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How to Calculate Your Hourly Rate (Without Making Your Brain Hurt)

Published on 15 September 15
How to Calculate Your Hourly Rate (Without Making Your Brain Hurt) - Image 1
Becoming a freelancer isnât like taking up a hobby; youâve got to have a plan when it comes to ratesâ¦

but what on earth should you charge for the services you plan to provide?

Letâs talk about James.
Figuring out how to calculate your hourly rate can be a frustrating thing to do for a few reasons. One being that freelancers arenât always immediately forthcoming with sharing their rates, and another being that rates can (and should) vary from person-to-person based on certain qualifiers.

We want to break this process down for you in a way thatâs customizable and realistic, so that calculating your freelance rates isnât such a daunting mystery. Once youâve been able to gather the information you need, we have a shiny new Hourly Rate Calculator tool to help you get started. For now, howeverâ¦

James is a graphic designer for a local T-shirt printing company. He loves burritos, good coffee, and settling in with a rerun of Downton Abbey on a Sunday night. (Heâs a big fan, and doesnât care who knows it.)

Up until recently, heâs been comfortable at his job. Desires for more creative freedom and flexible hours, however, have led him to the decision to branch out on his own. Heâs got a few leads on some clients, and time on the weekends and evenings to do a little extra work. Heâs ready and willing to get started⦠but how does he decide what to charge?

What does it take to survive?
Now, weâre talking about daily life here. In order to maintain the lifestyle heâs currently living, James needs to be able to pay for things like his rent, groceries, internet, cell phone plan, etc⦠These are all things heâs not willing to sacrifice, regardless of career change. Heâs got to sit down and organize all of his personal financial needs.

What does it take to become all professional-like?
Compared to your typical 9-5, freelancing is a whole new world. If James decides to quit his day job, heâs going to suddenly become responsible for things like invoicing clients, tax deductions, and even paying for his own health insurance. These business expenses are absolutely not insignificant details, which is why itâs so important to approach your freelance rates with intention and research. There are many reliable freelancing resources (like Freelancers Union) that provide extensive lists of the possible business expenses freelancers might incur.

How much are you willing to work?
The scheduling freedom of freelancing is an incredible perk, but needs to be approached with a healthy dose of realism. Sure, wouldnât it be amazing to work 20 hours a week, pull in $100 per hour, and buy all your friends Pina Coladas on Friday nights?

Luckily, James has a pretty good head on his shoulders, and is figuring heâll work about the same hours heâs working at the T-Shirt gig⦠give or take a few. Heâs going to be the boss, right?

There are 52 weeks in a year, but you need to factor in things like vacations, holidays, and the time youâll need for business housekeeping, which could range anywhere from 20 minutes to an hour each day. This busy-work isnât technically billable to your clients, so you shouldnât factor those hours into payment.

Some contract work doesnât allow for extended breaks, but some will let you take a work-free vacation to Maui. These are the things an Hourly Rate Calculator canât pull out of thin air; youâve got to take a moment to make your business plans concrete.

Sit down with the digits.
When youâre figuring out how to calculate hourly rate, youâve got to spend some quality time with the numbers.

For the sake of an example, letâs say James has $20,400 in yearly personal expenses. His anticipated business expenses will be around $11,050. He plans on working 50 weeks out of the year at about 6 billable hours a day, which comes to 1500 billable hours per year.

At this point, divide your added expenses by the number of hours you plan to bill:

($20,400 + $11,050) / 1500 = $20.97
And there you have it. In order to only pay his bills, James will need to charge about $21 per hour.

Some people call it the Minimum Acceptable Rate, some call it the Survival Rate, but weâre going to call it the Ramen Rate.

But who can live satisfyingly on Ramen alone? How can James reach his goal of buying his friends Pina Coladas on Friday nights?

Letâs help James find his Pina Colada Rate. Now he needs toâ¦

Add the humans.
Numbers are good and formulas are important, but freelance rates are fickle, situation-dependent beasts. Once youâve got your needs figured out, you can start to add the human element to your equation. Itâs time to research the competition.

James is a graphic designer⦠which is a huge industry. There will be plenty of opportunities to research others who are successful in his field. Some freelancers will post their rates on their website or will send them upon request. Forum sites like Quora are fantastic resources, as they are frequented by peers in your field who are more than happy to share their experience and wisdom.

The other option is to simply ask, especially in a local setting. Developing relationships with others in your field will provide many benefits, including a better understanding of the local landscape and the rates that are being charged in your geographic area.

The next human to consider here is you. What is your experience level? If youâre a recent graduate, itâs a good idea to start on the lower end of the rates range. James, who has been designing for the T-Shirt company for three or four years now, will be able to charge more than someone fresh out of undergrad.

The reasoning here is that A) for the most part, potential clients will research and compare freelancer options and B) you donât want to promise a product you canât deliver, simply to score a higher rate.

Compare your numbers with the marketâs numbers.
James knows, for sure, that he must make at least $21 per hour in order to survive. He also knows, after doing his research, that graphic designers are known to charge anywhere from $30 per hour to $1500 per hour.

How does he make sense of that?

This is where his local networking comes in handy. Heâs discovered that many designers in his area are charging between $45 and $65 per hour. Since heâs neither a weathered veteran nor a spring chicken in the design world, he should choose to shoot somewhere in the middle and see how clients react when he provides them with project proposals.

Now, $55 is quite a bit higher than $21. Whatâs the point of figuring out your Ramen Rate anyway? Why not just shoot for a desired salary?

Certain situations will crop up that may require you to charge less than the hourly rate youâve determined.

This is simply a freelancing reality. Perhaps youâd like to offer a friends and family rate to someone who gives you a lot of referrals, or maybe a lower rate will score you a client that with a future payoff of more work and increasing rates. Being aware of the cushion you have will also let you determine how much (if any) scope creep you can allow per project. Knowing the base rate you canât afford to undercut will provide you with a safety net and peace of mind.

We should probably recap all of this.

Hereâs how to calculate your hourly rate as a freelancer:
Figure out your Ramen Rate (the lowest possible amount you can charge in order to survive) by adding your yearly personal and business expenses and dividing that amount by the number of hours per year youâre willing to work.

Compare your Ramen Rate to the rates of successful and local freelancers in your field in order to find both your Pina Colada Rate (the amount of money that allows you to buy your friends fruity drinks without impacting your ability to pay rent) and the range you have to play with when applying discounts for certain clients.

Thatâs not so scary, right?

We donât mean to make it sound trivial; deciding on your freelance rates is a nuanced and personal experience that requires time and thought. Some freelancers may even decide to charge by project rather than by hour.

Figuring a baseline per-hour rate, however, is a good idea for any freelancer trying to determine what their time is worth, and it doesnât have to be a daunting task. In fact, weâve created an Hourly Rate Calculator that you can easily use to get started as you venture into the freelancing unknown.

As for James, weâd love to get a testimonial from him⦠but he said heâs busy right now⦠something about Pina Coladas.

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