How much do you need to earn?

Posted on: June 9th, 2010

Whether you charge a project rate or a day/hourly rate, here are the factors you need to take into consideration to ensure you earn sufficient levels of income:

  • Unless you’re a contractor on a full-time contract, it’s unlikely you will be earning money every day of the week.  And you don’t get paid for undertaking tasks such as marketing yourself, new business meetings, admin etc. You also don’t earn anything when you’re sick or go on holiday (unless you’re on a retainer).
  • You will incur business expenses. I work from home so I have low overheads but I still had to kit out my home office and pay for my website to be designed and built. My ongoing expenses include my marketing and networking activity, training courses and instructional books, my accountant, phone and internet connection, stationery, travel expenses, professional subscriptions, insurance….the list goes on.
  • Once you have estimated what your business expenses might be, draw up a list of how much you will need for your household outgoings. That’s things like rent/mortgage, council tax, utility bills, loan repayments, household insurance, grocery bills, pension, car running costs etc. Then, calculate how much you usually spend on items such as new clothes, holidays, going out, items for your home and other non-essential but ‘nice to have’ stuff that you might want to buy.
  • Next, you need to factor in amounts to put aside each month for your tax bill and your ‘buffer’ for when you get sick or when work is thin on the ground.

Once you’ve done this exercise, it should give you a good idea of what you need to earn – and therefore how many billable days a month you need to work. Here’s an example based on earning £350 a day. I’m not saying these are the amounts you should be spending – they merely serve as examples.

Business expenses over the course of a year

  • Marketing:  £1,200
  • Networking events: £400
  • Training: £350
  • Accountant: £400
  • Phone and internet: £600
  • Subscriptions: £150
  • Travel: £200
  • Stationery: £300
  • Insurance: £500
  • New software: £100
  • Miscellaneous: £300
  • TOTAL: £4,500

Household outgoings over the course of a year

  • Mortgage/rent: £700×12= £8,400
  • Council tac £125×12=£1,500
  • Utility bills: £1,500
  • Car loan: £1,200
  • Household insurance: £400
  • Groceries: £3,000
  • Savings: £3,000
  • Pension: £4,000
  • TOTAL: £23,000

Non-essential expenditure over the course of a year

  • Clothes: £1,000
  • Holidays: £2,000
  • Nights out: £1,200
  • Books/music: £300
  • Presents (Xmas etc): £300
  • Items for home: £700
  • Miscellaneous: £500
  • TOTAL: £6,000

Don’t forget you will also have to pay your tax bill from your earnings. Tax rates vary from country to country but let’s say you have to pay 35% of your net profit in tax. In my calculations above, you had £4,500 of business expenditure so your net profit (if you billed £33,500) is £29,000. 35% of £29,000 is £10,150. (The amount of tax you pay will depend on where you live and how many tax-deductible expenses you have etc. Your accountant will be able to advise you.)

So this means you actually need to earn £43,650 a year to cover your business and household outgoings, as well as your tax bill, and have enough left over for the leisure activities you want to pursue. That’s around 125 billable days a year of solid work at £350 a day to live the kind of lifestyle in my fictitious lists.

Does your freelance income add up?

2 Responses to “How much do you need to earn?”

  1. dental hygienist
    July 29th, 2010

    Pretty nice post. I just stumbled upon your blog and wanted to say that I have really enjoyed browsing your blog posts. In any case I’ll be subscribing to your feed and I hope you write again soon!

  2. Carole
    July 30th, 2010

    Thanks so much for your kind words, dental hygienist. I’m glad to know you enjoyed having a browse through my blog posts.

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