Many professionals turn into freelancers after getting sick and tired enough of the corporate world to escape the cubicle lifestyle.
Although happier and living more flexible lives, many freelancers fall into complacency as they get too comfortable in their routine, much like many corporate professionals do in their jobs.
In addition, while you might be living the dream of working as a freelancer, you are still trading hours for dollars. Sure you are earning more per hour than you did within the confines of the cubicle, but when you stop working, the money stops flowing in.
The good news is that no matter what field you are in, there are side business opportunities that can generate passive income for you and bring you closer to financial freedom.
Newly turned freelancers may not be in a rush to take on more work, and I can totally understand that. After all, it is after a long time that you are getting to taste a little bit of freedom.
Life as a freelancer or contract worker can get very comfortable as you set your own schedule, work from anywhere you want and pick and choose the jobs you want to work on. Too much comfort however leads to complacency.
So if your goals are larger than your comfort level, why not use your spare time away from clients and contracts to establish passive streams of income?
If you are an application developer, why not develop your own idea and sell it? As a writer, why not write your own ebooks and sell them on your own website? If you can’t think of ideas, think about how your clients are using your work to their benefit. Why can’t you do the same?
Set aside a few hours for yourself each week to work only on your own ideas. It might take you a while to get a hang of things and materialize your ideas. Once you are comfortable with the process however, you can easily establish multiple sources of passive income over the years in parallel to working for your clients.
If I would not have been successful establishing passive income streams as an entrepreneur, I definitely would’ve been a full time freelancer rather than sticking it out as an employee in Corporate America.
I don’t mean to imply that freelancing is relatively inferior, and that working in Corporate America is an absolute sin, but rather that MY personal preferences are different.
In fact, I recently took up an offer with a publicly traded billion dollar company for a very special and interesting initiative. In addition, although very selective and for a very high price tag, I also freelance every now and then.
Now that I have proven that I didn’t mean any disrespect, I certainly prefer working on building passive income streams. And because I absolutely love the idea of freelancing as well, I have dedicated this post to demonstrating a few ways freelancers can establish passive income streams rather than solely relying on trading their time for money, or hours for dollars as I like to call it.
I love the freedom, flexibility and financial rewards that freelancing can bring with it. I have written extensively on how freelancing increases your effective wage rate and gets you more time off from work annually at the same time.
That said, acquiring clients is an ongoing initiative. In addition, income stops flowing in when you stop working. Predictability is hard to come by, and without a steady schedule or work flow, it can be difficult to anticipate peaks and valleys in your work load.
Whether freelancers charge hourly or by project, payment depends on completion of either. There are some ways however through which freelancers can get away from the direct correlation of hours to dollars and supplement their cash flow with passive income streams from activities related to their disciplines.
Sure, establishing passive income streams involve unpaid time and effort upfront, but long term rewards certainly help increase the ratio of overall income output to time input.
Sell Residual Services on the Side
In the retail industry, the best customer is always the existing customer who has already bought from the business. In freelancing, when you are working for a client, you already have your foot in the door per-se.
Identify opportunities to cross sell products and services that are relevant to your discipline and your client’s needs. Products and services can either be sold for a one-time income or ongoing residual income depending on what you sell.
For example, if you are a CPA working as a freelance tax preparer, offer your clients a subscription to your newsletter or membership site where you publish valuable information on tax planning. This is a good opportunity to supplement your one time income from preparing tax returns to establishing a residual stream of income from subscriptions.
Although not completely passive, your income from subscription will increase the more clients sign up for your services. It is a scaleable income model, and one that has no limit on potential earnings. The result is an increase in your effective hourly wage rate.
You will also build an income producing asset in the process, which is your email list of targeted and interested clientele. Of course you need to make sure you are delivering value. But if this is your profession anyway, there should be no problem doing that.
Another example is selling or reselling domain, hosting, newsletter and similar services to a client. As a web designer or developer, you can sell the infrastructure your clients need to host, maintain and run their websites. Vendors like GoDaddy allow you to do just that. Both domain and host reselling pay residual commissions.
