Cash Rules Everything Around Me, C.R.E.A.M.
Securing a Healthy Financial Start to Freelance Knowledge Work
Whether you identify as a solopreneur, digital nomad, or something else entirely, this newsletter aims to share some insights in becoming your own boss in the dynamic world of freelance knowledge work.
🔗 Missed the beginning? Catch up here!
First, I’m covering essential preparations before you take the plunge: defining what you offer, pricing your services, and finding the first clients. But this was too much (for me) to write this week, so I've split the discussion into two parts. We’ll start with the most important topic — money. Next week, we'll explore finding clients and fine-tuning your offerings.
I hope you find this guide helpful, whether you're planning to strike out on your own or simply exploring a side business in your spare time.
Enjoy the read, like and subscribe if this newsletter helped in some way!
Money Matters
There are 4 numbers I think you should become familiar with: your burn rate, project value for the client, market rate, and your desired rate.
🔥 Burn Rate:
How much do I need to live?
This figure is your bottomline, the cost of sustaining your lifestyle and keep your operations running smoothly. How much is necessary monthly to cover essentials like rent, food, utilities, transportation, etc…? What else? Add all of it up and that’s your 🔥 Burn Rate.
This is what you NEED to make more on average than this number each month.
You should set this number high enough that you are not stressing or living in discomfort. Not just barely enough to survive. You want a baseline value that ensures you’re happy, comfortable, and healthy.
If you REALLY want to get this number low to start out your freelance career with low overheads. You can do what thousands of digital nomads do by moving to a country where the cost of living is lower. That’s why you see so many digital nomads in coffeeshops in Southeast Asia, where the reliable IT infrastructure allows them to work effectively, but cost of living allows them to multiply spending power.
⭐ Project Value:
If successful, how much is this project worth to the client?
This figure marks the absolute value cap, covering the absolute highest a knowledge worker can extract from a project. And most services won’t get close to this number, for a number of reasons:
Clients often need a margin. They won’t be paying you for the full value of your part to their project.
Competition drive down prices. Competitors offering lower rates for similar services drive the overall price for the service in the market down to an equilibrium.
There is always the risk that you fail at delivering the thing you promised, and there is an opportunity cost in money and time paid by the client in the task done so far.
So, the ⭐ Project Value varies with each client and project; it’s the trickiest to determine. It represents the maximum potential value you can charge based on the specific benefits and advantages your work brings to the client.
The ⭐ Project Value is different from a Project Budget. Today, you can can get a logo made for a budget as low as $10 on Fiverr by someone who probably generated with a $12 Midjourney subscription. The same logo design service could be worth thousands times more to a client with a powerful brand at risk (e.g., a major university might opt to pay millions for a rebrand, and have a lot of people angry at the value of it).
💰 Market Rate:
How much is this service normally?
It’s essential to stay informed about what others in your field and geography are charging. This is usually a bell curve. Where do you see your skillset and background fitting on that bell curve? Do you have advantages that set you apart? Are you still starting out and want to offer a discount to attract more clients?
When I first started freelancing as a technologist, I asked around for friends and colleagues. “What are you charging?”
A friend who had also been freelancing for a year charges £350 per day. We graduated from the same school in the same year, with a comparable skillset. Another had a studio practice with a mechatronics specialization and machines in-house charges £500 per day. One other who was doing it as a side hustle to his day job at Yves Saint Laurent charged £250. So on…
With these data points, I figured in 2016 that £300 per day would be an acceptable number to start with.
🧧 Desired Earnings:
How much do I want to make doing this?
This is a negotiation with the world. I have heard of clients who just enjoy how a freelancer works with their team; either because of their level of autonomy, or level of connectedness with the team. These soft qualities translate to higher rates; pretty much everything about you can supplement the core abilities and skillsets you’re offering. Your personality, passions, background, ethics, politics, everything can contribute to your freelance work. The 💰 Market Rate shouldn’t cap your earnings, and you don’t have to be the best technician or craftsperson in the field of your choosing to earn the top bucks. You will gradually figure out how to weave in all of your uniqueness into your freelance work.
So, think about what you aim to achieve beyond just covering your expenses. Consider your opportunity cost of freelancing versus being in another career. Set a target that reflects the value you deliver and contributes to your financial growth and stability. Freelancing forces you to know and set your value. Recognize your value, and advocate for it. Many of us struggle with self-doubt and hesitation when it comes to discussing money. But remember, you set the terms of your worth, and by doing so, you instruct others on how they should value your work and time.
Consider this poignant poem by Jessie B. Rittenhouse, which elegantly captures the essence of setting one's value in life and work.
I bargained with Life for a penny,
And Life would pay no more,
However I begged at evening,
When I counted my scanty store;For Life is a just employer,
He gives you what you ask,
But once you have set the wages,
Why, you must bear the task.I worked for a menial’s hire,
Only to learn, dismayed,
That any wage I had asked of Life,
Life would have paid.
Survival Fund.
Before you start freelancing, you should have 3-6 months worth of funds to survive on. So… about 6x your 🔥 Burn Rate.
When I first started, I remembering googling “how to start freelancing” and this was one of the advice in the list, and the only one from the list I remember. And I have to say, it has proven to be an accurate buffer. A month or so in, I felt incredibly anxious, and I reached out to a mentor with over 30 years in consulting, who reassured me, saying, “A lot can happen in 3 months (when you have a fire under your ass)” He didn’t say the last part, but that was how I felt.
I still use 3 months as my canary-in-the-mine, with a survival fund covering a runway of 6 months. If I failed to find any projects by 3 months, I will start diverting some energy to finding and interviewing for jobs. I had to do this a couple of times in my freelance career. The most recent one was during the pandemic, when I interviewed for a job with Samsung, passed 2 rounds of interviews before a project landed and I stopped interviewing.
Six months might feel like a lot or a little, depending on your appetite for uncertainty, but that’s how much I needed in liquidity to feel safe.
When you’re just starting, the 6 months survival fund acts as a buffer for figuring out your business. You have 6 months to raise your monthly income to exceed your 🔥 Burn Rate. Breaking even is the most important milestone in the first 6 months.
Don’t forget to take the VAT charge out of your clients’ payments; put it in a separate account so you don’t accidentally spend the money that the government will take for taxes. At the end of the year, you’ll claim a lot of it back as a freelancer. So at the end of a tax year, you’ll have a chunk of change. I recommend you invest that money in yourself or in something that grows.
Or… you can put it in a “F#@K Off Fund”.
F#@K Off Fund.
This is money set aside so you can basically say tell a client to “F#@K Off.”
The client could be a nightmare; the project could be too boring or evil; the team could be impossible to work with. Regardless of the reason, having a “F#@K Off Fund” gives you the confidence to walk away from a project you no longer wish to be a part of.
There isn’t any rules with the fund. Just something significant enough to give you the freedom to say no. If your turnover rate is high, then this fund can be low. If your rate of getting projects is low, then this should be high.
There is a lot more we can delve into, and I might in future posts if there is enough interest. But these are the key concepts that will hopefully help you figure out the money side of starting freelance. Underlying these practical discussions around money and funds… The fund-amental (heh) point of freelancing is having a say in your own value. So all the discussion, despite the practical numbers, is really about your comfort with the worth of your labor and in setting your price. If you had an agent underselling you, you can part ways with them.
But what if the person underselling you is yourself?