Why would you want to become a freelancer?
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.
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.
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.
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:
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.
|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|
|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!