If you determine that your client can benefit from implementing a newsletter marketing initiative, you may recommend services such as Aweber which pay residual commissions to their affiliates. Similarly, many such vendors exist who’s products and services you can cross sell to your client.
The bottom line is, identify what your client needs, what can make their life easier, and then find a way you can offer these services and benefit from it. Because you are the subject matter expert, chances are that you are more aware of relevant solutions than your client is.
Sell Your Work
No matter what discipline you practice in, there is a market for pretty much anything out there. If you are a programmer, you can sell incomplete or unused files you have developed online. If you’re a photographer, you can sell your images to stock photography websites.
Selling creations of your work is a great way to supplement your income from freelancing. With a planned approach, you can even establish a passive income stream by selling your work on a non-exclusive basis.
The theme of this blog Thesis is a great example of this. The developers of this theme sell it on a non exclusive basis (available to everyone) on their DIYThemes website. Thousands of copies have been sold to date.
I recently blogged about selling your work and earning passive income in my post titled Creating Passive Income on the Side.
Sell Your Expertise
Through your course in freelancing, if you happen to stumble upon a niche or areas in which you have worked extensively, you can sell your knowledge and expertise to other clients in the same field. Because you have seen many clients try different things within the same niche, you can offer your diversified value in form of resources you create for that specific niche.
For example, if you are a web designer and have developed several websites for real estate agents, you may develop standard templates specific to the real estate industry and sell it along with consulting services geared toward helping agents leverage the internet to sell real estate.
Even if you can’t sell your consulting services, at least you can provide a website template customized for their industry. You can then supplement the template with a guide or ebook on how to edit and write content to market the website for a small fee.
I hope this post has given you some thought starters on filling your down time as a freelancer. Congratulations to you if you don’t have down time. You may still want to think about some of these ideas. Maybe you need to take some time out to implement one of these?
Time is scarce and we all have the same amount of it. It is how we use that time which differentiates output of one from another. If you are going to pursue avenues to establish passive income streams, I recommend focusing on one project at a time. It is easy to get distracted with several ideas and get none accomplished in the process.
What you ideally want is a pet project to work on in down times that can evolve into a supplemental stream of side income to your freelance business.
Those working hard making a lot of money often complain they don’t have much spare time. Those that have a lot of free time complain they don’t make enough.
There is a healthy solution to both predicaments, especially for the service industry professional working for a professional firm; just increase your hourly wage. Yes – It’s not very difficult! Because I worked for a professional service firm earlier in my career, I will use this example for simplicity purposes as I can relate to it most.
If you are currently working for a professional service firm, I hope you realize that your firm is making a killing for each hour you spend working for or on your client. Lawyers bill every 8 minutes, and many CPAs (accountants) bill every half hour.
At what rates? As a Senior Associate in an M&A (Mergers and Acquisitions) practice, my firm was raking in $350 per hour that I worked on a Merger or Acquisition deal. That $350 certainly wasn’t going in my pocket I can assure you that.
It was going into paying the rent on our 20,000 square foot office building, the laptops and chairs we used, the pencils and notepads that I took from the office room, the restroom toilet paper and the liability insurance coverage of my firm’s partners in the event they were sued for malpractice.
Similarly, there are a bunch of other cost buckets the $350 gets divided into, diluting it down to a small number. I was surely very well compensated, but if I were to add up the hours I spent working for The Man and the income I made, the average hourly rate came out to roughly $55 an hour (before taxes). That is about one seventh of the $350 my firm was charging the client in exchange for my brain power and sweat.
You can increase your wage significantly by eliminating the middle man (i.e. your firm). I am not suggesting you quit your job today. In fact, here is why I think you shouldn’t quit your full time job just yet. Rather, focus on building your own clientele on the side and start experimenting with freelancing on your own.
When you begin freelancing, you start working directly for the client or end-customer. You don’t have the overhead your firm does, and therefore can charge a much lower rate than they do but higher than what you would have made working for them.
