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