How to calculate your hourly rate as a freelancer

Overview

Calculating an hourly rate is the classic freelancer tool to getting paid. I mean, it’s just how people get paid in general. Whether you work salaried for a big company or are hourly, you still have an hourly rate.

This blog focuses on why you should calculate an hourly rate that’s best-suited for you and your goals, and how to actually do that.

Why is your hourly rate important?

The main reason calculating an hourly rate is important is to get you paid. How will you make any money if you don’t have an hourly rate? Even if you decide to sell a product with a fixed cost, it’s still wise to determine an hourly rate to make the money that you need to make (more on that later).

Instead of picking an arbitrary number that you hear all over the internet ($100 per product, making $10k per month, hitting 6 figures in a year, etc.), why not do a little extra work to decide what number is right for you?

The second reason your hourly rate is key is that as your business grows, so will your credibility. And along with that goes the hourly rate. If you’re running a brand new business, you aren’t going to sell your website design services for $3,000 per hour. In the same way, if you were a seasoned veteran, you wouldn’t charge $10 per hour for your services.

The cost at which you charge scales with your experience and credibility, so starting with a realistic number in the beginning will help to shape your growth patterns along the way.

Step 1: Determine your financial goals

There are few things to consider when deciding your financial goals. You’ve got to have a “why”, and you’ve got to know how much money you need to achieve that “why”.  I’m assuming you want to pursue this freelance gig strongly enough that you’d take it full time. That being said, let’s jump into deciding your financial goals.

What is your “why”?

When determining your freelance hourly rate, ask yourself, “why do I want to make money anyway?”

What’s the real “why”? It’s likely not just to make money, because money by itself is useless. Money is only good for purchasing something else, whether that be education, an experience, or a material item. Even if it’s for retirement, that money is getting saved to spend later on.

The reason I started Fridley Communications in the first place was because I wanted to pay off student debt. My goal since day one has always been to get my student loans paid off as quickly as possible, and that’s what motivates me to do everything I do in this business.

And deeper than that, I want to pay off my student loans so that I don’t owe anyone money, thus securing my financial freedom. So there’s my goal: financial freedom.

Alongside financial freedom, I’d like freedom to do what I want with my time. I’d love to grow my business large enough I could work for myself. So I guess you could say my ultimate goal is autonomy, both with time and money.

What do you want? Are you saving up for a house? Wanting to quit your office job for something more cozy? Interested in making a difference in the world? Whatever the motivation is, you need to start with you “why”, because if you don’t, you’ll quit when things get hard.

How much money do you need to reach your calculated hourly rate?

Like I said earlier, I’m assuming you want to take this thing full time and want to be your own boss, alongside any other goal you may have. If not, then disregard the aspects of the rest of this blog that are associated with being your own boss. The best part is that you get to decide what your goals are and how much money you want to make to get there!

What are your expenses?

The first thing is to cover your expenses. If you're trying to make enough to replace your income entirely, how much do things cost in your life? Between food, rent/mortgage, utilities, fun, health, pets, random payments, and all the other stuff, there’s a heck of a lot of things that cost money.

If you're just trying to make some cash for a new computer or maybe fund a hobby you enjoy, what does that cost look like on an annual basis?

How much will you need to save for taxes?

Second is to determine how much your taxes will be. If you’re just starting off, like me, your taxes are low. I budget 30% of my revenue to taxes. This is a high rate for me right now, but I’d rather have saved more than less.

How much will you give away?

Third is to decide how much you will give away. If you’re not used to giving, you should get there. Giving money, time, and resources away to people that need it is one of (if not the most) rewarding things you can do in your entire life. Just start giving things away and try to tell me it doesn’t feel good.

How much margin do you want to have for your calculated hourly rate?

Last is to decide what your margin will be. This is how much money you make after all your expenses, taxes, and giving. In other words, how much gravy do you want on your potatoes?

After you’ve covered all the important things above, how much profit do you want to make? Is every sale going to get you 10%? 80%? 300%? 

Once you’ve figured out what all the other stuff will cost, just multiply it by your growth percentage (1.x for less than 100% or x.x for greater than 100%). 

For example, if I needed to make $10,000 per year to live, pay taxes, and give, and then wanted to make 40% profit off every sale, I’d take 10,000x1.4=14,000 (yes I used a calculator. Shame me if you must). So now I know I need to make $14,000 every year to reach my financial goals.

Note on covering your cost of living

I also want to add that if your goal is to cover all your expenses, this number will be high, and likely very daunting. That’s okay! If that isn’t a realistic goal within the timeframe you’ve set to reach that goal, you should still try. Just because you missed the mark doesn’t make you a failure, it makes you brave.

You will likely need to change your numbers as you go along, but this is a great place to start.

Step 2: Decide how much you want to work

Now that we’ve figured out our annual revenue we need to hit, let’s decide how much we want to work to reach that goal. If you have a full-time job, you’re probably not looking to gain an extra 40 hours per week. 

Set a number that feels realistic to you and just take it in stride. There are people who say you should work as much as you possibly can in the beginning because you’ll reach the goal faster, which is true, but the goal isn’t worth burning yourself out, because then you’ll just end up quitting. Don’t do that to yourself

 If you can only do 5 hours per week, then just do that! There’s no right or wrong. It’s completely up to you.

Step 3: Do the math

Now here’s the fun part. To calculate your hourly rate, here’s the equation:

Weekly income needed/total number of hours you want to work per week = hourly rate

To get there, you need to first figure out how much annual income you need. I’ll provide the equation below with an example of how the math works as well. Grab a calculator and let’s get going!

Annual income needed=Yearly cost of living + tax % + giving % + growth %

48,000x1.3(30%)x1.1(10%) x 1.8(80%)= $123,552

After that, determine what your weekly income needs to be:

Weekly income needed=Annual income needed/52 (weeks in a year)

123,552/52= $2,376

Last is to take your weekly income needed and connect that with your hours per week:

Hourly rate = weekly income needed/total number of hours you want to work per week

2,376/20= $118.80/hr

Step 4: Start selling

That number can seem extremely unrealistic, especially if you’ve never sold something at that high of an hourly rate. And it probably is, and that’s totally okay!

The only way to tell is to just start selling. If you believe in your product or service and deliver on your promises as well as sell to the right kind of people, you will certainly be able to hit your goals.

So just get selling! I plan to write blogs on generating leads and diving into that whole process later. If you’d like to read that blog, please let me know in the comments!

Conclusion

Freelancing isn’t an easy game to play, but it pays off if you nurture your craft. It doesn’t matter whether you have 0 experience or 30+ years, the only way to know if you will succeed is to try, learn, and fail.

Deciding your hourly rate is super important for the future of your business, and if you get your goals set straight early, you’ll be far ahead of the game when you-know-what hits the fan!

Thank you so much for reading through this! Please leave your thoughts and feedback in the comments, and if you want weekly updates on what’s going on in my life and Fridley Comms, get signed up for my newsletter! I pray that you experience the love of Jesus today💟

And here's a lovely photo of my dog, Lila, and me!