It is important to realize that the services you offer are worth a lot more to the receiver (your client who engages you), and that is why they are willing to pay a ton more to the firm you work for. At the end of the day, folks who are paying for a service are concerned about what they are getting in return for their money, especially in times when budgets are tight.
There are some exceptions to this. For example, a fortune 100 company may choose to engage a Big Four accounting firm to prepare their taxes, when a small CPA firm can likely do the same job for a tenth of the price. So why would the big company hire a big firm? Because of the name brand recognition and market or outside perception attached to the name.
A tax return signed by a partner of a Big Four accounting firm holds more “weight” and credibility in the eyes of the IRS. It’s merely because of perception based reasons. But when you move away from this extreme example, you will find that there are unlimited takers for your services at rates much lower than what your firm would charge but higher than what they pay you.
I derailed for a minute, but what I want to convey is that you are worth more than you are paid, and currently your employer is likely banking on all that worth. When you eliminate them from the equation, you start to cash in more of that for yourself and increase your hourly wage rate. Think about it, if my firm was making 7 times more than what they were paying me, I could easily double, triple and even quadruple my wage working directly for clients and undercut my firm.
I recommend you start this on the side, and if things flourish and you start to build a portfolio of recurring clients, then you might wonder why continue working for your firm? You are right, at this time it would be wiser to quit. If you are paid $80,000 by your firm, you can easily make double that, if not more on your own.
I was able to successfully transition from full time employment as a consultant to quitting my job all together, though I mostly did this through establishing passive and residual streams of income on the side (automated internet based side businesses). Freelancing however is the quickest and easiest way to get started and immediately see results. I was involved in several freelancing engagements on the side when I was working as a consultant.
There are some excellent programs and systems developed by experts that specifically teach how to do this. These experts have been there and done that, and teach from first-hand experience. I highly recommend these programs because they specifically walk you through the key steps involved, as well as tell you what actions to avoid. These actions are essentially the mistakes 99% of freelancers make when they try to branch out from the firms and companies they work for.
You! And anyone else who has something to offer to this world. You can command even higher rates if you are skilled in something that is scarce and in demand. Having a good education and certifications in your profession is yet another way to command top dollar. This assumes you are skilled in something that is also in demand. In my experience, there is a market for pretty much anything out there. You just have to go out and find it.
This strategy particularly works well for someone who is working for a big name like a McKinsey Consulting or PricewaterhouseCoopers. Anytime you can claim that you have high caliber experience, your client will immediately start to perceive you under a different light all together. Having alphabet soup after your name (i.e. CPA, CFA, MBA) also amplifies how you are perceived and increases the likelihood that you increase your hourly wage.
Education and experience are some other variables to be considered in the mix. In order for you to successfully deliver the services your clients are likely interested in, you will need to invest a few years working for a firm and developing the skill set required to branch out on the side or on your own.
Just as an experienced consultant’s bill rate is significantly higher than a brand new associate in a firm, the same applies to the rate you can demand from your clients. The more experience you have, the higher rate you can command. Education and experience alone can therefore increase your hourly wage if and when you branch out on your own.
Here is the best part of freelancing. Initially, I’d say you set your wage to what you are comfortable with and what the market has appetite for. Free economies find a way to work rates out on their own. You will know what to charge once you start experimenting with freelancing and talking to your clients.
If you decide to do this full time in the future, let me introduce a backward equation for your consideration that enables you to back into a rate that fits your preferences.
Desired Take Home Pay + Forecasted Expenses / Hours You Want to Work
Stick with me here for a moment. Your desired take home pay is what you decide you need to make to live the lifestyle you want. Forecasted expenses include expenses you need to factor in to be able to run and sustain your work. Some examples include your laptop, software costs, ongoing professional training, insurance, etc. This does not include travel assuming you pass on travel costs to your client.
The hours you want to work are essentially driven by how much time you want to take off. If you want to take 10 weeks off each year for vacation, training and whatever else, the hours you want to work will be based on 42 weeks of work (52 weeks a year minus 10 weeks off).
If you decide you want to work 50 hours per week, your annual working hours will be 50 X 42 = 2100. If you choose to work 40 hours per week, your annual working hours will be 1,680.
