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Today I want to write about expenses and investments and a good way to think about them. This article is about a situation I encountered as a freelancer, so it might not be 100% relevant to you. But I think the lessons might be interesting for everybody. They are:
- Learn to think about all your expenses as costs or investments
- Exchange money for time (if you can)
- Convert monetary amounts to time or goods in your head
We’ll come to the lessons soon, but first, a story…
But, but... I Only Wanted to Help...
About a year ago, some people asked me at a conference whether I could join a new mailing list they created for freelancers. The idea was to have a discussion forum where we could help each other.
I joined, because I really liked the idea. And I like to discuss and to help where I can. I ended up answering questions and helping others, not really discussing, because I already was a small business owner and then freelancer for 8 years at that time, and everyone else was just starting.
After a few weeks, someone new joined the mailing list and asked, like 5 or six people before, for some hints and resources to get started as a freelancer. So I answered, again. I gave him some generic tips (like, get and accountant, your city or government probably offers free services for founders, …). And I wrote something like:
Buy Double Your Freelancing Rate by Brennan Dunn. Yes, the title sounds a little bit like click-bait. And yes, it's very expensive. But it's really worth the price. And if you don't like it, you can get a full refund by the author. BTW: The author interviewed me for one of the case studies ;)
Basically the same mail I wrote to everyone else who asked before. This time, the answer was like:
$130 for an ebook? You must be kidding me! Are you completely crazy? I bet the author pays you for advertising his book. And you only want to brag with your case study!
Well… I immediately unsubscribed from that mailing list. I don’t have time for people like that. Even when I think about it now, it makes me a little bit angry. But now I have the distance to write about it.
So, besides being rude to someone who just wanted to help, what mistakes was the person making? How should you change your thinking when you want to work for your own?
Basic Considerations
Say your rate is 50€ per hour. This is quite low, but easy to calculate with.
And say you can comfortably work 1500 billable hours per year. This might be a little bit to high or too low (depending on how much time you have to spend for sales, marketing, administration, how long your projects are, how many projects you do in parallel, …), but again, it’s easy to calculate with.
So, in an average, month, you will work 125 hours and get 6250€ for it. But that’s only the average. You might work 170 hours for two months, than have three weeks of idle time because a client canceled their contract, then work for two months, than you’re sick or on vacation, and so on. You get the idea.
Also, let’s assume a year has 200 working days, i.e. days where you can work billable hours. Again, this might be more or less than you’re willing or able to work. But it’s a nice, round number.
And, say, 1$ = 1€. Easy to calculate with.
CAPEX, OPEX
So, an “ebook” for 130€ is expensive, right? (DYFR is actually more than a simple ebook, but that’s what I was accused of selling…) You could get two fancy dinners with your spouse at a really nice restaurant for the same amount. And two dinners with a loved one are clearly more valuable than an ebook, right? Basically, yes. But…
A fancy dinner is an Operating Expense (OPEX). It is clearly necessary (if you don’t go out for dinner with your loved one from time to time, it might be bad for you business and for your relationship), and you get something valuable for your money. But then, the money is gone. There is no chance that you’ll get it back or make a profit on it, by just eating the dinner.
The “ebook” is (potentially) an investment (Capital Expenditure, CAPEX). It will potentially alter the future of your business. Say you learn something from the book that allows you to raise your hourly rate by 1€. Now the book pays for itself in one month.
And from then on, you can buy two fancy dinners for you and your spouse every month, for the rest of your life.
So, stop thinking like “ebooks are worth less than 10€” or “a 250€ android tablet is cheap”. Think about costs and investments. Think about OPEX and CAPEX. A 130€ ebook that teaches you something important is damn cheap. And a 250€ android tablet you don’t need is really, really expensive.
Time is Money is Time
As a freelancer, you can exchange time for money and money for time. You can choose to take on more work to earn more, or you can work less billable hours when you have enough money for now. And you can work on things that might earn money later (i.e. passive income like books, …).
This, for me, is the single most important benefit of working for my own. Yes, this works only to a certain degree, but you have way more freedom here than an employee, who has to work at least 40 hours/week but also has to ask when they want to do overtime.
But there is more to that than just freedom.
Say you are developing applications for iOS using XCode. I do not (I mostly work with Java these days), but I read rants about XCode on Twitter every day, so there seem to be people who do it. So you’re working with XCode, and it crashes (it seems to do that, sometimes, according to Twitter). So you get angry, get a coffee, write a rant on Twitter, restart XCode, continue working.
You’ve heard that there is AppCode and that it might be better, but it costs 200€. Should you buy it?
If it saves you the equivalent of 4 hours per year, it’s a no-brainer: Buy it! (BTW, 4 hours per year are 1.2 minutes per day…)
You don’t want to sort your invoices, but your accountant would charge you 50€ per month for doing it. Should you outsource it? Yes, if it would take you 1 hour per month to do it yourself (including the time you spend thinking “OMG, this is so boring. I don’t even want to start. I’ll just read a little bit of Twitter before starting…”)!
You don’t want to clean your house, but a cleaning service charges 20€/hour. Should you hire them? Yes, you can buy 2 1/2 hours of cleaning by a professional for one hour of your work! (Yes, I didn’t consider taxes here, but the ratio is probably still favourable).
Money is iPhone
Don’t think “money” when you about money. Think about money in terms what it could buy you (iPhone) or what it would cost you (time). That’s basically the trick from above, but a little bit more generic.
50€ is one hour of your time, or a little bit less than a fancy dinner. 1500€ is just about one week of your time, two iPhones, a cheap laptop or a nice holiday with your family. 5000€ is a little less than one month of your time, more than your credit card limit, and almost enough for a long over-seas vacation.
I think you get the idea…
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You might be also interested in:
- Cheap plastic drills: Most people think construction workers should have great tools. A lot of people think paying more than 1000 Euros for an office chair is a waste of money, even for a software developer who uses it 8 hours a day. Good tools are expensive.
- A Spectrum Of Effort Estimates: An introductory post about estimating development effort.
- Improve your Agile Practices: A FREE course that teaches you how you can improve as a software development team
