enough. If you have a wife and kids and they depend on you, I would err toward the higher number. For the example above, that means you should have $12,150 to $24,300 in liquid funds.
Where can you get these liquid funds? They can take the form of cash or certificates of deposit (Guaranteed Investment Certificates for us Canucks). If you are so disposed, you may even decide to take advantage of today’s low interest rates and put it on a home equity line of credit (HELOC). Debt can make sense for business, but I personally prefer to do it without debt so I aim for the more conservative stash.
Will you really need this much?
The stash is there assuming you don’t make another dime and need to enter the workforce in a hurry. If you really haven’t made a dime by nearly half a year out, it might be wise to re-enter the workforce. On the other hand, it’s pretty unrealistic to assume that you won’t make anything at all! At the same time, because you are now a business, many things become tax deductible: Internet and cell costs, some of your transportation costs, business meeting expenses, etc… so you get to pay these expenses with before-tax dollars. Yes, you have to pay a double regressive tax for the pension and unemployment insurance, but at worst, it may end up being a wash once offset against your deductions.
Canadians also benefit in three additional ways:
- Self-employed Canadians do not have to pay double the unemployment insurance. They pay the same rate as employees. They may additionally choose to opt-out entirely.
- Canadians do have to pay double pension, but they get to reduce their income by the amount of the “employer” contribution which helps to reduce the effect.
- Even though a Canadian will have to pay more for private health insurance, they do not need to worry about medical emergencies since the public system will cover that.
Add in another $500 a month for splurges and as a buffer; how much would a Canadian spending $2,500 a month overall be able to save if they reached a gross income of $60,000? For this example, I will use someone working and paying taxes in Ontario (Canadians just to the east will have to pay a few thousands more in taxes!), with taxes calculated using the Canadian Income Tax Calculator.
| Gross income | $60000 | ||
| Less: Business expenses | $6000 | ||
| Less: Employer portion of CPP | $2217 | ||
| Taxable gross income | $51783 | ||
| Less: Federal/provincial tax bill | $9583 | ||
| Less: Employee portion of CPP | $2217 | ||
| Less: Employment Insurance | $1176 | ||
| Net Income | $38807 | ||
| Less: Other expenses | $24000 | ||
| Income left for savings | $14807 |
So, a Canadian grossing $60,000 and spending a total of $2,500 a month would still be able to save about $15,000 or nearly 40% of their net income. It’s actually a little more if you consider that the mortgage payment is reducing debt, which increases your net worth and financial standing. This is not quite 50%, but I did not account for any other tax deductions here, such as RRSP contributions or additional business deductions. The double hit of the CPP is painful, but at the end of the day it’s another $2217 and a portion of that is returned in the form of tax savings. I have no idea what the state of the CPP will be in 30-40 years, but realistically speaking you will probably get at least some of that back.
I am not a tax expert and I might have whacked something here, so take this with a grain of salt!
What do your monthly expenses look like? How long would you be able to survive, and how much of a buffer would you need before you would feel comfortable about quitting your job?
In the next part of this series, I will look at how to evaluate your opportunity costs and add up all of the benefits of your current job, so you can make a reasonable and balanced comparison between employment for the man and employment for yourself!
Hi Kevin, I realized zero entertainment costs 🙂 No more movie outings with your girlfriend or beer session with the guys? I normally factor in a hundred bucks for these.
I would say 12 months of expenses plus 10 percent buffer should do it, just to be on the safe side.
Haha, good point. I guess I included that in the “add $500” buffer. I actually don’t spend much on entertainment myself as we watch movies at home and beer sessions tend to be at home these days too. Our biggest form of entertainment cost tends to be stuff like skiing, camping, etc…
We’d need $4,000 minimum to pay all of our bills and living expenses… plus more for savings. I wouldn’t want to stress of freelancing full-time. You never know when a “hot niche” will die out… and your earnings start to dwindle.
That is a good point, but something I don’t think you need to worry about so long as you adapt and remain diversified. I don’t think the web or mobile will be dying out any time soon, but it’s important to move fast and be diversified. If I go back into the job market it will likely be in the same field unless I do a complete career change. I don’t rule that out, either. 😉
I see it as a great job…when I retire from my real one! Hopefully my wife will be working at that time for benefits and I’ll have a nest egg and the kids through college, but at this point in my thirties, I couldn’t pull it off. Our lifestyle and college/retirement savings needs don’t allow it.
For me I think the two biggest motivators were that 1), I couldn’t do what you’re doing now in building side businesses cause my previous company was against all moonlighting, and 2), The company was going nowhere. I had to quit eventually anyways if I didn’t want to stagnate. In a way, you can say I was lucky that the combination of factors combined to push me out onto my own. 😉
I think you’re setting up a good strategy so that in a few years down the road, it might be very viable for you to go forward. I think that’s a great idea, too — build up something on the side while you continue to work for your day job.
Hi Kevin,
Would it be too much trouble to ask you to email me back so that I could ask you some questions, as you are an unbiased party with no vested interests in my money or investments, I would like to ask you some very rudimentary things about investing (I’m fresh out of college but saved a lot of money on waitressing tips that I look to invest).
Thanks,
Rachel
I’ll send you an email. 🙂
I like blogging, but I don’t want to do it full time. I’d have to make around $6,000 per month for me to “break even” blogging vs. working.
I love blogging, but it’s not a big money maker. If I did not have other things in mind I would have continued to blog part-time.
I think freelancing is the balance of working full-time and earning part-time. I know, it sounds weird but I think it’s important to have a steady income to pay for the main bills and the earnings from your freelance gigs will supplement the miscellaneous. The problem I had is when my freelance money is earning me more than my regular job and I decided to go full-time. Things didn’t work out because I overreached with my desired income and cash flow started to run dry. I learned hard way that you should have savings before venturing out into the unknown. I’m still doing freelance gigs apart from my new job and I am now extra careful not to compromise the time I have with my regular job doing freelance stuff. I also learned to save.