So let’s work out this equation to arrive at a wage rate given the following assumptions.
If your effective tax rate is 35%, you get to keep $78,000 of what you earn. If you are making $80,000 working for a firm and your effective tax rate is 30%, you get to keep $56,000 on what you earn. So what are you better off doing? It’s a no brainer isn’t it?
Not only do you make more money, but you also work on your own terms and take a bunch of time off rather than the typical 5 to 10 days off max when working for a typical company. It’s typically not as simple and black and white as this, but I think the point is clear; the equation looks much rosier if you are able to increase your hourly wage.
To avoid further complication, I purposely have not discussed the tax effect on your earnings. I wanted to demonstrate how you can use this equation and adjust it to fit your preferences.
Do not forget the tax component, as it is likely the single largest bill you will be paying annually. Read my discussion on what your effective tax rate really is, where I also discuss how having a side business comes with tremendous tax advantages.
Can you increase your wage rate from $55 to $61? You Bet. I was able to triple mine when I was a consultant. I took up a project helping a group of investors invest in a chain of businesses. They had hired me to conduct some due diligence on the acquisition target and provide my valuation of the businesses.
In another side project, I was engaged to help a group of investors execute an IRS 1030 Like Kind Exchange on buying and selling real estate. In plain English, this means that I helped them sell a bunch of property, not pay tax on the gains, and roll-over the money into new investments and then rinse and repeat the procedures. I doubled my hourly wage, and then some.
Why only double instead of triple in the previous example? Because different tasks call for different wage rates. Just like you pay your maid $15 an hour to clean your house but your CPA $35 to do your taxes, some tasks require more skill, technical expertise and experience to execute. When you increase your hourly wage, you will have to consider the skill set you bring to the table.
The only other caveat I will mention is to be careful and ensure that your employment contract does not contain a non-compete clause that prevents you from engaging in side gigs related to your profession. Read my discussion on whether or not you should be telling your boss about your side ventures.
Because of the equation above, many employees become full time consultants in search for a better balance between work and life. There is a lot of value to being able to dictate your own wage and schedule to live the life you want, not the life you are forced to live because of the restrictions that come with a 9 to 5 JOB.
Let’s look at an example if you decide to freelance on the side while maintaining your full time job. Let’s assume you make $80,000 a year and work 2,080 hours (40 hours per week). This comes out to an hourly wage rate of $38.5 per hour.
Let’s also assume that you are able to take up 4 engagements a year on the side. That is one every quarter or 3 months. Let’s assume each engagement is for 60 hours and you set your hourly wage at $77 (double of $38.5) because a firm would typically charge $120 for similar work. This equates to a total of $18,480 in side income generated annually. Now let’s add this amount to the base salary of $80,000 to come up with a total of $98,480 in annual income.
If you add all hours worked, you arrive at 2,320 total hours worked for the year. Divide your total income $98,480 by 2,320 hours and you arrive at an effective hourly wage rate of $42 for the year. You just got yourself a raise and didn’t even have to beg for it!
The example discussed in this post was chosen for simplicity purposes. Because I have a service background as a CPA working for a Big Four firm, it is the best one I could’ve used to explain how to increase your hourly wage. That said, do not feel that this post is restricted to service professionals operating at a high level only.
This discussion can be applied to anyone in any profession. As long as there is a need for your products and services out there, you can cut out all middle men and women involved, control your cost structure and provide your services directly to the consumer / client, earning the maximum wage you can while defining your own schedule at the same time.
I am certainly not suggesting you quit your job to do this full time. Rather, you can start experimenting with it in your spare time and increase your hourly wage rate. If you enjoy it and are able to build a portfolio of recurring clients overtime, you will eventually have the option to quit your job and become a full time freelance consultant.
Options are always good to have in life. There is a market out there for anything and everything so go out and get it!
Readers: What are your thoughts on contracting vs. being salaried? What about side gigging as a freelance contractor to increase your hourly wage rate?
Earning & Enjoying More