Yes, you really should have savings! 🙂 You also need a job that isn’t against moonlighting. You have to be careful cause some companies claim intellectual rights to everything you do even if it’s on your own time.
Thanks for sharing your story — I think that the dual approach is a great one, too, you just have to balance the tradeoffs and it depends on what kind of a future you have at the company, and if they have policies that are not overly restrictive.
I’m a huge fan of income diversification, and I feel as if I’m continuously seeking out new ways to make more money, no matter how odd they may be. What I enjoy most from my love of side gigs is the doors it opens because I’m also constantly acquiring new skills.
As much as I’d love to kick the day job to the curb, I know it’s not realistic right now. But I also know that if I wasn’t varying my income, I’d be cutting myself (and earning power) significantly short!
That is a good approach. If you have savings and diversified income, you also have flexibility, and in the end the day job is just a company competing in the market the same as you. In many emerging fields, like mobile development, scale and size is not worth very much. Yes you need scale if you want to design your own handset, but write apps and stuff like that? Scale is actually a detriment, at least as far as my own personal experience goes! 😉
I am really glad to see a much more analytical approach to this topic rather than the usual “go chase your dreams!” type of encouragement that people usually run with. You have some great points being made. Unfortunately, I am no where near your goals for savings rates and expenses.
On Point No. 2, I never considered counting auto depreciation as an expense. We do it in the business world, so I guess it makes sense …
I think you have to, unless you plan on walking once your car gives out. 😉
Not easy to spend less & earn more (right now I’ve accomplished more of the former than the latter), but combine the two and you have a powerful combination for getting that savings rate up and getting closer to getting out of the rat race. 🙂
I only worked for a few years after school before I went freelance. I had gone to Europe and when I got back I had no job. I did have a few small freelance jobs and enjoyed the freedom of it so much, I managed to freelance from then on even though I was only making a pittance. The freedom of freelance has always meant more to me than the money. Working alone is isolating though and if you don’t enjoy spending a lot of time in your own company, you won’t be a good candidate for freelancing.
The loneliness can be a big factor. I’ll have to look into those co-op working arrangements or see if I can’t get a friend to join in the adventure with me. 🙂 So you would have no desire to re-enter the corporate life?
This is an awesome post!
About the loneliness piece- yeah I guess so, but imagine having to deal with people you find so annoying and you don’t like at your office workplace?
I would rather face my computer at home all day instead of dealing with annoying people 🙂
Hahaha, I guess that’s true, too! My coworkers were pretty decent, but yeah, there have been days…
Kevin, our expense is at about $4,000 per month. Currently we have enough income to cover this if I decide to quit my job. We won’t have a lot of saving left each month.
I have about $50k in liquidity now and that should cover us even if both of us didn’t make a dime in the next year. It’s a huge step to quit a nice paying job so we wanted to have a big hefty cushion.
Does that include taxes or before taxes? True, I didn’t include taxes as a direct expense since it’s variable, but it definitely should not be ignored.
My expenses here just cover my side so if you add my gf we probably get closer to there as well. So long as I can at least cover the $1000 or so in shared expenses, we survive…
Kevin,
I really enjoyed this very thorough post! It’s always good to run the numbers before doing anything drastic!
I did my recent calculation when I wrote the post “How To Retire Early And Never Have To Work Again”, and the number comes out to 18 years of living expenses covered if I exclude all passive income and blog income. I was originally shooting for 25 years, but I didn’t realize how much I would have an urge to just be my own boss that I will probably pull the rip chord earlier!
I added up my online and passive income and I can live off it relatively comfortably now. Won’t save as much, but I’ve already saved for 13 years. How many years of living expenses do you think is overkill?
Sam
Hey Sam,
I don’t think it would be fair to say that most people would be ecstatic to be in your shoes and would definitely call that overkill, because everyone’s situation is different! However, when you say you have 18 years, is that not including your other investments? That’s just liquid cash and cash equivalents? If so, I think that is amazing, and certainly far more than what I have in total net assets.
I think you have to weigh the following factors:
* How happy will I be if I continue working for the next 2 years?
* How happy will I be if I work for myself?
* How will it affect my goals and dreams if I fail?
* Can I re-enter the workforce? How long will it take me to get back to where I was?
* Any chance of getting laid off? 😉
I know you like the idea of getting laid off so that you can follow your dreams, and honestly, I’m surprised that your government does not claw back UI on self employment. “Socialist” Canada does that! However, unless your company is struggling, or you can grease the wheels somehow and end up with a sweet package, I wouldn’t wait to get laid off. In my own personal case I basically would have had to have done a terrible job to get laid off, and I wouldn’t have gotten much anyways. If your company is borrowing to meet payroll how much can they give? But, every situation is different.
Either way, I think you have a solid plan for life, Sam, and I do wish you the best of success and future happiness! 🙂
Interesting post. A few years ago I was doing my own thing with computer repair. At the end of the day, despite the needed skills, I chose a paycheck instead. When I look back at that time I wonder how it is we managed to pay the bills and eat!
How did you compete with all of the kids? 😉 P.S. I was looking to change my theme, too, but unfortunately my designer ran into life. I don’t hate this one but I was looking for an incremental refresh.
There are a number of pros and cons about working for yourself as your post highlights very well. I imagine for anyone reading it they are at the point they are already running a blog or site, but for anyone thinking of freelancing full time one essential thing is self-motivation. You have to be able work on your own initiative without someone else telling you what to do.
The pressure of a mortgage payment is a pretty good motivator… 😛 But yes, completely agree with you.